A.M. Best Affirms Ratings of Protective Life Corporation and Its Subsidiaries

  A.M. Best Affirms Ratings of Protective Life Corporation and Its
  Subsidiaries

Business Wire

OLDWICK, N.J. -- February 22, 2013

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) (headquartered in
Birmingham, AL) [NYSE: PL], 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.

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% (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 Corporation 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. For more information,
visit www.ambest.com.

       Copyright © 2013 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

Contact:

A.M. Best Company, Inc.
Michael Adams, 908-439-2200, ext. 5133
Senior Financial Analyst
michael.adams@ambest.com
or
William Pargeans, 908-439-2200, ext. 5359
Assistant Vice President
william.pargeans@ambest.com
or
Rachelle Morrow, 908-439-2200, ext. 5378
Senior Manager, Public Relations
rachelle.morrow@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com
 
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