NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Protective Life Corp.'s (NYSE: PL) Issuer Default Rating (IDR) at 'BBB+' and senior debt ratings at 'BBB'. At the same time, Fitch has affirmed the 'A' Insurer Financial Strength (IFS) ratings of PL's primary life insurance subsidiaries. The Rating Outlook is Stable. A full ratings list follows at the end of this release.
KEY RATING DRIVERS:
PL's ratings continue to reflect the group's diversified operating profile, strong operating performance, solid debt service capability and sound risk-adjusted capitalization. The company's financial leverage ratio is in line with rating expectations, but total leverage is high driven by reserve financing.
Fitch views PL's operating results as good and in line with expectations for the rating. PL's operating return on equity based on Fitch's calculation is expected to be about 11% for the full year 2013 compared to 10% in 2012. Results in the first nine months of 2013 were driven by improvement in the Annuities, Stable Value, and Asset Protection segments, partially offset by less favorable mortality in the Life Marketing and Acquisitions segments. The acquisition of MONY Life Ins. Co. and business of MONY Life of America closed Oct. 1 and is expected to add about $20 million to full-year 2013 earnings before financing costs.
Fitch views PL's debt service capability as strong. Fitch expects GAAP interest coverage in 2013 to be in the 10x range, which is above rating expectations. Cash interest coverage, which considers maximum statutory dividend capacity and committed cash at the holding company relative to adjusted interest expense, is very strong at about 10x.
Protective estimates the NAIC risk-based capital (RBC) ratio of Protective Life Insurance Company, the group's primary operating company, was about 550% as of Sept. 30, 2013, compared with 510% at year-end 2012. The RBC is expected to be in the 400% range for full-year 2013, reflecting the close of the $1 billion MONY acquisition in the fourth quarter.
PL's financial leverage ratio (FLR) is in line with rating expectations at 28% at Sept. 30, 2013, compared to 29% at year-end 2012. Fitch notes, however, that the FLR excludes reserve funding arrangements, which are included in Fitch's total financings and commitments (TFC) ratio. Fitch views PL's TFC as high relative to peers at 1.7x as of Sept. 30, 2013, but generally views PL's reserve financing activities as well-managed.
Key concerns include macroeconomic headwinds from low interest rates and the weak economic recovery. These conditions are expected to constrain PL's ability to improve earnings over the near term and could have a material negative effect on the company's earnings and capital in a severe, albeit unexpected, scenario.
The key rating triggers that could result in an upgrade include GAAP interest coverage above 9x, operating return on equity (ROE) sustained in the 11% to 12% range; financial leverage below 25%, and TFC below 1.0x.
The key rating triggers that could result in a downgrade include: financial leverage above 30%; reported RBC below 300%, a downturn or weak growth in earnings, or a material reinsurance loss. Ratings could also be pressured if interest coverage falls below 5x or the TFC rises above 2.0x on a sustained basis.
Fitch has affirmed the following ratings with a Stable Rating Outlook:
Protective Life Corporation
--IDR at 'BBB+';
--$150 million in senior notes due 2014 at 'BBB';
--$150 million in senior notes due 2018 at 'BBB';
--$400 million of 7.38% senior notes due 2019 at 'BBB';
--$300 million of 8.45% senior notes due 2039 at 'BBB';
--$100 million of 8.00% senior retail notes due 2024 at 'BBB';
--$288 million of 6.25% subordinated debt due 2042' at 'BB+';
--$150 million of 6.00% subordinated debt due 2042 at 'BB+';
--$103 million of 6.13% trust-preferreds issued through PLC
Capital Trust V due 2034 at 'BB+'.
Protective Life Insurance Company
Protective Life and Annuity Insurance Company
West Coast Life Insurance Company
MONY Life Insurance Co.
--IFS at 'A'.
Protective Life Secured Trust
--Medium-term notes at 'A'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Insurance Rating Methodology' (November 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology -- Amended