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Protective Life (PL) Placed on Review for Upgrade at Moody's

June 4, 2014 3:37 PM EDT

Moody's Investors Service placed the debt ratings of Protective Life Corporation (NYSE: PL)(senior debt at Baa2) on review for upgrade and affirmed the A2 insurance financial strength (IFS) ratings and debt ratings (stable outlook) of its operating companies including Protective Life Insurance Company (PLIC), its primary operating subsidiary. This rating action follows the announcement by Dai-ichi Life Insurance Company (Dai-ichi, IFS at A1, stable outlook) of its proposed acquisition of all the outstanding stock of Protective for $5.7 billion of cash in a transaction expected to close by early January 2015, subject to regulatory and shareholder approvals.

RATINGS RATIONALE

Commenting on the affirmation of the operating companies' ratings, Moody's analyst, Ann Perry said, "Following its acquisition by Dai-ichi, we expect Protective's business strategy and risk profile to remain essentially unchanged and the current management team to remain in place." According to the rating agency, the review for upgrade of Protective's holding company credit ratings is driven by the acquirer being a much higher rated company (i.e., Dai-ichi's A1 IFS and A3 (hyb) subordinated debt rating relative to Protective's Baa2 senior debt rating) and Moody's expectation that Dai-ichi would likely provide some level of support to Protective's creditors to protect Dai-ichi's $5.7 billion investment, thus possibly resulting in a narrowing of the typical three notches between an operating company IFS rating and its holding company senior debt rating. If the transaction closes with the currently planned ownership structure, Protective's debt ratings would likely be raised by one notch.

The rating agency added that it expects some level of ongoing dividends to be paid from Protective to the new owner, but also believes that there is the potential for a two way flow of capital, as Dai-ichi could provide Protective with additional capital for future growth.

Moody's noted that Protective's ratings reflect the group's diverse revenue and earnings sources, a high proportion of earnings deriving from the life insurance business, multiple distribution channels, manageable cash outflows at the holding company, and an established core competency in acquiring other companies and blocks of business. The rating agency added that Protective's credit challenges include its growing variable annuity (VA) business and significant credit exposure to reinsurers.

RATING DRIVERS

According to Moody's, the following could place upward pressure on Protective's ratings: 1) sustained earnings growth in excess of 10% annually and sustained returns on capital of over 10%; 2) adjusted financial leverage maintained in the mid 20% range; 3) sustained annual cash flow interest coverage of above 6 times and earnings coverage of at least 8 times; and 4) company action level NAIC Risk-Based Capital (RBC) ratio at PLIC consistently over 400%. In addition, upon the closing of the acquisition by Dai-ichi, Moody's expects to upgrade Protective's debt ratings by one notch to reflect the expectation of support of holding company creditors. Conversely, the following could place downward pressure on the company's ratings: 1) adjusted financial leverage rises above 30%; 2) annual cash flow interest coverage falls below 4 times; and 3) company action level NAIC RBC ratio at PLIC falls below 350%.

The following ratings were placed on review for upgrade:

Protective Life Corporation -- senior unsecured debt at Baa2; subordinated debt at Baa3(hyb); junior subordinated debt at Ba1(hyb); preferred shelf at (P)Ba1; senior unsecured shelf at (P)Baa2; senior unsecured MTN program at (P)Baa2; junior preferred shelf at (P)Ba1; subordinated shelf at (P)Baa3;

PLC Capital Trusts III, IV, V -- backed preferred stock at Baa3(hyb);

PLC Capital Trusts VI, VII,VIII -- backed preferred shelf at (P)Baa3;

The following ratings were affirmed with a stable outlook:

Protective Life Insurance Co. -- insurance financial strength at A2; short-term insurance financial strength at Prime-1;

West Coast Life Insurance Co. -- insurance financial strength at A2;

MONY Life Insurance Co. -- insurance financial strength at A2; surplus notes at Baa1(hyb);

Protective Life Secured Trusts -- backed senior secured at A2; backed senior secured MTN program at (P)A2

Protective Life U.S. Funding Trusts -- senior secured MTN at (P)A2.



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