OREANDA-NEWS. Fitch Ratings has affirmed the 'A' Insurer Financial Strength (IFS) rating of Pan-American Life Insurance Company (PALIC) and its wholly owned subsidiary, Pan-American Assurance Company (PAAC), collectively referred to as Pan-American. The Rating Outlook is Stable.

Pan-American Life Insurance Group (PALIG) and Mutual Trust Financial Group (Mutual Trust), jointly announced yesterday a definitive merger agreement to combine Pan-American and Mutual Trust Holding Company (Mutual Trust), both mutual insurance holding companies.

The merger will strengthen Pan-American's position in the U.S. life insurance market and enhance geographic diversification. However, Fitch believes the company will continue to face competitive challenges in the U.S. from companies with significantly greater scale, market share, pricing power and distribution capabilities. Integration risk is considered low, as Mutual Trust will operate as a wholly-owned subsidiary of PALIG with existing management in place. Further, the companies utilize identical administrative platforms for various functions.

Fitch's ratings reflect Pan-American's extremely strong capitalization, relatively low-risk liability profile and modest operating performance. The ratings also consider that PALIG's non-U.S. insurance operations are concentrated in Latin America and the Caribbean, the majority of which have sovereign ratings that are lower than Pan-American's rating.

Pan-American's strong balance sheet continues to be a key ratings driver with operating leverage of 5.5x on a pro forma GAAP basis. The company's capitalization remains extremely strong based on its NAIC risk-based capital (RBC) ratio of 560% at Dec. 31, 2014. Consolidated financial leverage for PALIG remains modest at 8.2% and 10.1% on a pro forma basis.

Pan-American generates relatively stable and predictable earnings, due to its low-risk product profile. Mutual Trust writes predominantly participating whole life insurance in the U.S., which generates consistent earnings with minimal volatility. The combined companies' liability structure has minimal exposure to equity market volatility or disintermediation risk.

PALIG has foreign government exposure to fulfill local regulatory requirements in the Latin American and Caribbean countries where it operates or to back insurance reserves in those countries. This exposure is a primary driver of the company's below-investment grade (BIG) exposure, which makes up 13% of total fixed income. Following the merger, BIG exposure will drop to 10% of total fixed income, due to the higher asset quality of Mutual Trust's portfolio.

PALIG also has above-average exposure to 'BBB'-rated bonds and below-average exposure to U.S. government securities, which will also moderate following the merger. Favorably, PALIG has minimal exposure to equities and troubled real estate as compared with the industry.

Fitch does not anticipate an upgrade in the near-to-intermediate term. The agency views Pan-American as a solid niche player, which under Fitch's criteria has a market position, size and scale supportive of a 'BBB' rated company. However, the company's extremely strong balance sheet fundamentals provide Pan-American with uplift in its rating to the 'A' category. Fitch does not expect a change in the balance of these key rating attributes to occur over the ratings horizon.

RATING SENSITIVITIES

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

--A sustained drop in the company's U.S. RBC ratio below 400%;
--An increase in consolidated financial leverage to over 20% or an increase in surplus notes as a percentage of total adjusted capital to over 25%;
--Deterioration in financial results including a drop in GAAP interest coverage to below 7x; or
--An increase in GAAP operating leverage (defined as liabilities to capital excluding unrealized investment gains and losses) to over 7x (this metric was 3.8x as of June 30, 2014); or
--An adverse development related to the merger with Mutual Trust.

Fitch affirms the following ratings with a Stable Outlook:

Pan-American Life Insurance Company
Pan-American Assurance Company
--IFS at 'A'.