A.M. Best Affirms Ratings of Pacific LifeCorp and Its Subsidiaries [Professional Services Close – Up]

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 subsidiary, Pacific Life & Annuity Company (PLAC) (Phoenix, AZ) (together referred to as Pacific Life).

Concurrently, A.M. Best has affirmed the debt ratings of PLIC as well as the ICR of "a-" and debt ratings of its parent holding company, Pacific LifeCorp (Wilmington, DE). The outlook for all ratings is stable. (See link below for a detailed listing of the companies and ratings.)

The rating affirmations of Pacific Life are based on its continued strong risk adjusted capitalization, diversified operating profile, extensive liquidity sources and good enterprise risk management (ERM) practices. Pacific Life's total-adjusted-capital (TAC) increased significantly by 10 percent, to $6.9 billion at year- end 2012, primarily due to its net income of $1.0 billion, which was offset by unrealized derivative losses of $413 million and dividends to its parent of $133 million. Statutory results primarily were positively impacted by lower reserve requirements on Pacific Life's variable annuity block. 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 six writer of life insurance and holds leading market positions in universal life, indexed universal life and variable universal life. The organization's penetration into the affluent market along with strong core operating fundamentals, including persistency and mortality, have contributed to favorable rates of return on its life insurance business. Pacific Life's operating profile benefits from the diversification provided within its life, retirement services and to a lesser extent, its reinsurance and aviation equipment leasing business. Consistent with its peers, Pacific Life has made strides in de-risking its variable annuity product line, lowering crediting rates for new life and annuity business and refining its overall ERM practices, including the continued development of economic capital modeling and expansion of hedging practices to protect against low interest rate risks and spread compression along with reducing volatility risk in its variable annuity block.

Partially offsetting these positive rating factors are Pacific Life's high (but industry consistent) minimum guarantees on its universal life business, elevated level of financial leverage and earnings sensitivity to financial market (equity and interest rate) movements. 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 much lesser extent, Generally Accepted Accounting Principles earnings, are negatively impacted by higher required reserves and negative mark-to-market losses on variable annuity guarantees. However, Pacific Life maintains statutory focused hedging programs and has refined its other hedging programs in recent years to partially offset its financial market sensitivity, which evidences good ERM practices. Additionally, Pacific Life has traditionally maintained, on a combined basis, a higher level of residential and commercial mortgage-backed securities (excluding agency issued securities), commercial mortgage loans, equity real estate holdings, asset backed securities and private equity that is roughly two times TAC. Consolidated financial leverage has increased to approximately 23 percent as of year-end 2012 (adjusted for a January 2013 debt issuance and surplus note tender offer). This ratio is substantially higher than historical levels although it is supported by adequate interest coverage, and both ratios remain within A.M. Best's guidelines. A.M. Best notes that risk-adjusted capital has been enhanced through the issuance of surplus notes, which comprised roughly 26 percent of statutory capital and surplus as of year-end 2012. Additionally, Pacific Life has historically maintained higher levels of operating leverage, within its aircraft leasing company. However, the related debt is non-recourse to Pacific Life, is within A.M. Best's tolerance and is substantially supported by guaranteed minimum leasing rental fees.

Given the interest rate and equity market sensitivities associated with Pacific Life's earnings, the potential for upgrading its ratings in the near term is limited. However, factors that could result in positive rating actions include reduced exposure to real estate linked assets, structured assets and other less liquid investments as well as a substantial shift in the operating profile to lower equity market and interest rate sensitive product lines.

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.

For a complete listing of Pacific LifeCorp and its life/health subsidiaries' FSRs, ICRs and debt ratings: ambest.com/press/ 071703pacific.pdf.

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides an explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process.

A.M. Best Company is an insurance rating and information source.

More Information:

http://www.ambest.com

Best's Credit Rating Methodology:

http://www.ambest.com/ratings/methodology

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