A+ EFFECTIVE: October 2, 2015

Transcription

1 PACIFIC LIFE INSURANCE COMPANY Omaha, Nebraska Ultimate Parent: Pacific Mutual Holding Company PACIFIC LIFE INSURANCE COMPANY 6750 Mercy Road Omaha, NE Mailing Address: 700 Newport Center Drive, Newport Beach, CA Exec. Office: 700 Newport Center Drive, Newport Beach, CA Web: Tel.: Fax: AMB#: NAIC#: Ultimate Parent#: FEIN#: BEST S CREDIT RATING Best s Financial Strength Rating: A+ Outlook: Stable Best s Financial Size Category: XV A+ EFFECTIVE: October 2, 2015 RATING RATIONALE Rating Rationale: The ratings of Pacific Life Insurance Company (PLIC) and its subsidiary, Pacific Life & Annuity Company (PL&A) (together known as Pacific Life), reflect the group s continued strong risk-adjusted capitalization, diversified operating profile, extensive liquidity resources, improved statutory earnings and record sales in key product lines. These factors are tempered by its above-average exposure to real estate and other less liquid assets, a statutory capital base that has been enhanced by the issuance of surplus notes and exposure to equity market volatility. A.M. Best notes that operating results can be impacted by the ongoing potential for earnings and surplus volatility due to the group s large book of variable annuities with living benefit guarantees. However, this risk is partially mitigated by strong hedging practices embedded in its enterprise risk management practices and, to a lesser extent, by Pacific Annuity Reinsurance Company (PARC), a captive Copyright 2016 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. Printed April 25, Page 1 of 13

2 subsidiary, established in 2012, that is used to manage a small portion (5%) of the risks relating to the variable annuity business. Total adjusted capital for Pacific Life increased from year-end 2014 to year-end 2015, primarily driven by strong operating performance for the year. The company has experienced favorable capital growth over the past three years, and the acquisition of Manulife Financial s retrocession business in 2011 and older life business from RGA in 2014 has provided additional life insurance in force and incremental earnings. In addition to its core life and retirement services segment, Pacific Life s operating profile is enhanced by its reinsurance and aircraft leasing business, which contributes meaningfully to its operating results. Pacific Life continues to maintain its prominent position as a provider of choice in the affluent market segments for individual life insurance. Overall, the group is in the top 7 in life insurance sales. Pacific Life holds strong market positions in universal life, current assumption universal life, indexed universal life and variable universal life and has demonstrated solid growth in its life insurance premiums in recent years. The group s penetration in the affluent marketplace along with strong core operating fundamentals, including persistency and mortality, has contributed to favorable rates of return on its life insurance business. Pacific Life has extensive sources of liquidity, which as of year-end 2015 include sizable positions in cash and highly liquid assets, a $700 million commercial paper program, a $400 million back-up facility at PLIC, and a $600 million revolving credit facility at its parent holding company, Pacific LifeCorp. Furthermore, PLIC and PL&A are approved to receive collateralized advances as members of the Federal Home Loan Bank of Topeka and Federal Home Loan Bank of San Francisco, respectively. A.M. Best notes that neither Pacific Life nor Pacific LifeCorp has any long-term debt maturing until Pacific Life s earnings remain correlated to the financial markets due to its large variable annuity block; however, the company has implemented measures to reduce its sensitivity to financial markets. With fluctuations in equity market performance and interest rates, Pacific Life s GAAP earnings and, to a lesser extent, Pacific Life s statutory earnings are impacted by changes in reserves and mark-to-market gains/losses on variable annuity guarantees. Pacific Life s risk-based capital ratio is sensitive to increases in required capital for variable annuity guarantees (due primarily to equity market movements and, to a lesser extent, interest rate movements). Up until late 2011, Pacific Life s variable annuity hedging program was primarily focused on protecting statutory capital against equity market risk. However, A.M. Best notes that Pacific Life has since expanded the program to protect against equity volatility, which helps mitigate GAAP earnings and RBC volatility as a result of changes in equity volatility. A.M. Best also notes that Pacific Life has since added interest rate hedging and has expanded its hedging program to incorporate delta, rho and vega hedging practices for PARC. Financial leverage remains within A.M. Best s guidelines at roughly 20.1% as of year-end Additionally, the quality of statutory capital is somewhat diminished given that surplus notes comprised roughly 20% of statutory capital and surplus at year-end Also, Pacific Life, through its aircraft leasing subsidiary, has historically maintained elevated operating leverage, although it is within A.M. Best s guidelines. The related debt is non-recourse to Pacific Life. Finally, Pacific Life has consistently been near the lower end of the range of high-risk assets/capital and surplus relative to its peers. Positive rating movement is possible based on a continuing trend in favorable operating performance, and demonstrated growth in absolute capital and risk based capital. Factors that could result in negative rating actions include a significant and sustained decline in consolidated risk adjusted capital, deterioration in investment performance, and an unfavorable earnings trend. FIVE YEAR RATING HISTORY Date Best s FSR Date Best s FSR 10/02/15 A+ 07/06/12 A+ 08/04/14 A+ 06/28/11 A+ 07/17/13 A+ KEY FINANCIAL INDICATORS ($000) Total Capital Capital Asset Net Net Surplus Valuation Premiums Invest Funds Reserve Written Income Net Income Year Assets ,724,385 5,576, ,790 5,911,232 1,798, , ,000,915 6,175, ,866 7,606,725 1,575, , ,064,766 6,502, ,801 8,702,003 1,857, , ,503,493 7,171, ,317 8,573,869 2,216, , ,241,838 7,762, ,618 9,039,689 2,461, ,752 (*) Within several financial tables of this report, this company is compared against the Individual Annuity Composite. (*) Data reflected within all tables of this report has been compiled from the company-filed statutory statement. BUSINESS PROFILE PLIC operates in conjunction with its subsidiary, PL&A, and is collectively referred to as Pacific Life. Pacific Life has primary business operations consisting of life insurance, reinsurance, individual annuities, mutual funds, investment related products, and aircraft leasing. PLIC is owned by Pacific LifeCorp, an intermediate holding company whose ultimate parent is Pacific Mutual Holding Company. Primary business reporting segments for Pacific LifeCorp include the Life Insurance Division (LID), Retirement Solutions Division (RSD), Aviation Capital Group (ACG) and Reinsurance, which includes the international reinsurance operations of Pacific Life Re Limited, an affiliate of PLIC and a wholly owned subsidiary of Pacific LifeCorp and the life retrocession business. A final segment is the Corporate and Other segment. LID s principal products include UL, IUL, VUL, interest-sensitive whole life, survivor life, term life and corporate-owned life insurance (COLI). Pacific Life s early entry into the indexed universal life insurance market (2005) has enabled the company to capture significant market share in a growing product line and broaden its market segments beyond the upper-income to include the upper middle-income market. The company s continuing success in the individual life insurance market stems from Copyright 2016 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. Printed April 25, Page 2 of 13

3 diversified product offerings, a focus on key market segments, diversified, highly professional distribution sources, and an excellent producer and policy owner service platform. This combination has allowed the company to build a stable and profitable book of business over the years. Its multi-channel life distribution system includes regional life offices, the M Financial producer group, independent marketing organizations, and institutional accounts. The institutional accounts distribution focuses on national and regional wirehouses, as well as banks and other joint marketing organizations. Pacific Life s strategy has been to focus on expanding its present distribution systems, continuing to address the changing needs of the high net worth and corporate markets, and broadening market share in the upper middle-income market. Pacific Life s life insurance sales represent a mix weighted largely between IUL followed by VUL and UL. RSD develops and markets a diversified range of competitive fixed and variable annuities, mutual funds and institutional products, such as structured settlements to individuals, businesses and retirement plans through a diverse wholesaler network consisting of regional and national wirehouses, financial institutions, independent planners, settlement firms and benefit consultants. A broad range of both name-brand funds and proprietary fund selections are offered through their variable annuity and mutual fund products. RSD is positioned to meet a variety of retirement needs including wealth planning, wealth accumulation, retirement and retirement income management through its ability to continue providing value-added products and services, characterized by a strong customer and producer service orientation. Strong relationships between a nationwide network of securities broker-dealer