CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings of Protective Life Corporation's (PL) primary life insurance subsidiaries at 'A+'. The Rating Outlook on the IFS rating is Negative. Fitch has also affirmed PL's Issuer Default Rating (IDR) at 'A-' and senior debt ratings at 'BBB+'. The Rating Outlook on the IDR is Stable. A full ratings list follows at the end of this release.
KEY RATING DRIVERS
PL's ratings and Rating Outlook reflect its status as a wholly-owned subsidiary of Japan-based Dai-ichi Life Insurance Company, Ltd. (Dai-ichi Life: IFS 'A+'/Outlook Negative). Based on Fitch's criteria, PL's strategic importance within the Dai-ichi Life enterprise is considered 'Very Important' and, as such, it has been assigned the group rating. The Negative Outlook reflects Dai-ichi Life's exposure to Japan sovereign risk.
Fitch views PL's standalone credit profile as in line with an 'A' IFS rating, which reflects the company's strong operating profile and financial 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.
Fitch views PL's underlying profitability as solid and consistent with rating expectations. The company reported a net operating return on equity of 6% for the first nine months of 2016 compared with double-digit levels in historical periods. The significant decline compared with prior levels reflects purchase GAAP adjustments related to its acquisition by Dai-ichi Life in February 2015. The company continues to experience unfavorable mortality, which is consistent with industry results and is offset by strong participating mortgage income.
Fitch views PL's capitalization as solid based on its primary operating subsidiary's RBC ratio of 562% at Dec. 31, 2015, which Fitch expects to be managed at very strong levels. PL's RBC ratio benefits from its extensive use of captive reinsurance arrangements. The reserve credit recognized by PL's insurance subsidiaries for amounts ceded to special purpose captive reinsurers is approximately $7.2 billion, or 152% of the companies' total adjusted capital (TAC), which is among the highest in Fitch's rated universe. Also supporting Fitch's view of PL's capitalization is its Prism capital model score of 'Very Strong' at year-end 2015.
Fitch views PL's financial leverage ratio of 23% and its total financing and commitments ratio (TFC) of 1.2x, the latter of which accounts for operating leverage including reserve funding arrangements, as being at the high end of its rating range. Both leverage metrics have been reduced by purchase accounting adjustments following PL's acquisition by Dai-ichi Life.
Fitch views PL's asset quality as relatively high, based on its below-average risky asset ratio of 42% at year-end 2015 compared with approximately 80% for the industry. While PL's exposure to below-investment-grade bonds has increased during the first nine months of 2016, it remains below average for the life insurance industry.
Fitch views PL's acquisition of United States Warranty Corp. as in line with its strategy and neutral to the rating. The transaction enhances PL's Asset Protection segment.
Protective Life's IFS ratings will be downgraded if Dai-ichi Life's ratings are downgraded based on a negative rating action on Japan's sovereign rating or deterioration in its credit profile.
PL's holding company ratings would likely be affirmed if Dai-ichi Life's ratings are downgraded by one notch based on a negative rating action on Japan's sovereign rating.
Given that Dai-ichi Life's ratings have a Negative Outlook, an upgrade of PL is unlikely in the near term.
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-'.
Fitch has affirmed the following ratings with a Negative Outlook:
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.
Insurance Rating Methodology (pub. 15 Sep 2016)
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