A.M. Best Affirms Ratings of Protective Life Corporation and Its Subsidiaries
January 27, 2016 by Best's News Service
Oldwick – A.M. Best has affirmed the financial strength rating (FSR) of A+ (Superior) and the issuer credit ratings (ICR) of “aa-” of the primary life insurance subsidiaries of Protective Life Corporation (Protective) (headquartered in Birmingham, AL). Additionally, A.M. Best has affirmed the ICR of “a-” and existing issue ratings of Protective. Concurrently, A.M. Best has withdrawn existing shelf ratings on Protective and its program rating on Protective Life Secured Trusts, as those structures have been terminated by Protective. All of the above ratings have a stable outlook.
In addition, A.M. Best has affirmed the FSR of A- (Excellent) and the ICR of “a-”of Protective’s asset protection subsidiary, Lyndon Property Insurance Company (Lyndon) (St. Louis, MO). The outlook for Lyndon’s ratings is stable. Lyndon’s ratings reflect the strong risk-adjusted capitalization, strong and improving underwriting and operating results and the support provided by its affiliation with The Dai-ichi Life Insurance Company, Limited’s (DL) principal U.S. subsidiary, Protective.
The ratings of Protective and its life subsidiaries continue to reflect its favorable operating results and diversified business profile. Protective has historically produced steady earnings on a statutory and GAAP accounting basis, albeit recently lower due to GAAP purchase accounting adjustments (PGAAP) related to the purchase of Protective by DL, which are noneconomic in nature. A.M. Best notes that the group’s business mix has good diversification with an emphasis on life, annuities and a core competency as an acquirer of life and annuity blocks of business and/or legal entities. Historically, the organization’s acquisition strategy has contributed to meaningful growth in earnings while allowing it to realize scale-related operating efficiencies. Operating earnings have benefited from favorable overall mortality results, historically strong equity market performance, albeit recently reversing, and generally stable investment spreads. The ratings also reflect DL’s ownership of Protective, which provides it additional financial flexibility and recognizes its leading market position as a global insurer, strong capitalization and diversified business profile. The ratings also acknowledge Protective’s more-than-adequate risk-adjusted capitalization and good enterprise risk management capabilities as demonstrated by strong asset /liability management and capital stress testing, along with a general reduction of risk throughout the organization in recent years.
These strengths are partially offset by a modest decline in premium trends and the periodic use, in connection with its acquisition business, of solutions to fund Regulation XXX and Guideline AXXX (AG38/AG48) reserves in order to mitigate capital strain, which qualitatively impacts reported levels of risk-adjusted capitalization. Although Protective maintains above-average financial and operating leverage, metrics remain within the guidelines for its ratings. A.M. Best believes the company’s strong and consistent operating cash flows, liquidity resources and financial flexibility have partially mitigated this concern. Moreover, A.M. Best believes Protective’s financial flexibility will be enhanced by DL’s strong risk-adjusted capitalization and diversified business profile. Protective also maintains a relatively high level of real estate-related mortgages as investments in its portfolio, which are more than twice its capital and surplus. Despite good overall hedging practices, Protective’s net amount at risk related to its variable annuity with guarantee business represents roughly 27% of total statutory capital. As noted above, PGAAP resulted in a large write-up of invested assets due to low interest rates at the point of acquisition. This trend has reversed through the third quarter resulting in a sizeable net unrealized loss position on a GAAP basis of $2.2 billion as of Sept. 30, 2015. Finally, A.M. Best notes that Protective may face challenges with respect to its acquisition-oriented growth strategy given increased competition within the U.S. life insurance marketplace from traditional and non-traditional competitors.
A.M. Best believes that the potential for a positive rating action would be dependent upon a positive rating action being taken on DL. Conversely, a negative rating action could occur if there is a negative rating action taken on DL or there is a significant decrease in Protective’s risk-adjusted capitalization, as a result of new dividend requirements. Additionally, a negative rating action could occur should Protective’s business profile become more concentrated toward interest-sensitive lines of business, large realized losses arising from portfolio impairments or an increase in total leverage.
For a complete listing of Protective Life Corporation and its subsidiaries’ FSRs, ICRs and issue ratings, please visit Protective Life Corporation.
