A.M. Best Affirms Ratings of Protective Life Corp. and Its Subsidiaries [Manufacturing Close - Up]

Proquest LLC

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 Corp. (Protective) (headquartered in Birmingham, AL), led by Protective Life Insurance Company (Brentwood, TN).

Additionally, A.M. Best has affirmed the ICR of "a-" and debt ratings of Protective. (See link below for a detailed listing of the companies and ratings.) The outlook for all ratings is stable.

The ratings reflect Protective's diversified business profile, favorable operating results and proven ability to acquire and integrate insurance companies and blocks of business. A.M. Best notes that recent acquisitions have been accretive and have resulted in a predictable and stable source of earnings. Additionally, these acquisitions have enabled the company to enter new markets and realize certain operating efficiencies.

The ratings also acknowledge Protective's sound risk-adjusted capitalization on both a consolidated basis and within each of the insurance operating entities. While financial leverage at the holding company remains relatively high, A.M. Best notes that Protective's debt-to-capital ratio and interest coverage ratios have improved modestly over the past year and 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 is currently in a sizable net unrealized gain position.

A.M. Best has observed that Protective's life and annuity sales were generally flat year over year, reflecting a number of market conditions. In order to improve profitability, premium rates were increased on existing life insurance product lines while certain traditional life products were discontinued. In addition, A.M. Best notes that sales of universal life insurance with secondary guarantees have been impacted by new regulatory guidelines that require an increase in reserves. Fixed annuity sales have declined due to the unfavorable interest rate environment. On the positive side, variable annuity sales have increased substantially in 2012, as some competitors exited the market and others aggressively reduced product features. Given that Protective's variable annuity sales really started to accelerate in 2010, these products generally have less risk and higher returns relative to what was sold pre- crisis.

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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 percent (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 Corp. 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.

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