A.M. Best Affirms Ratings of Pacific LifeCorp and Its Subsidiaries
August 5, 2014 by Best's News Service
Oldwick – A.M. Best 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 Group) (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 to $7.1 billion at year-end 2013 from $6.9 billion at year-end 2012, primarily due to its strong operating earnings of $532 million, which was offset by other changes in surplus that was primarily driven by derivative losses and dividends to its parent of $200 million. Reported 2013 statutory net income, while still strong, was significantly lower than the prior year as a result of increases in net reserves and commissions driven by strong sales and 2012 net income, reflecting a favorable non-recurring gain resulting from the company’s termination of cash flow hedges.
Pacific Life continues to enjoy a prominent position in the most affluent market segments for individual life insurance. Overall, the company is the fifth 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, 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 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 the recent development of economic capital modeling and expansion of hedging practices in the past three years to protect against interest and equity market movements to reduce volatility risk in its variable annuity block.
Partially offsetting these positive rating factors are Pacific Life’s high 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 variable annuity block. With positive equity market performance and a decrease in interest rates, 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 a statutory capital macro hedge and has refined its hedging programs in recent years to partially offset its financial market sensitivity, which evidences good ERM practices with a focus on statutory capital and surplus. Additionally, Pacific Life has traditionally maintained high levels of real estate and other less liquid assets of roughly two times TAC, when residential and commercial mortgage-backed securities (excluding agency issued securities), commercial mortgage loans, equity real estate holdings, asset backed securities and private equity are combined. Consolidated financial leverage has increased to approximately 22.5% as of year-end 2013. 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 made up roughly 27% of statutory capital as of year-end 2013. Additionally, Pacific Life has maintained high levels of operating leverage, although this did decline in 2013, which are typically needed for its aircraft leasing business. The current operating leverage is within A.M. Best’s guidelines and with no recourse to Pacific Life.
A.M. Best believes that positive rating movement is unlikely in the near to medium term. Factors that could result in negative rating actions include a significant decline in Pacific Life’s consolidated risk-adjusted capital, a prolonged decline in its surplus or a significant deterioration in its investment performance.
For a complete listing of Pacific LifeCorp and its life/health subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/080407pacificlife.pdf .
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.
