A.M. Best 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 (Brentwood, TN). Additionally, A.M. Best has affirmed the ICR of “a-” and debt ratings of Protective. The outlook for all ratings is stable. (See link below for a detailed listing of the companies and ratings.) The ratings reflect Protective’s diversified business profile, favorable operating results and proven ability to acquire and integrate insurance companies and blocks of business. Protective has experienced strong top line growth in its core life and annuity lines of business over the past year, despite a decline in the second half of the year due to a strategic decision to reduce variable annuity sales and increased competition in the ordinary life insurance line of business. Pre-tax operating results on both a statutory and GAAP basis also have increased during the past year and have benefited from favorable mortality in the life insurance line of business and increased separate account fee income due to increasing variable annuity account balances. In addition, Protective closed on the acquisition of MONY Life Insurance Company (MONY) on October 1, 2013, which also contributed positively to earnings and insurance premiums. A.M. Best notes that recent acquisitions by Protective have been accretive and have resulted in a stable source of earnings. Additionally, these acquisitions have enabled the company to realize certain operating efficiencies. The ratings also acknowledge Protective’s sound risk-adjusted capitalization on both a consolidated basis and within each of its insurance operating entities, despite a decline in the fourth quarter of 2013 due to the MONY acquisition. While financial leverage at the holding company also increased somewhat, A.M. Best notes that Protective’s debt-to-capital ratio and interest coverage ratios remain within A.M. Best’s guidelines for the current ratings. In addition, the company maintains multiple sources of liquidity including strong cash flows from its insurance operating entities, access to a line of credit of up to $750 million, cash held at the holding company equivalent to 12 months’ interest expense, and a fairly liquid investment portfolio, which remains in a sizable net unrealized gain position.
While A.M. Best believes that operating results will remain favorable over the near to medium-term, earnings may be pressured somewhat due to continued spread compression as a majority of Protective’s reserves are interest rate 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 high (representing almost two times capital and surplus).A.M. Best notes that Protective also maintains an elevated level of intangible assets on its balance sheet, with a ratio of deferred acquisition costs plus value of business acquired to shareowners’ equity of almost 100% (excluding Accumulated Other Comprehensive Income) as of September 30, 2013. 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 capital volatility driven by its businesses. 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 the potential for positive rating actions on Protective is limited in the near to medium term. Key drivers that may lead to negative rating actions include a deterioration of earnings due to spread compression in the organization’s interest-sensitive lines of business, a significant increase in impairments in its investment portfolio, or heightened financial leverage or lower interest coverage ratios. For a complete listing of Protective Life Corporation and its subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/021307protective.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. 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 © 2014 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.