Protective remains profitable in its core operating segments on both a GAAP and statutory basis. Overall results have improved over the most recent period due to the aforementioned increase in variable annuity sales as well as increased fee income from separate accounts, which have benefited from rising equity markets. Operating results also benefited from favorable mortality, improved spreads in its stable value business and increased scale and efficiencies in its acquisition segment.While A.M. Best believes that operating results will remain favorable over the near to medium-term, earnings may be pressured somewhat due to spread compression as a majority of Protective’s reserves are interest sensitive, with a significant portion at or near the guaranteed minimum interest rates. In addition, while the company’s exposure to residential mortgage-backed securities has declined in recent periods and the commercial mortgage loan portfolio has performed well, Protective’s exposure to real estate-related assets remains relatively high (representing almost two and a half times capital and surplus). This could become a concern in an economic downturn. A.M. Best notes that Protective also maintains an elevated level of intangible assets on its balance sheet, with a deferred acquisition costs to shareowners’ equity ratio of over 100% (excluding AOCI) as of year-end 2012. Finally, as with some of Protective’s publicly traded peers, the organization relies heavily on the use of captives to fund Regulation XXX and Guideline AXXX (AG38) reserves and to help smooth earnings volatility driven by its hedging activity. Given the magnitude of captive and other redundant reserve financing solutions, A.M. Best believes that risk-adjusted capital measures may be difficult to compare across the life industry and warrant further scrutiny. 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, significant impairments in its investment portfolio, heightened financial leverage or lower interest coverage ratios.
For a complete list of Protective Life Corporation and its subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/022202protective.pdf.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 © 2013 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.