Fitch Ratings has affirmed the “stable” ratings of Pacific Life Insurance Company and certain of its subsidiaries, including Pacific Life & Annuity Company.
Fitch Ratings, Chicago, states that the rating affirmation is based on Pacific Life’s “diverse business profile, strong statutory capitalization, good liquidity and stabilizing investment performance.” Offsetting these positives, Fitch adds, are the “increased leverage across the organization and expectations of lower earnings [that] will pressure organic capital generation.”
Pacific Life had a statutory capitalization of $6.6 billion on June 30, 2012, up $343 million from the prior the year-ago period. Fitch attributes the increase to a shift in the company’ portfolio to less “capital-intensive products.” Fitch also cites a strengthening of Pacific Life’s variable annuity hedging program, which “should lessen the statutory capital impact if equity markets experience significant deterioration.”
Pacific Life’s reported risk-based capital stood at 467% on Dec. 31, 2011. Reported net income of $87 million on a GAAP basis through the first six months of 2012 was down from $331 million for the same period in 2011 due to declining interest rates and tightening credit spreads, Fitch states.
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 states. “Fitch believes further investment losses, particularly in the company's commercial mortgage and RMBS portfolio, should remain manageable in context of Pacific Life’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,” Fitch adds. “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, as well as the heavy use of surplus notes at Pacific Life at 17% of statutory capitalization diverges from that of life industry peers.