OLDWICK, N.J. - (Business Wire) A.M. Best Co. has affirmed the financial strength rating (FSR) 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 (Phoenix, AZ) (together known as Pacific Life). Concurrently, A.M. Best has affirmed the existing debt ratings of PLIC, as well as the ICR of “a-” and debt ratings of its parent holding company, Pacific LifeCorp (Wilmington, DE). A.M. Best also has assigned a debt rating of “a-” to Pacific LifeCorp’s recently issued $450 million, 6.00% 10-year senior notes. The outlook for all ratings is negative. (Please see link below for a detailed listing of the companies and ratings.) The rating actions reflect Pacific Life’s strong risk-based capital position at year-end 2009, a significantly reduced net unrealized loss position within its investment portfolio, and a substantial shift in the individual annuity product sales mix from primarily variable to an equal amount of variable and fixed. The ratings also reflect the company’s extensive distribution relationships and strong competitive positions.
Furthermore, A.M. Best notes that Pacific Life has not fully utilized available on-shore and off-shore capital management initiatives, which leaves the company with more statutory financial flexibility than some of its Superior-rated peers. Pacific Life has considerable sources of liquidity through its commercial paper program, revolving credit facility and membership in the Federal Home Loan Bank of Topeka.
Partially offsetting these positive rating factors are the remaining material unrealized loss positions within its non-agency residential mortgage-backed securities portfolio, a $6.1 billion direct exposure to commercial mortgages, declining total net written premiums and increased financial leverage coupled with lower interest coverage resulting from recent capital markets activity. Pacific Life also has experienced a decline in ordinary life sales commensurate with industry averages due to its focus on universal life and variable universal life products designed for the affluent markets.
The negative outlook primarily recognizes A.M. Best’s concern over the future performance of Pacific Life’s investments connected to the residential and commercial mortgage loan markets, the ongoing volatility in its risk-based capital ratios driven primarily by variable annuity guarantees and its overall declining premium trends. While A.M. Best notes Pacific Life’s prudent commercial mortgage loan underwriting practices and excellent historical performance, the persistently negative economic climate suggests the potential for impairments. Additionally, the company’s future earnings will be challenged by substantially higher interest expenses due to its recent debt issuances and a strong correlation to the equity markets—particularly within its retail variable annuity business.
A.M. Best notes that as a result of the $1 billion surplus note issuance in 2009 and the recent $450 million senior note issuance, Pacific Life’s adjusted proforma financial leverage has increased to nearly 28%. This ratio is substantially higher than historical levels but remains within A.M. Best’s guidelines. Concurrently, both statutory and GAAP proforma interest coverage ratios have declined to the low end of the range for its current ratings. A.M. Best notes that neither Pacific Life nor Pacific LifeCorp has any long-term debt maturing until 2020, and that the organization maintains ample earnings and cash flow capacity to service its debt in the near to medium term.
For a complete listing of Pacific Life Insurance Company and Pacific LifeCorp’s FSRs, ICRs and debt ratings, please visit http://www.ambest.com/press/030505pacificlife.pdf.
The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at www.ambest.com/ratings/methodology.
Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.
A.M. Best Co.
Analysts
Thomas Rosendale, 908-439-2200, ext. 5201
thomas.rosendale@ambest.com
or
Andrew Edelsberg, 908-439-2200, ext. 5182
andrew.edelsberg@ambest.com
or
Public Relations
Rachelle Morrow, 908-439-2200, ext. 5378
rachelle.morrow@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
james.peavy@ambest.com
