AM Best Information Services




OCTOBER 02, 2015 11:58 AM (EDT)

A.M. Best Revises Issuer Credit Rating Outlook to Positive for Pacific LifeCorp and Its Subsidiaries


CONTACTS:
 Joan Sullivan
Senior Financial Analyst
(908) 439-2200, ext. 5144
joan.sullivan@ambest.com

William Pargeans
Assistant Vice President
(908) 439-2200, ext. 5359
william.pargeans@ambest.com

Christopher Sharkey
Manager, Public Relations
(908) 439-2200, ext. 5159
christopher.sharkey@ambest.com

Jim Peavy
Assistant Vice President, Public Relations
(908) 439-2200, ext. 5644
james.peavy@ambest.com

FOR IMMEDIATE RELEASE

OLDWICK - OCTOBER 02, 2015 11:58 AM (EDT)
A.M. Best has revised the outlook to positive from stable and affirmed the issuer credit rating (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 Group) (Pacific Life). Additionally, A.M. Best has affirmed the financial strength rating (FSR) of A+ (Superior) for PLIC and PLAC. The outlook for the FSR is stable.

Concurrently, A.M. Best has revised the outlook to positive from stable and affirmed the issue ratings of PLIC, as well as the ICR of “a-” and issue ratings of its parent holding company, Pacific LifeCorp (Wilmington, DE). (See below for a detailed listing of the companies and ratings.)

The rating affirmations of Pacific Life are based on its strong and increasing trend in risk-adjusted capitalization, diversified operating profile, extensive liquidity sources and strong enterprise risk management (ERM) practices. Pacific Life’s total adjusted capital (TAC) increased to $7.8 billion at year-end 2014 from $7.1 billion at year-end 2013, primarily due to its favorable operating earnings of $687 million and unrealized capital gains of $355 million, which was partially offset by dividends to its parent of $200 million. Reported 2014 statutory net income demonstrated strong results in their Retirement Services Division, primarily driven by strong fee income. However, the net income was partially offset by unfavorable mortality results in addition to minimal strain related to the acquisition of an older block of traditional life insurance within the reinsurance operations segment. GAAP net income for 2014 was $541 million, compared with $721 million in the prior year. The decline was primarily driven by the lower level of interest rates and unfavorable mortality, partially offset by favorable investment experience.

Pacific Life continues to enjoy a prominent position in the affluent market segments for individual life insurance. Overall, the company is the fourth largest 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, has contributed to favorable results on its life insurance business. Pacific Life’s operating profile benefits from the diversification provided within its life and retirement services, and to a lesser extent, its reinsurance and aircraft 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 a maturing economic capital model and expansion of hedging practices in the past three years to protect against interest and equity market movements to reduce volatility in its variable annuity block.

Partially offsetting these positive rating factors are Pacific Life’s minimum guarantees on its universal life business and elevated exposures to financial market (equity and interest rate) movements. Pacific Life’s earnings remain correlated to the financial markets due to its large, but declining, legacy variable annuity block. With positive equity market performance and a decrease in interest rates, Pacific Life’s GAAP, and to a much lesser extent, STAT earnings, are negatively impacted by higher required reserves related to variable annuity guarantees. Pacific Life maintains a statutory capital macro-hedge program and an enhanced variable annuity hedging program. These programs and favorable movements in new business helped reduce in its financial market sensitivity, which evidences good ERM practices. Additionally, Pacific Life has an established track record of successfully managing, and to a degree, mitigating, some of the risks inherent in its various annuity product lines.

A.M. Best notes that the allocation to commercial mortgages relative to capital and surplus for the group is high, although this percentage has declined over the past five years. In addition, its holdings of NAIC class 2 bonds exceed industry averages. Consolidated financial leverage has declined to approximately 21.3% as of year-end 2014. This ratio is higher than historical levels, has been trending favorably and is supported by adequate interest coverage. Both metrics remain within A.M. Best’s guidelines. A.M. Best notes that the Company’s capital includes $1.7 billion of surplus notes, which makes up approximately 24% of statutory capital as of year-end 2014. Pacific Life maintained adequate level of operating leverage in 2014, which is due to its aircraft leasing business. The current operating leverage is within A.M. Best’s guidelines and aircraft leasing debt is without recourse to Pacific Life.

The following issue rating has been upgraded:

Pacific Life Insurance Company

— to AMB-1+ from AMB-1 on commercial paper

The following issue ratings have been affirmed with the outlook revised to positive from stable:

Pacific LifeCorp

— “a-” on $500 million 5.125% senior unsecured notes, due 2043

— “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 billion 9.25% surplus notes, due 2039 (of which $677 million remains)

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

This press release relates to rating(s) that have been published on A.M. Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.

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