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As a part of its periodic review exercise, the rating agency A.M. Best Co. has undertaken rating action on the life insurer Protective Life Corporation (PL - Analyst Report). Per its action it has reiterated the issuer credit ratings (ICR) of “a-” and debt ratings of Protective Life.

Concurrently, the rating agency reiterated the financial strength rating (FSR) of A+ and ICR of “aa-” of the main life as well as health subsidiaries of the insurer. 
 
All the ratings are of investment grade. A.M. Best Co. also carries a stable outlook on the company which reflects remote chances of any rating change in the near term.
 
Protective’s ability to acquire and integrate companies as well as chunks of business is also well appreciated by the rating agency.  Recent acquisitions made by the company have poised it well with respect to a consistent source of earning, by entering into new regions.
 
With reference to the balance sheet, the rating agency finds that Protective has a strong balance sheet with adequate risk adjusted capitalization at each of its operating entities. While the company has a greater level of financial leverage in its capital structure, the company’s capacity to service its debt obligations remains strong. The company also maintains adequate financial flexibility witnessed by healthy cash flows from its subsidiaries, financing aid from line of credit of upto $750 million.  
 
The rating agency went a step further to find that the company’s balance sheet carries intangible assets in the nature of deferred acquisition costs which is more than 100% of shareholder’s equity. Moreover the company’s liberal use of captives to finance Regulation XXX and Guideline AXXX (AG38) reserves and to weather earnings volatility driven by its hedging activity would require greater scrutiny of its risk based capital ratio.
 
With respect to its business performance, the rating agency notes that the company’s sale in its life and annuity line of business remained essentially unchanged in 2012. The rating agency is of the opinion that a number of steps undertaken by the company which include repricing of certain products, discontinuance of some others and introduction of new products will help it regain lost business. 
 
Despite challenging market conditions the rating agency is confident of the company’s ability to remain profitable in its core business. Led by an improvement in equity markets the company has benefited from a rise in fee received on separate account assets along with higher variable annuity sales.
 
The rating agency is, however, of the view that the continuing low interest rate environment may suppress earnings. 
 
Another cause of concern is the company’s investment portfolio with a significant exposure to residential mortgage-backed securities that has declined in recent periods. While the commercial mortgage loan portfolio has performed well, Protective carries a relatively higher amount of exposure to real estate-related assets, which can lead to investment loss if the economy turns weak. 
 
Protective Life might face rating downgrade if results decline, it incurs considerable impairments in its investment portfolio, financial levegare increases or interest coverage ratios decline.
 
Protective Life retains a Zacks Rank #3 (Hold). Other players in the same field which includes Genworth Financial Inc. (GNW - Analyst Report), Torchmark Corp. (TMK - Analyst Report), Reinsurance Group of America Inc. (RGA - Analyst Report) all hold an investment grade rating from A.M. Best.

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