firms, external and internal wholesalers, along with enhanced products and superior service have all contributed to continued strong distribution capacity. The variable annuity products include institutional money management, asset allocation strategies and asset-based compensation, with an emphasis on service. Variable annuity products are sold with and without riders and, in recent years, Pacific Life has made progress in significantly reducing the amount of variable annuities sold with riders. Pacific Life has successfully diversified its individual annuity product offerings through the continued development and enhancement of the company s suite of fixed products, resulting in strong fixed annuity sales over the past several years. Fixed annuity products now include book value, market value adjustment, indexed and immediate annuity options. In 2012, the RSD segment established PARC, a variable annuity captive domiciled in Arizona as a subsidiary of Pacific LifeCorp, which assumes 5% of the variable annuity business. In addition, RSD broadened its group annuity solutions for defined benefit plans which now offer a comprehensive range of products designed to insulate the plan from investment, liquidity, and/or mortality risk. In addition, Pacific Life markets a single premium universal life product with a long-term care rider benefit which is jointly distributed between LID and RSD. The Reinsurance segment offers a comprehensive range of wholesale life risk management products in the United Kingdom, Ireland, Asia and North America. The Reinsurance segment specializes in term life, critical illness, income protection and annuity business. Reinsurance includes the operations of the life retrocession business acquired in In August 2011, PLIC and Pacific Life Reinsurance (Barbados) Limited (PLRB), a newly formed insurer and wholly owned subsidiary of Pacific LifeCorp, acquired Manulife s domestic and international life retrocession businesses, respectively. Also included in the Reinsurance segment is the international reinsurance operations of Pacific Life Re Limited (PLRL), an affiliate of PLIC and a wholly owned subsidiary of Pacific LifeCorp. PLRL reinsurance risks are primarily mortality risks in the UK and Asia along with some assumption of retrocession business from larger reinsurers and some UK related longevity swaps from insurers and pension funds without material investment risk. In late 2014, the company completed a large inforce reinsurance transaction with Reinsurance Group of America, representing approximately $200 billion in face amount. Pacific Life Re Australia (Pty) Limited (PLRA) was launched in the second half of 2015 to capitalize on the withdrawal of reinsurance capacity in Australia. Aviation Capital Group Corp. (ACG) is a wholly owned subsidiary of Pacific Life that offers aircraft leasing to the airline industry throughout the world and provides brokerage and asset management services to other third-parties. As of December 31, 2015, ACG had 266 owned and managed commercial jets, leased to approximately 100 airlines in 40 countries. Despite significant operating leverage associated with its large fleet of aircraft, ACG debt is nonrecourse to Pacific Life and is recourse only to either ACG or certain aircraft. Also, less than 15% of its portfolio is on lease to U.S. airlines. The Company s investment in ACG represents Pacific Life s alternative to the industry s traditional investment in airline issued debt and has proven to be a superior strategy. The Corporate and Other segment consists of assets and activities, which support the Company s operating segments. Included in these support activities is the management of investments, certain entity level hedging activities and other expenses and other assets not directly attributable to the operating segments. The Corporate and Other segments also include several operations that do not qualify as operating segments and the elimination of intersegment transactions. Scope of Operations: The Company and its subsidiaries have primary business operations consisting of life insurance, annuities, mutual funds, aircraft leasing and reinsurance. The Company s primary business operations provide life insurance products, individual annuities and mutual funds and offers a variety of investment products and services to individuals and businesses. The top geographic locations in the United States for direct statutory premiums and annuity considerations were California, Colorado, Texas and Florida representing collectively more than one-third of total statutory direct premiums for the year ended December 31, No other jurisdiction accounted for more than 5% of the total. TOTAL PREMIUM COMPOSITION & GROWTH ANALYSIS Reinsurance Period DPW Prem Assumed Ending ($000) (% Chg) ($000) (% Chg) ,812, , ,467, , ,638, , ,302, , ,090, ,296, Yr CAGR Copyright 2016 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. Printed April 25, Page 3 of 13

4 Reinsurance Period Prem Ceded NPW & Deposits Ending ($000) (% Chg) ($000) (% Chg) ,533, ,006, ,404, ,985, ,471, ,150, ,505, ,106, ,347, ,682, Yr CAGR Territory: The company is licensed in the District Of Columbia, AL, AK, AZ, AR, CA, CO, CT, DE, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, ME, MD, MA, MI, MN, MS, MO, MT, NE, NV, NH, NJ, NM, NC, ND, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VT, VA, WA, WV, WI and WY BY-LINE BUSINESS ($000) Reinsurance DPW Prem Assumed Product Line ($000) (%) ($000) (%) Ordinary life 3,005, , Individual annuities 5,673, , Group annuities 411, , Individual A&H 2, Total 9,090, ,296, Reinsurance Prem Ceded NPW Product Line ($000) (%) ($000) (%) Ordinary life 1,133, ,846, Group life Individual annuities 213, ,750, Group annuities 440, Individual A&H 2, Total 1,347, ,039, BY-LINE RESERVES ($000) Product Line Ordinary life 27,001,294 25,393,551 23,701,811 22,265,949 21,023,941 Group life 14,177 13,807 13,445 13,056 13,575 Supplementary contr 3,278 2,831 3,355 2,730 2,648 Individual annuities 17,184,898 15,116,957 13,730,361 12,155,277 11,318,095 Group annuities 2,487,838 2,355,632 2,670,940 2,772,305 3,204,421 Deposit type contracts 2,134,561 2,078,205 1,811,321 2,440,683 3,392,276 Individual A&H 19,175 21,840 18,735 20,872 21,664 Group A&H 1,976 2, Total 48,845,222 44,982,824 41,951,943 39,673,314 38,976,744 LIFE POLICIES STATISTICS -Ordinary Policies- -Group Policies- -Group Certificates- Year Issued In Force Issued In Force Issued In Force ,677 3,299, ,281 3,150, ,962 2,933, ,116 8,270, ,460 7,995, Whole Life Endow. & LIFE INSURANCE IN FORCE ($000) Total Insurance In Force Year Adds Term Credit Group Industrial ,287, ,998,079 19, ,304, ,898, ,607,065 18, ,523, ,805, ,802,344 18, ,626, ,760, ,369,078 18, ,148, ,387, ,399,298 18, ,805,990 NEW LIFE BUSINESS ISSUED ($000) Year Whole Life & Endow. Term Credit Group Industrial Total Insurance Issued Non- Par (%) Par (%) ,698,115 9,509,226 16,207, ,142,012 10,290,019 18,432, ,923,630 9,305,466 19,229, ,026,945 11,601,102 21,628, ,181,925 10,094,328 20,276, ORDINARY LIFE STATISTICS Ord. Renew Average 1st Yr 1st Yr Gen. Lapse Premium Ord. Policy Avg Prem / Comm / Exp. / Ratio Persist (in dollars) Prem Total 1st Yr Policies Year % % Issued In Force ($/M) Prem Prem In Force ,104,268 89, ,008,262 92, , , ,631 59, ,839 60, First Year Gen l Exp/ Return on Number of Policies Premium Reserves Reserves Year Issued In Force (000) (%) (%) ,677 3,299, , ,281 3,150,936 1,074, ,962 2,933,531 1,081, ,116 8,270,890 1,019, ,460 7,995, , Copyright 2016 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. Printed April 25, Page 4 of 13

5 INDIVIDUAL ANNUITY STATISTICS Comm & Exp to Res Exp to NPW (000) Res(%) (%) Benefits & Wdrwls to NPW (%) Benefits & Wdrwls to Res (%) NPW Year (000) ,087,780 11,320, ,358,885 12,158, ,322,418 13,733, ,890,486 15,119, ,750,201 17,188, GROUP ANNUITY STATISTICS Comm & Exp to Res Exp to NPW (000) Res (%) (%) Benefits & Wdrwls to NPW (%) Benefits & Wdrwls to Res (%) NPW Year (000) ,676 3,204, ,747 2,772, ,217 2,670, ,445 2,355, ,078 2,487, TOTAL ANNUITY ACTUARIAL RESERVES BY WITHDRAWAL CHARACTERISTICS With Min or No Surrender Surrender Charge 5% With Charge (%) or more (%) MVA (%) No Surrender Allowed (%) Total Annuity Year Res (000) ,525, ,930, ,404, ,475, ,676, SEPARATE ACCOUNT DATA Sep Acct Assets 54,466,300 58,113,761 58,634,333 53,467,594 49,901,962 % Growth S/A Assets/Adm Assets Sep Acct Reserves 53,539,335 57,118,851 57,523,528 52,217,634 48,577,094 % Ordinary Life % Individual Annuities % Group Annuities 0.0 Deposit Type Liabilities 5,092 5,587 68, , ,144 Other Liabilities 921, ,323 1,042,211 1,140,324 1,213,723 S/A Prems & Deposits 3,874,241 4,335,814 4,661,952 3,867,674 3,292,164 % Ordinary Life % Individual Annuities % Group Annuities Sep Acct Fees & Charges 1,290,733 1,320,450 1,321,618 1,225,106 1,223,496 % Ordinary Life % Individual Annuities % Group Annuities Fees & Chgs to Assets% Sep Acct Ben & Wdrwls 5,931,421 6,311,213 5,625,162 5,382,552 6,071,363 % Ordinary Life % Individual Annuities % Group Annuities Ben & Wdrwl to Assets% Market Share/Market Presence: PLIC is the top tier operating entity in the Pacific Mutual Holding Company with consolidated assets of $137 billion at year-end Pacific Life enjoys a top tier market position in the U.S. life insurance segment with leading positions in IUL followed by VUL and UL. GEOGRAPHIC BREAKDOWN BY DIRECT PREMIUM WRITINGS ($000) California 1,318,154 1,295,460 1,343,420 1,201,136 1,002,300 Colorado 863, , , , ,872 Texas 628, , , , ,890 Florida 608, , , , ,331 Ohio 479, , , , ,233 Illinois 464, , , , ,158 Pennsylvania 336, , , , ,722 Minnesota 318, , , , ,344 Arizona 292, , , , ,535 Michigan 281, , , , ,900 All Other 4,030,756 4,177,574 4,544,335 3,951,483 3,244,369 Total 9,623,363 9,741,729 10,063,904 8,769,208 6,843,653 Copyright 2016 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. Printed April 25, Page 5 of 13

