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Fitch Affirms Pacific Life's Ratings; Outlook Stable
December 20, 2016 / 5:11 PM / 10 months ago

Fitch Affirms Pacific Life's Ratings; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, December 20 (Fitch) Fitch Ratings has affirmed the ratings of Pacific LifeCorp (PLC) and certain of its subsidiaries, including Pacific Life Insurance Company (PLIC). The Rating Outlook is Stable. A full list of ratings follows at the end of this release. KEY RATING DRIVERS PLC's ratings are based on the company's diverse business profile, very strong statutory capitalization, good liquidity and solid investment performance. Somewhat offsetting these positives are the company's high total financing and commitments (TFC) ratio, above-average variable annuity (VA) exposure and moderate earnings. PLC has diversified its product portfolio by further reducing its exposure to legacy VAs with aggressive riders and increasing its emphasis on fixed annuities (FA), investment-only VAs and indexed universal life (IUL) products. Business diversification has also been enhanced by growth in its aircraft leasing subsidiary, Aviation Capital Group (ACG), and its reinsurance subsidiary, Pacific Life Re Limited. Fitch views PLC's capitalization as very strong based on its RBC ratio of 632% and Prism capital model score of 'Very Strong' at year-end 2015. The company's total adjusted capital (TAC) totaled $9 billion at Sept. 30, 2016, which represents a five-year compound annual growth rate (CAGR) of 7.5% driven primarily by earnings and unrealized capital gains. Asset leverage remains relatively modest at 14x as of Sept. 30, 2016, given PLC's product profile. PLC's financial leverage remains within rating expectations at 19% as of Sept. 30, 2016. While PLC's capital is exposed to equity market volatility related to its VA business, the company has taken steps over the years to reduce volatility. PLC modified the profile of its VA book by discontinuing sales of products with aggressive guarantee features while enhancing its hedging program. The company also reinsures a portion of its base VA contracts and contract guarantees to third party reinsurers and its captive subsidiary, Pacific Annuity Reinsurance Company. Fitch views PLC's earnings profile as moderate and in line with rating guidelines at the current level. The company's earnings remain subject to market volatility and low interest rates remain a modest drag on returns. Fitch expects near-term earnings growth to be constrained by hedging costs and lower investment yields. GAAP ROE is expected to remain in the 7%-9% range. Through the first nine months of 2016, PLC reported GAAP net operating income of $539 million and operating ROE of 7.4%. Interest coverage calculated on a pre-tax operating income basis was modest at 8.4x for the period. Fitch views PLC's asset risk as modest demonstrated by its high-quality fixed income investments and minimal equity and Schedule BA assets. This is somewhat offset by its above-average exposure to corporate bonds rated 'BBB', which makes it susceptible to credit migration in a market downturn. PLC also has an above-average allocation to commercial mortgage loans, which Fitch views as well managed. We expect investment losses to remain modest and manageable in context of PLC's capitalization and earnings. Fitch views PLC's future financial flexibility as somewhat constrained given the company's limited access to external equity capital and modest organic statutory earnings generation prospects. However, the company has demonstrated an ability to access the debt markets through the issuance of surplus notes and senior debt issuances. PLC's TFC ratio is high relative to peers, primarily driven by the capital-intensive profile of ACG. Fitch expects the company's total financing and commitments (TFC) ratio to remain in the 1.0X range over the near term. ACG debt is non-recourse to PLC. PLIC's statutory carrying value of ACG was $1.8 billion at year-end 2015. Fitch views ACG's aircraft leasing business as well managed and related risks are captured in Fitch's ratings. Fitch views PLIC's ownership of ACG as a concentrated exposure to an entity with a stand-alone credit profile of 'BBB-'. PLIC's current 100% ownership of ACG's equity represents a meaningful portion of the insurance company's equity base. PLC announced that it is considering a partial public listing of ACG primarily intended to give ACG access to additional capital to execute its growth strategy. While the magnitude of the offering remains unknown, PLC has publicly stated that it intends to retain a majority equity stake in ACG after the IPO and that ACG will remain an important component within PLC's diversified portfolio of businesses. The current ratings on both ACG and PLC implicitly assume that PLC would provide a modest level of support if necessary. RATING SENSITIVITIES The key rating triggers that could result in a downgrade include: --Deterioration in Prism capital model score below 'Very Strong'; --Higher leverage, such as financial leverage ratio at or above 30% or TFC above 1.4x; --Significant earnings and capital volatility, such as a 10% or more drop in TAC; --Losses or rapid growth at aircraft leasing subsidiary. The key rating triggers that could result in an upgrade include: --Decline in TFC ratio to 1x or below; --Decline in financial leverage below 20%; --Sustained improvement in operating performance as evidenced by an increase in GAAP interest coverage ratios to near 10x; --Continued reduction in exposure to legacy blocks of VA contracts with enhanced rider benefits. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings with a Stable Outlook: Pacific LifeCorp --Long-Term Issuer Default Rating (IDR) at 'A-'; --$450 million 6% senior notes due 2020 at 'BBB+'; --$600 million 6.6% senior notes due 2033 at 'BBB+'; --$500 million 5.125% senior notes due 2043 at 'BBB+'. Pacific Life Insurance Company --Long-Term IDR at 'A'; --$150 million 7.9% surplus notes due 2023 at 'A-'; --$676 million 9.25% surplus notes due 2039 at 'A-'; --Insurer Financial Strength (IFS) at 'A+'; --Short-Term IDR at 'F1'; --Commercial paper at 'F1'. Pacific Life & Annuity Company --IFS at 'A+'. Pacific Life Re Limited --IFS at 'A+'. Pacific Life Funding, LLC --Funding agreement-backed note program at 'A+'. Pacific Life Global Funding --Funding agreement-backed note program at 'A+'. Contact: Primary Analyst Dafina M. Dunmore, CFA Director +1-312-368-3136 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Doug L. Meyer, CFA Managing Director +1-312-368-2061 Committee Chairperson Brian C. Schneider, CPA, CPCU Senior Director +1-312-606-2321 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 15 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016798 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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