A.M. Best Affirms Ratings of Torchmark’s Operating Subsidiaries

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A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and the issuer credit ratings (ICR) of “aa-” of the major life/health subsidiaries of Torchmark Corporation (Torchmark) (McKinney, TX) [NYSE: TMK]. A.M. Best has also affirmed the FSR of A (Excellent) and ICR of “a” of Torchmark’s stand-alone rated subsidiary, United Investors Life Insurance Company (United Investors Life) (Birmingham, AL). Concurrently, A.M. Best has affirmed Torchmark’s ICR of “a-”and all its debt ratings. The outlook for all ratings is stable. (See link below for a detailed list of the companies and ratings.)

The rating affirmations primarily reflect Torchmark’s ability to generate exceptional profitability, despite competitive market conditions and challenges in some of its distribution channels. In addition, Torchmark’s equity position has generally increased over the past five-year period, resulting in favorable risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio. The increasing capital position is due to the retention of earnings that are derived from Torchmark’s well diversified operating subsidiaries. As a result, financial leverage and coverage ratios continue to remain within acceptable ranges for its ratings, and the company generates more than enough excess cash flow to service its debt.

While investment income has been impacted by the generally declining long-term interest rate environment over the last several years and financing costs have increased due to rising short-term rates, net operating results have remained consistently strong, and Torchmark has generated above average profitability ratios. This is primarily attributable to Torchmark’s conservative underwriting guidelines and its low cost operating structure. A.M. Best believes underwriting margins should benefit from some of the changes Torchmark has made in its distribution systems.

Torchmark’s focus on the low-to-middle income segment targets an underserved market through a diverse network of direct marketing, agencies and niche markets specific to each insurance company within the group where the brand identity of each company markets to various segments. While Torchmark has been challenged to increase new life/health sales in recent periods, the company has implemented a number of new initiatives, with the expectation that they will result in increased premium production going forward. A.M. Best believes Torchmark may see a gradual improvement in new life sales in 2007 but could continue to be challenged to organically increase premiums in the Medicare supplement line of business in the near term. A.M. Best will be monitoring the success of Torchmark’s efforts to increase premium production.

One of the group’s lead companies, Liberty National Life Insurance Company (Birmingham, AL), restructured producer compensation to reward higher producing agents and eliminate non-producing agents over this past year. As a result, the company experienced substantial declines in its captive agency force in the second half of 2006, and sales declined more than the company had anticipated. However, recruiting efforts appear to be successful in the early part of 2007. A.M. Best believes that the restructuring of agent compensation should help to enhance the prospects for future growth.

Globe Life and Accident Insurance Company (Globe Life and Accident) (Oklahoma City, OK), which primarily markets through direct mailings and insert media, is well positioned to increase premium and earnings growth through its state-of-the-art distribution facility in Oklahoma. Torchmark is projecting significant growth for Globe Life and Accident in 2007, partially due to the purchase of Direct Marketing and Distributors, Inc. (DMAD), a direct marketing firm, which Torchmark had been contracting for the circulation of its insert media business. The purchase of DMAD is expected to allow Torchmark to increase its insert media circulation, which had been declining over the past year, and should also contribute to better control over operating costs.

American Income Life Insurance Company (Waco, TX), a subsidiary of Globe Life and Accident, has also seen an increase in its agent count. This subsidiary remains focused on the union market, which has been extremely profitable for Torchmark.

Through its primary health subsidiary, United American Life Insurance Company (United American) (McKinney, TX), Torchmark recently has been focusing on increasing production of its limited benefit product while placing less of an emphasis on growth of its Medicare supplement production. A.M. Best presently views the Medicare supplement market as very competitive and believes Torchmark’s measured approach and growth strategy are prudent. Although Torchmark’s inforce Medicare supplement block remains one of United American’s core lines of business, due to increased annualized premium production of its limited benefit plans, this product is expected to surpass Medicare supplement inforce premiums in 2007. United American also continued the expansion of its branch offices in 2006 and has increased its exclusive agency force with the goal of improving new sales.

United Investors Life has historically marketed Torchmark’s fixed and variable life and annuity products. In recent years, United Investors Life has been largely operating in run off, due to the de-emphasis of these product lines, with limited premium expansion being reported through year-end 2006. However, both capital and reserve levels remain adequate for its insurance and investment risks.

For a complete listing of Torchmark Corporation’s FSRs, ICRs and debt ratings, please visit www.ambest.com/press/060801torchmark.pdf.

Founded in 1899, A.M. Best Company is a full-service credit rating organization dedicated to serving the financial services industries, including the banking and insurance sectors.