A.M. Best Downgrades ICRs and Affirms FSR of Protective; Revises Outlooks to Negative
February 11 2009 - 4:23PM
Business Wire
A.M. Best Co. has affirmed the financial strength rating
(FSR) of A+ (Superior) and downgraded the issuer credit ratings
(ICR) to �aa-� from �aa� of the primary life/health subsidiaries of
Protective Life Corporation (Protective) (Birmingham, AL)
[NYSE: PL] led by Protective Life Insurance Company (PLIC)
(Brentwood, TN). Concurrently, A.M. Best has downgraded the ICR to
�a-� from �a� and debt ratings of Protective. In addition, A.M.
Best has downgraded the debt ratings of the outstanding notes
issued for the various funding agreement-backed securities (FABS)
programs of PLIC. The outlook for all ratings has been revised to
negative from stable. (See link below for a detailed listing of the
companies and ratings.)
The downgrades reflect the decline in PLIC�s risk-based capital
position during 2008 as a result of realized investment losses and
the accumulation of reserve strain from recently issued term and
universal life insurance business. The downgrades also reflect A.M.
Best�s expectation that near-term improvement in PLIC�s capital
ratio will be dampened by likely adverse investment experience and
by the build-up of excess statutory reserves as Protective issues
new business. Prior to the credit market freeze, PLIC�s capital
ratio benefited from capital market securitizations, whereby
external funding was raised, and statutory capital was subsequently
released, when blocks of excess reserves were securitized through
captive reinsurers.
The negative outlook reflects the likelihood of additional, and
possibly significant, investment losses as indicated by
Protective�s net unrealized loss position. With the severe credit
spread widening that occurred during fourth quarter 2008,
Protective�s GAAP net unrealized losses as of December 31, 2008
totaled nearly $1.7 billion or approximately two-thirds of gross
stockholders� equity. The negative outlook also recognizes the
limitations on Protective�s financial flexibility as a result of
its current level of leverage combined with the ongoing turmoil in
the financial markets. Protective�s all-in financial
leverage�senior debt plus hybrids�is slightly over 30% and near the
upper end of the range for its ratings. Additionally, Protective�s
future earnings may be reduced due to a smaller contribution from
the stable value segment as the stable value market has been
hampered by the credit freeze. Protective�s ratio of deferred
acquisition costs to equity has risen significantly over the past
year and may pressure the ratings should the ratio remain elevated
for an extended period.
Offsetting these negative rating factors are Protective�s
diversified revenue and profit sources, broad distribution
capabilities and its strong track record of effectively integrating
acquired insurance companies and blocks of business. Despite the
net loss for 2008, A.M. Best notes that Protective�s business mix
of primarily traditional life insurance provides for greater
earnings stability than other companies that have large equity
market exposures. The stable, recurring premiums associated with
Protective�s seasoned block of life business are a source of
strength, and the block contains significant embedded profits. A.M.
Best also notes that Protective has sufficient liquidity in cash,
short-term holdings and expected asset cash flows to meet scheduled
maturities without the need for asset sales, stable value liability
sales or external debt funding. Additionally, Protective does not
have a significant corporate debt maturity until 2013.
For a complete listing of Protective Life Corporation�s FSRs,
ICRs and debt ratings, please visit
www.ambest.com/press/021102protective.pdf.
The principal methodologies used in determining these ratings,
including any additional methodologies and factors, which may have
been considered, can be found at
www.ambest.com/ratings/methodology.
Founded in 1899, A.M. Best Company is a global full-service
credit rating organization dedicated to serving the financial and
health care service industries, including insurance companies,
banks, hospitals and health care system providers. For more
information, visit www.ambest.com.
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