Rating agency Fitch Ratings has confirmed the insurer financial
strength ("IFS") rating at 'A+' and long-term issuer credit rating
("ICR") at 'A-' of
) and its insurance subsidiaries. The ratings also carry a stable
Fitch's rating affirmation acknowledges Torchmark's strong
capital position and solid cash flow. Torchmark had $16.7 billion
in assets and $3.8 billion in shareholder equity as of March 31,
2012. Strong operating performance of its subsidiaries ensures
consistent operating cash flow for the parent, that is used
for debt repayment and share repurchases, thus strengthening the
parent's capital and bottom-line earnings.
Fitch also reviewed Torchmark's profitability, taking into
account its Return on Assets ("ROA"), which stood at 3.9% at the
end of first quarter 2012. Its debt service capability, as measured
by interest coverage ratio, also stood at 9.4x. Fitch noted that
though both these metrics lagged behind the historical average of
4-5% and 10x-13x for ROA and interest coverage respectively, it
fared relatively better than peers with 1.4x and 8.0x for similar
The affirmation of Torchmark's IFS ratings comes on the back of
its adequate risk based capital levels. According to Fitch, the
company's current risk based capital and adjusted capital stands at
333% and $1.4 billion, respectively, which aligns with the 325%
limit for risk-based capital set by the company itself.
One of the factors offsetting the strong ratings was Torchmark's
enhanced financial leverage, which stood at 26%, higher than
Fitch's comfort level of 25%. However, the rating agency views this
as a temporary phenomenon driven by $395 million or 10% decline in
shareholders' equity. The reduction and consequent rise in leverage
was driven by the impact of the new accounting rules for Deferred
Acquisition Cost ("DAC").
On January 1, 2012, the company adopted Accounting Standard
Update 2010-26, which changed the rules regarding the deferral of
acquisition cost. This standard changes the timing of GAAP profits
to the extent that certain expenses deferred under the previous
rules will no longer be deferred.
However, it does not affect Torchmark's overall profitability,
cash flow or statutory earnings. The company adopted the new rule
retrospectively, which implies that the DAC was written in a way as
if the new standard had already been in practice. The new rule is
likely to impact earnings through a reduction in expenses deferred
on newly issued policies, somewhat offset by the reduced
amortization of DAC resulting from the retroactive write-down.
The rating agency, however, notes that Torchmark has a strong
capital profile, which will enable it to fulfill its commitments
reflected through its total financing and commitment ratio of 0.41x
as of March 31, 2012, stronger than most of its peers and
within the comfort range of 0.54x set by Fitch Ratings.
The rating agency also laid out the factors, which may cause an
uptick in ratings. These include risk based capital of more than
370% and enhanced business diversification. The rating agency may
take a reverse action if the company incurs more-than-expected
losses in its investment portfolio; the risk based capital falls
below 290%, financial leverage is higher than 25%, total financing
and commitment ratio breaches the maximum limit of 0.55x and
interest coverage ratio drops below 5x.
Earlier during the month, another rating agency A.M. Best
undertook a rating action on Torchmark as a part of its yearly
review exercise. It affirmed the financial strength ratings
(FSR) of '"A+" and the ICR of "aa" for the company's subsidiaries
while Torchmark's ICR of "a-" along with its existing ratings were
also affirmed. All the ratings carried a stable outlook.
) also carries an ICR of "bbb" with a stable outlook. Torchmark
currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating. We are also maintaining our long-term
Neutral recommendation on its shares.
ASSURANT INC (AIZ): Free Stock Analysis Report
TORCHMARK CORP (TMK): Free Stock Analysis
To read this article on Zacks.com click here.