Fitch Affirms Protective Life Corporation's Ratings; Outlook Stable
On Sept. 30, 2015, PL announced that its wholly-owned subsidiary, Protective Life Insurance Company (PLIC), has reached an agreement to acquire via reinsurance certain in force blocks of term life insurance from Genworth Life and Annuity Insurance Co. (GLAIC). PL's total capital investment in the transaction is estimated to be approximately \\$661 million. The transaction is expected to close in the first quarter of 2016 subject to customary regulatory approvals.
The transaction is expected to be funded through existing capital resources at PL. Certain reserve funding debt that is currently being treated as operating leverage is expected to be reclassified as financial leverage as part of this transaction based on Fitch's criteria. As a result, Fitch expects PL's financial leverage ratio (FLR) to increase to approximately 27% from 17% at June 30, 2015.
Fitch views this transaction as in line with PL's strategy to acquired blocks of life insurance business and neutral to PL's ratings. Integration and execution risk are considered low given PL's track record and the seasoned nature of the acquired block of business, which will continue to be administered by GLAIC.
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). 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. PL's ratings benefit from greater resources and the stronger credit profile of Dai-ichi Life. As such, the PL entities have been assigned the group rating.
Fitch views PL's standalone credit profile as in line with an 'A' IFS rating, and reflects the company's strong operating performance, solid debt service capability and low investment risk. While PL's risk-adjusted capitalization remains in line with rating expectations, its ratings also reflect the company's high total leverage driven by reserve funding arrangements.
Fitch anticipates greater reported earnings volatility due to purchase GAAP adjustments made when the company was acquired by Dai-ichi Life in February 2015. Fitch views PL's underlying profitability as solid and consistent with rating expectations. The company reported net operating earnings of \\$126 million for first-half 2015 (which reflects five months of data) compared with \\$203 million in the prior-year period, as reported on the legacy accounting basis. Excluding acquisition-related accounting adjustments, the decline in profitability reflects unfavorable mortality and spread compression.
PL's capitalization remains in line with Fitch's rating expectations. PLICO reported an RBC ratio of 562% at Dec. 31, 2014, which is heavily leveraged to reinsurance captives. At year-end 2014, PL's life companies recognized a reserve credit for approximately \\$5.4 billion ceded to special purpose captive reinsurers, or approximately 141% of total adjusted capital (TAC). Reserve credit is expected to increase to approximately \\$7.8 billion after the transaction closes, which is among the highest in Fitch's rated universe.
Fitch views PL's asset quality as high, given its relatively low risky asset ratio of 38% at year-end 2014 compared with approximately 82% for the industry. Fitch's risky asset ratio is made up of below investment-grade (BIG) bonds, unaffiliated common stocks, lower quality real estate and Schedule BA/other assets in relation to TAC.
With Protective Life Corporation currently rated at Japan's long-term local currency IDR, an upgrade is unlikely in the near future.
Conversely, if the rating on Japan were lowered, PL's ratings will also likely be lowered in conjunction with its parent.
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'.