A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of the primary life/health subsidiaries of Protective Life Corporation (Protective) (headquartered in Birmingham, AL) [NYSE: PL], led by Protective Life Insurance Company (PLIC) (Brentwood, TN). Additionally, A.M. Best has affirmed the ICR of “a-” and debt ratings of Protective. (See below for a detailed listing of the companies and ratings.) The outlook for all ratings is stable. The ratings reflect Protective’s diversified revenue and profit sources, expanding distribution capabilities and strong track record of effectively integrating acquired insurance companies and blocks of business. The ratings also acknowledge Protective’s seasoned block of traditional life insurance, which provides a predictable and stable source of earnings. Protective has exhibited solid consolidated operating performance in recent periods. A.M. Best notes that the company’s business mix of primarily traditional life insurance provides for greater earnings stability and that its equity market linked product exposure, which is inherently more volatile, is generally more limited than peer companies. The stable, recurring premiums associated with Protective's seasoned block of life business are a source of strength as this block contains significant embedded profits. In addition, Protective’s acquisitions have increased its earnings and have allowed the company to enter new markets and realize operating efficiencies. Protective remains active in the acquisition arena and recently closed two transactions deploying more than $500 million of capital. These acquisitions were immediately accretive to earnings and added almost $60 million to GAAP operating income in 2011. Moreover, while new business and acquisition activity has given rise to substantial Regulation XXX and AXXX reserves, Protective has been effective in securing cost-effective longer term funding solutions. A.M. Best believes Protective maintains adequate levels of risk-adjusted capital at all of its insurance entities. In addition, the company has reduced the level of below investment grade securities in its general account investment portfolio to approximately 5%, and the unrealized gain position has improved to roughly $1.8 billion as of year-end 2011.
Partially offsetting these factors is near- to medium-term spread compression in Protective’s fixed annuity and interest-sensitive life insurance lines of business, as much of this business is at or near the minimum guaranteed crediting rate. In addition, near-term operating results may also be impacted by declining account balances within its stable value segment. A.M. Best notes that Protective maintains a relatively high level of real estate-related investments in its portfolio. Residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) and direct commercial mortgage loans account for more than one fifth of invested assets and more than two times capital and surplus. In addition, 30% of Protective’s RMBS portfolio was rated below investment grade as of year-end 2011. Partially mitigating this concern is that most of the RMBS portfolio is invested in “super senior” or senior tranches that possess significant credit enhancement within the deal structure, and that RMBS balances have declined rapidly over the past several years. Additionally, the direct commercial loan portfolio has performed well with no significant loss of principal in recent years and only a modest amount of delinquent loans.While the operating companies continue to generate significant cash flows supporting Protective’s strong liquidity position and enhancing its financial flexibility, A.M. Best remains somewhat concerned about the high level of intangible assets on its balance sheet and modest amount of cash held at the holding company. Although the organization’s financial leverage and interest coverage ratios are currently within A.M. Best’s guidelines for its current rating, the recent DAC accounting change (Accounting Standards Update 2010-26) has reduced Protective’s opening 2012 stockholders’ equity position by a measurable amount, elevating its financial leverage ratio. A.M. Best believes that Protective and its life/health subsidiaries are well positioned at their current ratings. Key drivers that may lead to negative rating actions include a deterioration of earnings due to spread compression in its interest-sensitive lines of business or significant impairments in its investment portfolio, heightened financial leverage or lower interest coverage ratios.
The FSR of A+ (Superior) and ICRs of “aa-” have been affirmed with a stable outlook for the following primary life/health subsidiaries of Protective Life Corporation:
- Protective Life Insurance Company
- Protective Life and Annuity Insurance Company
- West Coast Life Insurance Company
- Protective Life Insurance Company of New York
- United Investors Life Insurance Company
Protective Life Corporation—-- “a-” on senior unsecured debt -- “bbb+” on subordinated debt -- “bbb” on preferred stock PLC Capital Trust VI, VII and VIII— - - “bbb” on preferred securities The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology. Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com. Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.