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Rating Action:

Moody's downgrades Pacific LifeCorp (sr debt to Baa1) and subs; negative outlook

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 remains negative.

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 in 2009.

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 from Aa3;

Pacific Pilot Funding -- senior secured debt at A1 from Aa3;

Pacific Pilot Funding II -- senior secured debt at A1 from Aa3;

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 from stable.

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 31, 2009.

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 obligations.

For more information please visit Moody's website at ww.moodys.com/insurance.

New York
Arthur Fliegelman
VP - Senior Credit Officer
Life Insurance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
Managing Director
Life Insurance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Pacific LifeCorp (sr debt to Baa1) and subs; negative outlook
No Related Data.
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