6 RISK MANAGEMENT Pacific Life has a formalized and well-defined enterprise-level risk framework, with committees attended by senior management. Key risks managed within the ERM program include interest rate, equity, credit, insurance, liquidity, model, operational and emerging risks. The principal objective of the ERM program is to enable Pacific Life to grow and prosper, regardless of the economic environment, by ensuring that risks are identified, understood, and managed. The ERM framework defines objectives, establishes risk appetites and tolerances, and specifies practices for risk management and provides transparency of risk throughout the organization. The ERM group along with senior management monitors key risks and reports to the board of directors on a quarterly basis, or more frequently if needed. Business units, in coordination with ERM, define and execute risk management for their operations. Equity and interest rate risks are the greatest exposures with credit risk being smaller. Pacific Life manages its significant equity market risk through a combination of product design, customer asset allocation and hedging programs that focus on preserving statutory capital. Interest rate risk is managed by separate product portfolios with clear duration targets. Mortality, longevity and lapse risks are managed through product design, underwriting, monitoring and reinsurance. The company also has an information security program to protect against current and emerging risks that is linked to their business strategy, drivers, objectives, and processes. The Company continuously monitors the results of their dynamic ERM program and makes continuous improvements relative to stated risk management preferences and risk limits based on the market and economic environment, and hedging effectiveness results as necessary. The company also employs an economic capital model to aid in understanding its risk profile, integrated into certain product pricing activity, and capital allocation. The economic capital model has been reviewed by independent consultants. OPERATING PERFORMANCE Operating Results: Pretax statutory operating earnings was a gain of $709 million for full year 2015, compared to the prior year gain of $780 million for The vast majority of the group s earnings are from PLIC which generated pre-tax statutory operating income of $669 million in GAAP net income was $662 million, compared to $541 million for the prior year. This increase was primarily driven by strong investment performance, the impact of widening credit spreads, and strong aircraft leasing performance, partially offset by unfavorable mortality and impacts from interest rates. Below are GAAP results by business unit. The Life Insurance segment provides a broad range of life insurance products (interest sensitive and traditional) through multiple distribution channels in the upper income and corporate markets. The Life Insurance segment represents 28% of Pacific Life s total admitted assets for 2015, and reported net income of $89 million, compared to $91 million for the prior year. The decrease in income was primarily related to unfavorable mortality experience and reserve increases driven by lapse assumption changes, partially offset by favorable investment returns. The Retirement Solutions segments products include variable and fixed annuities, mutual funds, structured settlement and group annuities offered through multiple distribution channels. The Retirement Solutions segment represents 59% of Pacific Life s total admitted assets for 2015, and reported net income of $448 million compared to $287 million for the prior year. The increase was primarily driven by strong investment returns, higher tax credits and lower hedge costs, partially offset by higher VA DAC amortization as the result of lower equity returns. The Reinsurance segment primarily includes the domestic retrocession business, which was acquired in August 2011, due to the acquisition of the retrocession business from Manulife Financial Corporation. The Reinsurance segment also includes international reinsurance, which Pacific Life has assumed from its affiliated Pacific Life Re Limited, and wholly owned subsidiary of Pacific LifeCorp. The Reinsurance segment represents 2% of Pacific Life s total assets for 2015, and reported net income of $67 million compared to $90 million for the prior year driven by PL Re Retro s higher than expected claims which were partially offset by longevity new business and strong realized investment gains. The Corporate and Other segment consists of asset and activities which support the Company s operating segments and includes the management of investments, corporate hedging activities, and other expenses not directly