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Acquisitive Protective Life has 'significant excess capital' to deploy on M&A

executivesrecently made clear that the company's appetite for acquisitions has notdiminished under its new ownership.

ExecutiveVice President, CFO and Controller Steven Walker told an audience of investorsand analysts on April 11 that Protective Life's 2016 financial plancontemplates that the company will end the year with $1.5 billion of capital inexcess of a 400% risk-based capital ratio, funds that he said Nancy Kane,senior vice president of acquisitions and corporate development, "isworking really working hard to try to find additional opportunities to deploy."

Ithas been more than 14 months since Dai-ichiLife Insurance Co. Ltd. completed its $5.58 billion acquisition of Protective Life,and Walker reiterated that the Japan-based parent views his company as itsengine for growth in the U.S. market.

ProtectiveLife said it has engaged in 48 deals through its history in its acquisitionssegment, with total capital invested of $3.76 billion. Only two of those dealsclosed subsequent to April 2011, however: the October 2013 purchase of MONY Life Insurance Co. and theJanuary 2016 additionof blocks of term life business from a GenworthFinancial Inc. unit. The former transaction involved capitaldeployment of $1.09 billion; the company said it invested $661 million in thelatter deal, which took the form of a reinsurance transaction that ProtectiveLife projects will be accretive to earnings in 2016.

ProtectiveLife said in a presentationaccompanying the investor meeting that the acquisition segment's primary focusremains on long-dated individual life insurance policies in a targeted blocksize of between $500 million and $1 billion.

"We'rereally interested in looking for mortality risk in these blocks," Walkersaid, according to a transcript of his remarks.

"Wehave significant institutional experience and know-how around things like duediligence, valuation, negotiation and systems consolidation," he added. "Wealso have been able to execute some innovative deal structures, so we have avery talented deal team. And we have a very strong reputation among potentialcounterparties around closing the deal. We have really good relationships withour regulators, and that has enabled us to always get a deal closed."

Walker,responding to an analyst's question that sought additional clarity around thecompany's projected excess capital position, said Protective Life ended 2015with approximately $1.2 billion in capital above a 400% risk-based capitalratio, giving it the ability to execute "a fairly sizable acquisition."To the extent that an even larger transaction was to emerge, Walker said inreference to Dai-ichi, "I think they would be happy to deploy additionalcapital through Protective if that opportunity becomes available to us."

SNLcalculates that Protective Life's subsidiaries ended 2015 on a combined basis,reflecting disclosures in their annual statutory statements, at a companyaction level risk-based capital ratio of 562.5%. With total adjusted capital ofnearly $4.06 billion and company action level risk-based capital of just morethan $721.1 million as of Dec. 31, 2015, as calculated by SNL, the group wouldhave needed approximately $2.88 billion in adjusted capital to achieve a 400%company action level risk-based capital ratio.

Accordingto the April 11 presentation, the acquisitions segment generated pretaxoperating earnings of approximately $195 million for the 11-month, post-saleperiod ended Dec. 31, 2015, relative to Protective Life's plan of $179 million.Walker attributed the better-than-expected profitability to favorable mortalityand lower lapses. The segment was the largest contributor to the company'soverall pretax earnings for the 11-month period of $484 million, which exceededthe plan by approximately $76 million. On an after-tax basis, operating incomeof $323 million exceeded Protective Life's plan of $269 million.

Walkersaid Protective Life's 2016 financial plan contemplates after-tax operatingincome for the full year of $350 million along with a risk-based capital ratioof 605% at year-end and a debt-to-capital ratio of 25% excluding nonrecoursecaptive financings. The plan assumes factors such as no unlocking of deferredacquisition costs, the beginning of payments of upstream dividends to Dai-ichiequivalent to 33% of Protective Life's 2015 net income and a GAAP effective taxrate of 34%. The company said its pace of future earnings growth would beheavily influenced by the potential for future acquisitions. To that end,Walker noted that the MONY Life deal had been "performing well above ourpricing and also giving us some good earnings growth."

ProtectiveLife's plan also contemplates the deployment of between $300 million and $400million per year in support of organic growth in its retail businesses.

"Wedo have a very complementary relationship between our retail operations and ouracquisition line of business, and this allows us to balance our growth andcapital deployment between retail and acquisitions," said Protective LifeSenior Vice President and Treasurer Lance Black. "Basically, having theseoptions allows us to rationally allocate capital to the best risk-adjustedreturn option and exercise discipline rather than chasing market share."

Black,responding to an analyst's question, dismissed the notion that Protective Life'scompetitiveness relative to peers had increased under its new ownership as aresult of a perception that its cost of capital might have declined.

"Sodespite what our competitors or the industry might believe," he said, "wehave not in any way really deviated from our historical discipline and pricingof our product."