Torchmark Upgraded by Fitch – Analyst Blog

Torchmark Corp.’s (TMK) life and health insurance subsidiaries were upgraded to “stable” from “negative” yesterday by Fitch Ratings. The rating agency also confirmed the insurer financial strength rating and long-term issuer credit rating of the subsidiaries at “A+” and “A-“, respectively.  

 

Fitch’s uptick acknowledges Torchmark’s strong capital position and solid cash flow. The company ended 2009 with a statutory risk-based capital ratio of 357% − well above management’s long-term target of 300% − net cash flow of about $897 million from operations, free cash flow of $281 million and excess capital of $225 million.

 

For 2010, management expects net cash flow from operations to be around $930–$950 million and free cash flow of about $270−$280 million. Total excess capital of $315 million is anticipated. Besides, it has a low total debt-to-capital ratio and an adequate interest coverage ratio.

 

Torchmark’s core operating strengths were also a reason behind the upgrade. The company’s earnings per share have shown a consistent growth despite a difficult operating environment. Its Life sales have shown a continued improvement with steady premiums and underwriting growth in Direct Response and American Income agencies.

 

An improvement in Torchmark’s investment portfolio with a significant decline in below-investment-grade bonds has led to the positive rating action. The company has seen an improvement in unrealized loss position within its fixed income portfolio. The percentage of below-investment-grade bonds at 8.4% is, however, high relative to 6% for its peers.

 

Last month, another rating agency A.M. Best had also upgraded Torchmark; its assigned outlook is now “stable”, up from “negative” earlier. A.M. Best also confirmed the financial strength rating and issuer credit rating of “A+” and “aa-“, respectively.

 

Torchmark has taken a number of initiatives to grow its top line. The implementation of need-based sales during the first quarter at American Income has shown encouraging initial results. The company aims to expand this new sales process over the next three quarters and projects sales growth at American Income to be in the 15% to 20% range for the full year.

 

Also, life underwriting and life sales at Global Life in Direct Response operation have shown growth in first quarter results. Management expects this favorable trend to continue for the balance of 2010.  

 

However, at Liberty National, life underwriting margin, sales and premium has shown a decline. The agent count at Liberty has been flat since the end of January, and net sales have also stabilized. Sales are expected to improve over first quarter levels, although management expects a slight decline for the full year 2010.

 

Though Liberty National is expected to show weak performance, top-line growth will be held up by American Income and Global Life, which together generate two-thirds of the company’s underwriting margin. These trends along with the increased share buyback expected in 2010 and excess capital available at the parent company will certainly add to the bottom line. Therefore, we fully anticipate another rating upgrade for Torchmark.