Torchmark Corp.’s (TMK) life and health insurance subsidiaries were upgraded to “stable” from “negative” yesterday by A.M. Best. The rating agency also confirmed the financial strength ratings and issuer credit ratings of “A+” and “aa-“, respectively.  
 
A.M. Best’s uptick acknowledges Torchmark’s strong capital position and solid cash flow. The company ended 2009 with a statutory risk based capital (RBC) ratio of 357%, which was 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 adequate interest coverage ratio.
 
Torchmark’s core operating strengths were also the reason of the upgrade. Its 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.
 
An improvement in Torchmark’s investment portfolio with a significant decline to below investment grade bonds has led to the positive ratings action. The portfolio 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.
 
A.M. Best had downgraded its outlook on the company to negative from stable during the same period last year on concerns of a heightened risk within Torchmark’s investment portfolio. The rating agency will continue to monitor the company’s performance and can make further upwards/downwards revision, depending on the company’s performance.
 
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 is bent on expanding 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 Globe Life in Direct Response operation, has 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 small 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 underwriting margin. These trends along with the increased share buyback expected in 2010, with excess capital available at the parent company will certainly add to the bottom line earnings. As such, we fully anticipate another rating upgrade for Torchmark.
 
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