Fitch Affirms Protective Life Corporation's Ratings; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Protective Life Corporation's (PL) Issuer Default Rating (IDR) at 'A-' 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 list of rating actions follows at the end of this release.

KEY RATING DRIVERS

PL's ratings reflect its status as a wholly-owned subsidiary of Japan-based Dai-ichi Life Insurance Company, Ltd. (Dai-ichi Life).

Fitch views PL's standalone credit profile as in line with an 'A' IFS rating, which reflects the company's strong operating performance, solid debt service capability and relatively low investment risk. The ratings also reflect strong balance sheet fundamentals based on PL's solid risk-based capitalization and above-average total leverage driven by reserve funding arrangements.

On Jan. 15, 2016, Protective Life Insurance Company (PLICO), a wholly owned subsidiary of PL, acquired via reinsurance certain in-force blocks of term life insurance from Genworth Life and Annuity Insurance Co. (GLAIC). The transaction was funded through existing capital resources at PL with a total capital investment of approximately $661 million. Fitch views this transaction as in line with PL's strategy and neutral to the rating.

As part of this transaction, certain reserve funding debt that was being treated as operating leverage was reclassified as financial leverage based on Fitch's criteria. As a result, PL's pro forma financial leverage ratio increased to 25.9% from 15.8% as of Dec. 31, 2015. The company's reported leverage metrics are understated, due to purchase accounting adjustments following PL's acquisition by Dai-ichi Life. Total leverage, as measured by PL's total financings and commitments ratio, which includes reserve funding arrangements, is above-average at 1.1x (1.9x excluding purchase accounting adjustments).

Fitch views PL's insurance companies as strongly capitalized, evidenced by PLICO's reported risk-based capital (RBC) ratio of 562% at Dec. 31, 2015, which remains well above its target. The company's reported RBC ratio benefits from its use of captive arrangements. The reserve credit recognized by PL's insurance subsidiaries for amounts ceded to special purpose captive reinsurers increased to approximately $7.2 billion following the GLAIC transaction from $5 billion at year-end 2015. This represents 178% of the companies' total adjusted capital (TAC), which is among the highest in Fitch's rated universe.

Fitch anticipates greater reported earnings volatility due to purchase accounting adjustments required under U.S. generally accepted accounting principles related to PL's acquisition by Dai-ichi Life in February 2015.

Fitch continues to view PL's underlying profitability as solid and consistent with rating expectations. PL reported after-tax operating income of $323 million in 2015 (reflecting 11 months of data) compared with $424 million in 2014, as reported on the legacy accounting basis. In addition to acquisition-related accounting adjustments, which reduced reported income, lower profitability also reflected reduced fee income and higher expenses, which were partially offset by strong participating mortgage income, favorable mortality and stable interest margins, as wider credit spreads offset the impact of low rates.

Fitch views PL's asset quality as relatively high, based on its below average risky assets to statutory surplus ratio of 42% at year-end 2015 compared with approximately 80% for the industry. During 2015, the company reported a modest $27 million of impairments on fixed income securities with a negligible $0.1 million related to energy companies.

PL's exposure to the energy sector made up approximately 10% of its fixed income assets at year-end 2015, which is largely in line with the U.S. life insurance industry. Fitch views PL's BIG energy exposure as below average at 7% of total energy exposure but the company remains susceptible to downward ratings migration in a 'lower for longer' oil price scenario. Fitch considers PL's exposure to sub-sectors most exposed to commodity prices as modest at 25% of total energy exposure at year-end 2015.

Based on Fitch's criteria, PL's strategic importance within the Dai-chi Life enterprise is considered 'Very Important.' The strategic category reflects Dai-ichi Life's initiative to expand into the U.S. life insurance market. As such, the PL entities have been assigned the group rating.

RATING SENSITIVITIES

In accordance with Fitch's group rating methodology, PL's ratings are expected to move in line with Dai-ichi Life's ratings, which are currently constrained by Japan's long-term local currency IDR rating of 'A'. PL's ratings could also be upgraded if Fitch's view of PL's standalone profile improves.

Conversely, if Dai-ichi Life's ratings were downgraded, based on its own credit quality, or deterioration in Japan's sovereign rating, PL's ratings will also likely be lowered in conjunction with its parent. As a 'Very Important' subsidiary, PL could also be downgraded below the group rating if its standalone assessment is downgraded by three or more notches.

Fitch has affirmed the following ratings with a Stable Outlook:

Protective Life Corporation

--IDR at 'A-';

--$150 million of 6.40% 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+';

--$288 million of 6.25% subordinated debt due 2042 at 'BBB-';

--$150 million of 6.00% subordinated debt due 2042 at 'BBB-'.

Protective Life Insurance Company

Protective Life and Annuity Insurance Company

West Coast Life Insurance Company

MONY Life Insurance Co.

--IFS at 'A'.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003056

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003056

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Dafina M. Dunmore, CFA
Director
+1-312-368-3136
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Douglas L. Meyer, CFA
Managing Director
+1-312-368-2061
or
Committee Chairperson
Doug M. Pawlowski, CFA
Senior Director
+1-312-368-2054
or
Media Relations:
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Dafina M. Dunmore, CFA
Director
+1-312-368-3136
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Douglas L. Meyer, CFA
Managing Director
+1-312-368-2061
or
Committee Chairperson
Doug M. Pawlowski, CFA
Senior Director
+1-312-368-2054
or
Media Relations:
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com