Fitch Ratings has affirmed Protective Life Corporation's (Protective) primary life insurance subsidiaries' Insurer Financial Strength (IFS) ratings at 'AA-' and its Long-Term Issuer Default Rating (IDR) at 'A'.
The Rating Outlook is Stable.
Key Rating Drivers
The affirmation of Protective's ratings reflects the company's moderate company profile and very strong balance sheet fundamentals. The ratings also reflect solid debt service capability and relatively low investment risk. Protective's earnings have been negatively impacted by adverse mortality due to the pandemic. Earnings pressure is expected to persist in the intermediate term.
Protective's ratings consider the company's stable standalone credit profile (SACP) and status as a 'Very Important' wholly-owned subsidiary of Japan-based Dai-ichi Life Holdings, Inc. Protective's ratings benefit from the greater resources and stronger credit profile of Dai-ichi Life and thus receive a two-notch uplift due to parent support. Fitch views Protective's SACP as in line with an 'A' IFS rating.
As a wholly-owned subsidiary of Dai-ichi, Protective derives significant financial flexibility from its parent. Fitch expects Dai-ichi will continue to provide capital to support organic growth and M&A at Protective, which represents Dai-ichi's largest business outside of Japan.
Fitch views Protective's overall company profile as moderate, which is in line with the rating category. Fitch considers Protective's operating scale and general competitive positioning to be at the upper end of moderate, with some favorable attributes that include a strong position in the life insurance market and a solid track record of successfully executing block acquisitions.
Protective's underlying profitability remains strong, though recent earnings have been pressured due to elevated mortality from COVID-19. Purchase accounting associated with its 2015 acquisition by Dai-ichi Life affects return metrics and could cause volatility.
Macroeconomic volatility and geopolitical uncertainty pose risks to Fitch's outlook for life insurers and could have a material negative effect on Protective's earnings and capital in a severe, albeit unexpected, scenario. Favorably, Protective's concentration in individual life insurance reduces its exposure to market risk, particularly interest rate and equity market volatility. However, earnings metrics are likely to remain below Fitch's expectations for the rating level over the intermediate term, and therefore, capitalization is expected to play a larger role in the company's ratings.
Fitch views Protective's capitalization as very strong based on its Prism capital model score of 'Very Strong', and its lead operating subsidiary, Protective Life Insurance Co.'s (PLICO), RBC ratio of 477% at YE 2021. PLICO's RBC ratio benefits from its use of a captive reinsurance arrangement to finance redundant term and universal life insurance reserves. Protective's financial leverage of 24% at YE 2021 remains in line with rating expectations.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
As a 'Very Important' subsidiary to Dai-ichi, Protective's ratings are two-notches higher than its standalone credit profile. An upgrade would be predicated on a one-notch upgrade in the standalone credit profile coupled with an upgrade of Dai-ichi's ratings or an increase in Protective's strategic importance to 'Core' coupled with an upgrade in Dai-ichi's ratings.
An upgrade in standalone credit profile could be driven by improvement in operating scale and competitive positioning, sustained capitalization of 'Very Strong' and an improvement in earnings to upper single digit ROEs.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of one-notch to Dai-ichi's ratings or a decline in Protective's 'Very Important' strategic importance to Dai-ichi;
A deterioration in Protective's standalone credit profile, which could be driven by sustained deterioration in earnings, capitalization or a material increase in risk profile or adverse experience with existing liabilities.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
Protective's ratings are directly linked to those of Dai-ichi Life Insurance Company, Ltd.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg