Fitch Affirms Protective Life Corporation; Outlook Stable

Fitch Ratings has affirmed Protective Life Corp.'s (PL) Issuer Default Rating (IDR) at 'BBB+' and senior debt ratings at 'BBB'. Fitch has also affirmed PL's trust preferred ratings at 'BB+' and primary life insurance subsidiaries' Insurer Financial Strength (IFS) ratings at 'A'. The Rating Outlook is Stable. A full ratings list follows at the end of this release.

PL's ratings reflect the group's good operating performance, including strong investment results, solid debt service capability and sound risk-adjusted capitalization. The company's financial leverage ratio is in line with rating expectations, but overall leverage is high driven by reserve financing.

Fitch views PL's operating results as good and in line with expectations for the rating. Full-year 2012 results are expected to be relatively flat with the prior year, as favorable factors, including good mortality and improved equity market performance, are offset by the impact of ongoing low interest rates, including lower lapses and a slowdown in top line growth. PL is deemphasizing growth in variable annuities going forward, although it plans to grow life sales through institutional channels.

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.
PL estimates the NAIC risk-based capital ratio of Protective Life Insurance Company, the group's primary operating company, at 462% as of Sept. 30, 2012, compared with 433% at year-end 2011. It is expected to increase further for the full year 2012 reflecting a fourth quarter captive reinsurance reserve financing transaction. PL indicates that, following the transaction, all XXX and AXXX reserve financing needs are now funded to the peak. New business written in the second half of 2012 and 2013 is not expected to require reserve financing.

PL's financial leverage ratio (FLR) was 29% at the end of the third quarter compared to 28% at year-end 2011. New debt issued in 2012 was used to pay off existing debt, so the increase in the ratio was due mainly to the new DAC accounting rules, which resulted in a decrease in GAAP equity. The FLR is in line with rating expectations. Fitch notes, however, that the FLR excludes reserve funding arrangements, which are included in Fitch's total financings and commitments ratio (TFC). Fitch views PL's TFC as very high relative to peers at 1.8x as of Sept. 30, 2012. Fitch generally views PL's reserve financing activities as well managed.

Key concerns include macroeconomic headwinds from low interest rates and high 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 material declines in GAAP equity that would drive financial leverage above 30%) or 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.