OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best Co. has affirmed the financial strength rating of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of Pacific Life Insurance Company(PLIC)(Omaha, NE) and its wholly owned subsidiary, Pacific Life & Annuity Company (PLAC) (Phoenix, AZ) (together referred to as Pacific Life). Concurrently, A.M. Best has affirmed the ICR of “a-” and debt ratings of PLIC’s parent holding company, Pacific LifeCorp (Wilmington, DE), as well as the debt ratings of PLIC. The outlook for all ratings is stable. (See below for a detailed listing of the companies and ratings.)

The rating affirmations of Pacific Life are based on its strong capitalization, extensive distribution relationships, strong competitive positions and extensive liquidity sources. Pacific Life’s total adjusted capital (TAC) increased slightly to $6.3 billion at year-end 2011 as derivative gains reflected in surplus offset a statutory net loss of $735 million. Pacific Life continues to maintain its prominent position as a provider of choice in the most affluent market segments for individual life insurance. Overall, the company is a top 10 writer of life insurance and holds leading market positions in universal life (#2), current assumption universal life (#1), indexed universal life (#1) and variable universal life (#4). The company’s penetration in the affluent marketplace along with strong core operating fundamentals, including persistency and mortality, have contributed to favorable rates of return on its life insurance business. Also, the acquisition of Manulife Financial Corporation’s (Manulife) retrocession life business in August 2011 has provided additional life reserves to Pacific Life’s inforce business mix and incremental earnings in 2011.

Partially offsetting these positive rating factors are Pacific Life’s exposure to the real estate market, elevated level of financial leverage and earnings sensitivity to financial market movements. Pacific Life’s real estate exposure is approximately two times TAC when residential and commercial mortgage-backed securities (excluding agency issued securities), whole commercial mortgage loans, real estate company debt and equity real estate holdings are combined. While A.M. Best notes Pacific Life’s prudent commercial loan underwriting practices and excellent historical performance, Pacific Life has over $7 billion of whole commercial mortgage loans, and the portfolio maintains an above average exposure to construction loans that inherently possess high loan to value ratios. Contributing to the increase in Pacific Life’s TAC in recent years was $1.450 billion in surplus notes ($450 million of which was through a senior note issuance by Pacific LifeCorp). As a result of this recent debt issuance, Pacific Life’s financial leverage (excluding accumulated other comprehensive income) has increased to 22% as of year-end 2011. This ratio is substantially higher than historical levels but remains within A.M. Best’s guidelines.

Pacific Life’s earnings remain correlated to the financial markets due to its large variable annuity block. With equity market declines or continued low interest rate levels, Pacific Life’s statutory and to a lesser extent, GAAP earnings are negatively impacted by higher required reserves and negative mark-to-market losses on variable annuity guarantees. The statutory net loss of $735 million for year-end 2011 was driven primarily by variable annuity reserve increases and, to a lesser extent, the investment made to acquire Manulife’s retrocession life business. In addition, Pacific Life’s risk-based capital ratio is sensitive to increases in required capital for variable annuity guarantees (due to equity market and interest rate movements). Up until late 2011, Pacific Life’s variable annuity hedging program was focused primarily on protecting statutory capital against equity market risk. However, A.M. Best notes that Pacific Life has since added interest rate hedging, which should provide some protection for interest rate movements.

Given the volatility associated with Pacific Life’s variable annuity block, the potential for an upgrading of its ratings in the near term is limited. However, factors that could result in positive rating actions include reduced exposure to real estate assets and a substantial shift in the operating profile with the company having a lower reliance on variable annuity products with equity market and interest rate risks. Factors that could result in negative rating actions include a significant and sustained decline in Pacific Life’s consolidated risk-adjusted capitalization, a prolonged decline in its earnings or significant deterioration in its investment performance.

The FSR of A+ (Superior) and ICRs of “aa-” have been affirmed with a stable outlook for the following life/health subsidiaries of Pacific LifeCorp:

• Pacific Life Insurance Company
• Pacific Life & Annuity Company

The ICR of “a-” has been affirmed with a stable outlook for Pacific LifeCorp.

The following debt rating has been affirmed:

Pacific Life Insurance Company—
-- AMB-1 on commercial paper

The following debt ratings have been affirmed with a stable outlook:

Pacific LifeCorp—
-- “a-” on $600 million 6.60% senior unsecured notes, due 2033
-- “a-” on $450 million 6.00% senior unsecured notes, due 2020

Pacific Life Insurance Company—
-- “a” on $150 million 7.9% surplus notes, due 2023
-- “a” on $1,000 million 9.25% surplus notes, due 2039

Pacific Life Funding, LLC—“aa-” program rating
-- “aa-” on all outstanding notes issued under the program

Pacific Life Global Funding—“aa-” program rating
-- “aa-” on all outstanding notes issued under the program

Pacific Pilot Funding—
-- “aa-” on $68.3 million floating rate senior secured notes, due 2016 ($56 million outstanding)

COUNTS Trust Series 2006-4—
-- “aa-”on $89.6 million floating rate senior secured notes, due 2025 ($50.5 million outstanding)

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2012 by A.M. Best Company, Inc.ALL RIGHTS RESERVED.

A.M. Best Co.
Darian Hala, 908-439-2200, ext. 5802
Senior Financial Analyst
darian.hala@ambest.com
or
Rosemarie Mirabella, 908-439-2200, ext. 5892
Managing Senior Financial Analyst
rosemarie.mirabella@ambest.com
or
Rachelle Morrow, 908-439-2200, ext. 5378
Senior Manager, Public Relations
rachelle.morrow@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com

Source: A.M. Best Co.

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