A.M. Best Affirms Ratings of Protective Life Corporation and Its Subsidiaries; Assigns Ratings to New Senior Notes
October 09 2009 - 9:36AM
Business Wire
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) (Wilmington, DE) (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. A.M. Best also has affirmed the debt ratings
of the outstanding notes issued for the various funding
agreement-backed securities (FABS) programs of PLIC. Concurrently,
A.M. Best has assigned debt ratings of “a-” to the newly issued 10,
15 and 30-year senior unsecured notes totaling $800 million of
Protective. The outlook for all ratings is negative. (See link
below for a detailed listing of the companies and ratings.)
The ratings reflect Protective’s diversified revenue and profit
sources, broad 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 as a stabilizing factor for its
earnings.
For the period ending June 30, 2009, the group reported GAAP net
income of $112.9 million after reporting a net loss of
approximately $42 million for 2008. A.M. Best notes that
Protective’s business mix of primarily traditional life insurance
provides for greater earnings stability than other companies with
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.
The negative outlook reflects the likelihood of additional—and
possibly significant—investment losses given the current economic
environment. Despite the substantial improvement in Protective’s
GAAP net unrealized loss position (approximately $900 million as of
August 31, 2009 from $3 billion at year-end 2008 before tax and
deferred acquisition costs), additional investment losses are
likely to occur within its corporate bond and commercial mortgage
portfolios. However, A.M. Best notes that less than 0.5% of
Protective’s $3.8 billion mortgage loan portfolio was
non-performing as of June 30, 2009. The negative outlook also
recognizes the limitations on Protective’s financial flexibility as
a result of its current level of financial leverage. Protective’s
all-in adjusted financial leverage—senior debt plus hybrids—is
approximately 30% (excluding other comprehensive income and
incorporating significant equity credit for hybrids). Additionally,
Protective’s future earnings may be reduced due to a smaller
contribution from the stable value segment as unfavorable market
conditions continue to hamper sales. Protective’s ratio of deferred
acquisition costs to equity (excluding other comprehensive income)
is high relative to similarly rated peers (150% as of June 30,
2009) and may pressure the ratings should the ratio remain elevated
for an extended period. However, A.M. Best notes that this ratio is
somewhat inflated due to the effects of reinsurance.
The proceeds from the $800 million aggregate senior notes
offering will be utilized by Protective to purchase newly-issued
surplus notes from its special purpose financial captive, Golden
Gate Captive Insurance Company (Golden Gate). Golden Gate will then
use the surplus note proceeds to repurchase, at a discount, $800
million of surplus notes that it originally issued to third
parties. Therefore, the transaction’s only impact on the group’s
capital will be the gain recorded on the repurchase.
A.M. Best considers the new senior debt of Protective to be
mostly operating leverage as the newly-issued surplus notes of
Golden Gate will directly support redundant Regulation XXX term
insurance reserves. Additionally, interest payments received from
Golden Gate will largely cover Protective’s annual debt service on
its senior notes. However, since the transaction is contractually
recourse to Protective, A.M. Best will consider a portion of the
$800 million senior notes as debt for the purposes of determining
GAAP financial leverage and interest coverage. While Protective’s
GAAP financial leverage is high relative to its peers, it is within
A.M. Best’s guidelines for the company’s current ratings. The
group’s GAAP interest coverage, at least in the near term, will
continue to be pressured by lower earnings due to elevated
investment losses. However, A.M. Best notes that the group’s
current interest coverage ratio of approximately four times is
adequate.
For a complete listing of Protective Life Corporation’s FSRs,
ICRs and debt ratings, please visit
www.ambest.com/press/100902protective.pdf.
The principal methodologies used in determining these ratings,
including any additional methodologies and factors that 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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