A.M. Best Revises Outlook to Stable for Protective Life Corporation and Its Subsidiaries

A.M. Best Co. has revised the outlook to stable from negative and 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 revised the outlook to stable from negative and affirmed the ICR of “a-” of Protective, as well as the debt ratings of Protective and PLIC. (See link below for a detailed listing of the companies and ratings.)

The revised outlook reflects the significant improvement in Protective’s risk-adjusted capitalization and net earnings during 2009 and into 2010 after experiencing a significant decline in 2008, concurrent with the financial market crisis. Historically, Protective has relied on capital market securitizations to fund excess statutory reserves. Due to global financial stresses, which effectively shut down the securitization markets in 2008, Protective was forced to internally fund the excess reserves that suppressed its regulatory capital ratio and limited its growth. As the credit markets have reopened, Protective has financed virtually all of its term insurance reserves as of year-end 2010. Going forward, Protective has designed alternative universal life products.

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.

Protective reported GAAP net income of $181.6 million for the period ending September 30, 2010, after reporting net income of $271.5 million for 2009. Although Protective reported a GAAP 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. In addition, Protective’s acquisitions have increased its earnings and have allowed the company to enter new markets and realize certain operating efficiencies.

Protective recently announced that it has agreed to terms on two acquisitions (purchase of United Investors and coinsurance of Liberty Life), in which it will invest a total of more than $500 million of internal capital. The acquisitions will be immediately accretive to earnings and provide $60-$80 million per year in incremental pre-tax income. Initially, the internal capital invested to acquire the businesses will lower Protective’s risk-adjusted capitalization. However, A.M. Best projects that Protective’s capitalization ratio post-closing will be supportive of its ratings and that the new earnings stream will return approximately 40% of the invested capital within two years.

Offsetting these positive rating factors is Protective’s level of below investment grade holdings in its fixed income portfolio. As a result of rating downgrades, below investment grade holdings have increased from 5.4% as of year-end 2008 to 13.6% as of September 30, 2010. In particular, 54% of Protective’s $3.4 billion residential mortgaged-backed securities (RMBS) portfolio was rated below investment grade as of September 30, 2010. However, A.M. Best notes that over 99% of the RMBS portfolio is invested in super senior or senior tranches that possess significant credit enhancement within the deal structure. Also, the RMBS portfolio is supported almost entirely by fixed-rate loan collateral, has a relatively short average life (the weighted average life is less than 2.5 years) and has limited or no exposure to subprime, hybrids, option-arms and subordinated RMBS tranches. In addition, Protective’s overall investment portfolio was in a $1.3 billion net unrealized gain position as of September 30, 2010 (GAAP basis, before tax and deferred acquisition costs), and credit impairment losses (recognized in income) have fallen to $35 million for the first nine months of 2010 from $312 million during 2008.

While Protective’s interest coverage ratio remains more than adequate for its ratings, the ratio has decreased from its historical range of 8 times to 10 times as a result of the current level of financial leverage. Protective’s all-in financial leverage—senior debt plus hybrids—is approximately 40% (excluding other comprehensive income). However, Protective’s financial leverage falls to 29% (excluding other comprehensive income) after applying operating leverage treatment to the $800 million of senior notes issued in October of 2009 for purposes of refinancing one of its existing securitization transactions (see related press release dated October 9, 2009).

For a complete listing of Protective Life Corporation and its subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/122115protective.pdf.

The principal methodology used in determining these ratings is Best’s Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best’s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Life and Health Insurers”; “Review of BCAR Treatment for XXX Captives”; “A.M. Best’s Perspective on Operating Leverage”; “Rating Members of Insurance Groups”; “A.M. Best’s Ratings & the Treatment of Debt”; and “Rating Funding Agreement-Backed Securities.” Methodologies 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. For more information, visit www.ambest.com.

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