TEXT-Fitch affirms Pacific Life ratings, outlook stable

(The following statement was released by the rating agency)

Oct 11 - 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 rating list is at the end of this release.

The rating affirmation is based on PLC's diverse business profile, strong statutory capitalization, good liquidity and stabilizing investment performance. Somewhat offsetting these positives are the increased leverage across the organization and expectations of lower earnings which will pressure organic capital generation.

PLIC had statutory capitalization of $6.6 billion at June 30, 2012, up $343 million from the prior year-end. Favorably, PLIC has diversified its product portfolio and has been moving away from capital intensive products. The company has also strengthened its VA hedging program, which should lessen the statutory capital impact if equity markets experience significant deterioration. Fitch expects PLIC's reported RBC to exhibit more volatility than peers since PLIC has not moved the business to a captive affiliate. The company's RBC was 467% at Dec. 31, 2011.

PLC's large VA exposure has resulted in higher than expected statutory and GAAP earnings volatility over the past several years. PLC reported net income of $87 million on a GAAP basis through the first six months of 2012, down significantly from $331 million for the same period in 2011 due to declining interest rates and tightening credit spreads. On a statutory basis the company reported net income of $705 million thus far in 2012, up from $335 million the prior year. Fitch expects prospective earnings to lag pre-crisis levels due to elevated hedging costs, lower investment yields and higher interest expenses. Fitch believes further investment losses, particularly in the company's commercial mortgage and RMBS portfolio, should remain manageable in context of PLIC's statutory capitalization and earnings.

Fitch views PLC's future financial flexibility as constrained given the increased financial leverage, limited access to external equity capital and modest organic statutory earnings generation prospects. While PLC's traditional GAAP-based financial leverage ratio at 23% is consistent with industry norms, the high total financing and commitments (TFC) ratio at 1.37 times (x) as well as the heavy use of surplus notes at PLIC at 17% of statutory capitalization diverges from that of life industry peers. The high TFC ratio is primarily driven by the capital intensive profile of the company's aircraft leasing subsidiary, Aviation Capital Group (ACG). PLIC's statutory carrying value of ACG was $1.2 billion at year-end 2011.

The key rating triggers that could result in a downgrade include:

--Financial leverage ratio at or above 30%;

--TFC ratio above 1.4x;

--Decline in statutory capital of 10% or more;

--Significant earnings and capital volatility;

--Losses or rapid growth at aircraft leasing subsidiary;

--Significant change in macro environment (tax law changes, interest rate spike, etc.).

The key rating triggers that could result in an upgrade include:

--Decline in surplus notes component of statutory capital below 15% could lead to an upgrade in surplus notes rating;

--Decline in TFC ratio to 1.0x or below;

--Sustained improvement in operating performance as evidenced by an increase in GAAP EBIT-to-interest coverage ratios to near 10x;

--Demonstrated success in executing shift in product and distribution strategy.

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+'.

Pacific Life Insurance Company

--Long-term IDR at 'A';

--Insurer Financial Strength (IFS) at 'A+';

--$150 million 7.9% surplus notes due 2023 at 'BBB+';

--$1,000 million 9.25% surplus notes due 2039 at 'BBB+';

--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+'.

Additional information is available at '

'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sept. 19, 2012).

Applicable Criteria and Related Research:

Insurance Rating Methodology (New York Ratings Team)

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