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11 Jun 2009
Approximately $750 million of securities affected
New York, June 11, 2009 -- Moody's Investors Service has downgraded the senior debt rating of Pacific
LifeCorp to Baa1 from A3, and also downgraded the insurance financial
strength (IFS) rating of its life insurance company subsidiaries,
led by Pacific Life Insurance Company (Pacific Life), to A1 from
Aa3. The outlook on Pacific LifeCorp and its life insurance subsidiaries
Moody's said that the downgrade was driven primarily by the company's
substantial exposure to variable annuity products with guarantees and
their inherent risks and volatility related to the equity markets.
In addition, the downgrade reflects the expectation of significant
credit losses in the company's residential mortgage-backed
securities (RMBS) holdings, as well as increased losses in its corporate
bond and commercial mortgage loan portfolios, as a result of higher
expected credit defaults due to the recession.
The rating agency commented that Pacific Life's emphasis and significant
growth in the variable annuity business over the past 5 to 10 years has
caused the company's earnings and regulatory capital to have a high
degree of sensitivity to equity market movements. Pacific Life's
statutory total adjusted capital declined from $4.1 billion
on December 31, 2007 to $3.6 billion on December 31,
2008, with its NAIC risk-based capital (RBC) ratio dropping
from 779% to 566% over the same period. Moody's
added that the $500 million decline in statutory capital was after
the inclusion of an additional $425 million increase in statutory
capital from an authorized permitted practice at December 31, 2008
compared to 2007. Statutory capital declined further to $3.2
billion as of March 31, 2009. In addition to a decline in
its nominal capital level, Pacific Life's RBC ratio has dropped
due to recent substantial downward rating migration in the company's
investment portfolio, especially related to RMBS investments,
which has increased required capital.
The company has in place a hedging program, which has mitigated
some of the economic risk of the variable annuities, but there can
still be significant swings in regulatory capital and RBC. Vice
President/Senior Credit Officer Arthur Fliegelman noted: "Moody's
expects that Pacific Life's management will continue to take actions
to protect the company's capital levels from equity market fluctuations
through hedging and similar efforts, but hedge programs bring their
own challenges and costs, especially when implemented in depressed
equity markets when hedges can be quite costly". The rating
agency is maintaining a negative outlook because there remains the risk
of additional reductions in regulatory capital due to the combination
of further declines in the equity market as well as an increased level
of investment losses. In terms of possible recapitalization,
the company -- organized as a mutual holding company --
does not have access to the equity markets, but could access the
debt capital markets, which would pressure its financial flexibility.
Moody's added the volatility in the company's regulatory capital
also constrains its financial flexibility.
The rating agency positively noted that Pacific LifeCorp, the group's
holding company, has no debt maturing for many years, and
maintains ample liquid assets relative to its annual fixed charges.
Pacific Life also benefits from a strong market presence and reputation
in the upscale life insurance market, and the consistent profitability
of the company's aircraft-leasing business.
According to Moody's, a further downgrade of Pacific LifeCorp's
ratings could result from the following: 1) NAIC company action
level RBC falls below 325%, 2) financial leverage exceeds
30% or 3) investment losses exceed $750 million pre-tax
in 2009. Conversely, the outlook could be moved to stable
if: 1) NAIC company action level RBC is maintained at or near 350%
for a sustained period, 2) financial leverage remains below 30%
and 3) investment losses are less than $500 million pre-tax
The following ratings were downgraded with a negative outlook:
Pacific LifeCorp -- senior unsecured debt at Baa1 from A3;
Pacific Life Insurance Company -- insurance financial strength
at A1 from Aa3; surplus notes at A3 from A2;
Pacific Life & Annuity Company -- insurance financial
strength at A1 from Aa3;
Pacific Life Funding, LLC -- senior secured debt at
A1 from Aa3;
Pacific Life Global Funding -- senior secured debt at A1
Pacific Pilot Funding -- senior secured debt at A1 from
Pacific Pilot Funding II -- senior secured debt at A1 from
COUNTS Trust, Series 2006-4 -- senior secured
debt at A1 from Aa3;
COUNTS Trust, Series 2007-2 -- senior secured
debt at A1 from Aa3.
The following short-term ratings were affirmed:
Pacific Life Insurance Company -- short-term insurance
financial strength at P-1; commercial paper at P-1.
The last rating action on Pacific LifeCorp was taken on February 11,
2009, when Moody's affirmed the ratings for Pacific LifeCorp (senior
debt at A3) and its subsidiaries, and the outlook was moved to negative
Pacific LifeCorp is an insurance and financial services organization headquartered
in Newport Beach, California. It had approximately $97
billion in GAAP assets and $4.1 billion in stockholder's
equity as of December 31, 2008. Pacific Life, its primary
subsidiary, had total statutory assets of $82 billion and
total adjusted statutory capital of $3.2 billion as of March
The principal methodology used in rating Pacific Life was Moody's Global
Rating Methodology for Life Insurers, which can be found at www.moodys.com
in the Credit Policy & Methodologies directory, in the Ratings
Methodologies subdirectory. Other methodologies and factors that
may have been considered in the process of rating this issuer can also
be found in the Credit Policy & Methodologies directory.
Moody's insurance financial strength ratings are opinions of the ability
of insurance companies to punctually pay senior policyholder claims and
For more information please visit Moody's website at ww.moodys.com/insurance.
VP - Senior Credit Officer
Life Insurance Group
Moody's Investors Service
Moody's downgrades Pacific LifeCorp (sr debt to Baa1) and subs; negative outlook
Life Insurance Group
Moody's Investors Service
No Related Data.
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