Rating agency Fitch Ratings has confirmed the insurer default rating ("IDR") at 'A-' and insurer financial strength at 'A+' of Torchmark Corp. ( TMK ) and its insurance subsidiaries. The ratings were given a stable outlook.
Fitch's rating affirmation acknowledges Torchmark's strong capital position and solid cash flow. 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 company's capital and bottom-line earnings.
The rating agency is also confident that the refunding of $94 million of prepayment facility in August will enable the company to lower its leverage down to below 25% levels from 28% highs. The company generally maintains a decent level of financial leverage but the increase in this ratio was brought about by taking up debt in order to fund the acquisition of Family Heritage Life.
The rating agency, also 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 0.45x as of Jun 30, 2013, stronger than most of its peers and within the comfort range of 0.55x set by Fitch Ratings.
Fitch also reviewed Torchmark's profitability, taking into account its Return on Assets ("ROA"), which stood at 3.9% at the end of second quarter 2013. Its debt service capability, as measured by interest coverage ratio, also stood at 9.7x. Fitch noted that though both these metrics were a tad below the historical average of 4-5% and 10x-13x for ROA and interest coverage respectively, Torchmark fared relatively better than peers with 1.4x and 8.0x for similar metrics.
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 348% and $1.3 to 1.4 billion, respectively, which aligns with the 325% limit for risk-based capital set by the company itself.
The rating agency also laid out the factors, which may cause an uptick in ratings. These include risk based capital of more than 350%, sustained financial leverage 20% or below and total financings commitments ratio below 0.40x and GAAP earnings based interest coverage ratio of a minimum of 13x or more.
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.
Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence on the stock as well as maintaining credit worthiness in the market. Rating downgrades, therefore, adversely affect the business, apart from increasing the costs of future debt issuances. We believe that strong ratings will help Torchmark to retain investor confidence and help it write more businesses going forward, thereby boosting results.
Other players from the same industry Assurant Inc. ( AIZ ), G enworth Financial Inc. ( GNW ), and StanCorp Financial Group Inc. ( SFG ) carry an investment grade rating from leading rating agenciesASSURANT INC (AIZ): Free Stock Analysis ReportGENWORTH FINL (GNW): Free Stock Analysis ReportSTANCORP FNL CP (SFG): Free Stock Analysis ReportTORCHMARK CORP (TMK): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research