A.M. Best Affirms Ratings of Protective Life Corporation and Its Subsidiaries; Assigns Ratings to New Senior Notes

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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