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:
Today's rating action follows PL's announcement that it plans to acquire MONY Life Ins. Co. from AXA Financial, Inc. for about $1 billion. As part of the transaction, PL will also acquire certain blocks of business via reinsurance from an affiliate of MONY Life, which will remain part of AXA Financial. The business to be acquired represents approximately $9.8 billion of statutory reserves and largely consists of legacy closed block individual participating life insurance business formed when MONY Life demutualized in 1998.
The affirmation of PL's ratings reflects Fitch's view that the proposed transaction is consistent with the company's strategy to acquire blocks of life insurance business. Fitch believes that the acquisition of companies and life blocks is a core competency of PL, and anticipates that the company's expertise in this area will mitigate execution risk. Fitch expects the acquisition should provide the company with a stable source of earnings and cash flow from a relatively low risk block of life insurance business.
The acquisition will be funded from existing sources of capital and liquidity. The bulk of the financing will come from capital at Protective Life Ins. Co. (PLICO), the group's primary operating company. The financing is expected to reduce PLICO's risk-based capital (RBC) ratio from 510% at year-end 2012 to closer to 400%. The RBC is expected to remain above 400% post-acquisition.
PL's $750 million credit facility is expected to provide about $100 million of acquisition funding. This will take PL's financial leverage ratio from 29% at year-end 2012 to about 31% on a pro forma basis. This is somewhat above expectations for the rating level but within tolerances. Total leverage remains high driven by PL's reserve financing. PL has one of the highest total financing and commitments (TFC) ratios in the Fitch universe at 1.7x.
Fitch views PL's full-year 2012 operating results as good and in line with expectations for the rating. Results were relatively flat with the prior year, as favorable factors, including good mortality and improved equity market performance, were offset by the impact of ongoing low interest rates, including lower lapses, and higher expenses in the asset protection segment.
Fitch views PL's ability to service adjusted debt interest expense as solid based on GAAP earnings coverage in the 8x range. Cash interest coverage, which considers maximum statutory dividend capacity and committed cash at the holding company relative to adjusted interest expense, is also strong at about 6x.
Key concerns include macroeconomic headwinds from low interest rates and financial market volatility. 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 continued good GAAP operating profitability and earnings-based coverage of interest expense; financial leverage below 25%; TFC below 1.0x range.
The key rating triggers that could result in a downgrade include a material decline in GAAP equity that would drive financial leverage above 30% or a drop in statutory capital that would drive reported RBC below 300%, a downturn or weak growth in earnings, or a material reinsurance loss. Ratings could also be pressured if interest coverage fell 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+';
--$250 million in senior notes due 2013 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
--IFS at 'A'.
Protective Life Secured Trust
--Medium-term notes at 'A'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--Insurance Rating Methodology' (Jan. 11, 2013).
Applicable Criteria and Related Research
Insurance Rating Methodology - Amended
Cynthia J. Crosson, +1-212-908-0863
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Douglas L. Meyer, CFA, +1-312-368-2061
Douglas M. Pawlowski, CFA, +1-312-368-2054
Brian Bertsch, New York, +1 212-908-0549
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