OREANDA-NEWS. 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 list of ratings follows at the end of this release.

KEY RATING DRIVERS

PLC's ratings are based on the company's diverse business profile, very strong statutory capitalization, good liquidity and solid investment performance. Somewhat offsetting these positives are the somewhat elevated leverage across the organization, significant variable annuity (VA) exposure and earnings pressure.

PLIC had statutory capitalization of \$7.8 billion at year-end 2014, up 11% from the prior year-end driven by statutory net income and unrealized capital gains from derivatives partially offset by a \$200 million dividend paid to the holding company. Favorably, PLIC has diversified its product sales and has moved away from the sale of 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.

PLIC's reported risk-based capital (RBC) has exhibited more volatility than peers, since historically PLIC had not moved the VA business to a captive affiliate. Currently the company cedes a small percentage of new and existing VA business to a captive. During 2013, PLIC changed the valuation basis/method for VA statutory reserves to include a voluntary reserve component. Both of these actions have reduced RBC volatility. At year-end 2014 the company's RBC was 677% compared to 673% at the prior year-end.

PLC's large VA exposure has also resulted in higher than expected statutory and GAAP earnings volatility over the past several years. PLC had almost \$56 billion in total VA net account value at year-end 2014. While PLC has been successful in balancing its sales mix, legacy rider VA business with credits continues to represent a significant proportion of assets under management.

Fitch expects prospective earnings to be constrained by increased hedging costs and lower investment yields. Fitch believes any future investment losses, particularly in the company's commercial mortgage loan and RMBS portfolios should remain manageable in context of PLIC's statutory capitalization and earnings. However, Fitch notes that PLC's large exposure to 'BBB' rated corporate bonds could have a material effect on earnings and capital in a severe credit market downturn.

Fitch views PLC's future financial flexibility as constrained given the company's limited access to external equity capital and modest organic statutory earnings generation prospects. While PLC's traditional GAAP-based financial leverage ratio at approximately 21% is consistent with industry norms, the high total financing and commitments (TFC) ratio at 1.1x diverges from that of many life industry peers. This high ratio is primarily driven by the capital intensive profile of the company's aircraft leasing subsidiary, Aviation Capital Group (ACG). Fitch views these activities as well managed and related risks are captured in Fitch's ratings. ACG debt is nonrecourse to PLC. PLIC's statutory carrying value of ACG was \$1.6 billion at Dec. 31, 2014.

RATING SENSITIVITIES

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.

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

--Decline in TFC ratio to 1x or below;
--Decline in financial leverage below 20%;
--Sustained improvement in operating performance as evidenced by an increase in GAAP EBIT-to-interest coverage ratios to near 10x;
--Continued reduction in exposure to legacy blocks of VA contracts with living and death benefit riders.

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+';
--\$500 million 5.125% senior notes due 2043 at 'BBB+'.

Pacific Life Insurance Company
--Long-term IDR at 'A';
--\$150 million 7.9% surplus notes due 2023 at 'A-';
--\$676 million 9.25% surplus notes due 2039 at 'A-';
--Insurer Financial Strength (IFS) at 'A+';
--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+'.