attributable to the operating segments. The Corporate segment also includes institutional investment products such as funding agreements, guaranteed interest contracts (GICs) and other operations that do not qualify as operating segments. The Corporate segment reported a net loss of $49 million in 2015 compared to a net loss of $20 million for the prior year primarily driven by lower investment results within the surplus portfolio. The Aviation Capital Group offers aircraft leasing to the airline industry throughout the world and provides brokerage and asset management services to other third-parties. They reported $107 million of net income in 2015, compared to $90 million for the prior year. The favorable results were largely driven by strong operating performance, increased lease revenue, and expense savings related to maintenance and interest. The group continues to grow and diversify its individual life and annuity businesses, with a primary focus on the most affluent retail market segments, as well as on medium and large-sized corporations. Also, Pacific Life has expanded its hedge program to include interest rate hedging beginning in 2011 and has successfully shifted its individual annuity product sales mix from primarily variable annuities with riders to a balance between variable annuities with riders, investment only variable annuities and fixed annuities. A.M. Best favorably views these changes as they serve to reduce the group s earnings sensitivity to equity market fluctuations. Copyright 2016 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. Printed April 25, Page 6 of 13

7 PROFITABILITY ANALYSIS ($000) Company Pre-tax Net Period Net Oper Operating Net Total Ending Income Gain Income Return , , , , , , , , , , , , , , , , , , , ,814 5-Yr Total 2,102,601 1,900,651 1,902,275 2,774,458 Company Industry Composite Period Operating Operating Operating Operating Ending ROR (%) ROE (%) ROR (%) ROE (%) Yr Avg PROFITABILITY TESTS Comm & Pre-tax Ben Paid Exp to NOG Operating Invest to NPW NPW to Tot NOG to Return on Net Total Year & Dep & Dep Assets Tot Rev Equity Yield Return Year Avg (*) Pre-Tax Invest Total Return quarterly calculation based on more limited quarterly data - see Calculation Specifications. NET OPERATING GAIN ($000) Product Line Ordinary life 110,224 29,302 19,618 62,086-93,972 Group life Supplementary contr 848 1, Individual annuities 413, , , , ,751 Group annuities 78,400 37,911 15,689 22,936 24,488 Individual A&H 1,300-2,058 2,387 2,044 7,179 Group A&H 476-2, Other 3,112-38,338 25,070-75, ,548 Total 607, , , , ,400 ACCIDENT & HEALTH STATISTICS ($000) Net Premiums Net Premiums Loss Exp. Underwriting Year Written Earned Ratio Ratio Results , , ,322 4, ,195 3, , ,471 3, , ,593 2, ,467 Current Year Experience: Non-can Guarant renew 2,578 2, ,991 INVESTMENT GAINS ($000) Company Net Realized Unrealized Inv Capital Capital Year Income Gains Gains ,798,787-71, , ,575, , , ,857,788 6,678-87, ,216,879-33, , ,461,008-88, ,062 5-Year Total 9,909,983 1, ,184 Company -Industry Composite- Pre-tax Invest Inv Inc Inv Return on Total Inv Inc Inv Growth Yield Inv Assets Return Growth Yield Year (%) (%) (%) (%) (%) (%) Yr Avg (*) Pre-Tax Invest Total Return quarterly calculation based on more limited quarterly data - see Calculation Specifications. BALANCE SHEET STRENGTH Capitalization: Pacific Life s total adjusted capital (TAC) increased by 8.2% to approximately $8.5 billion at year-end 2015, compared to $7.8 billion at year-end 2014, primarily due to net income of $537 million, strong investment performance, and unrealized capital gains of $138 million. PLIC s risk adjusted capitalization levels increased in 2015 due to strong operating performance. A.M. Best notes that Pacific Life s risk-based capitalization ratios typically exhibit volatility due to its sizeable variable annuity market risk. However, over recent years, volatility has decreased due to mitigation Copyright 2016 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. Printed April 25, Page 7 of 13

8 strategies Additionally, PLIC continues to employ a statutory capital hedge to maintain a minimum RBC of 300% under severe stress scenarios as part of its overall enterprise risk management program. NAIC RBC was very strong at 632% for year end 2015 Pacific Life s TAC has grown significantly in recent years, increasing by approximately $2.2 billion from year-end 2010 to year-end The increase is partially attributable to $450 million of 6.00% internal surplus notes issued in 2010 and organic earnings growth from positive statutory operations. Surplus notes represented 21% of surplus as of year-end A.M. Best recognizes that surplus notes are debt instruments that have the expectation of repayment. Therefore, A.M. Best views surplus notes as a lower quality of capital than retained earnings or paid-in capital. Current BCAR: 254 CAPITAL GENERATION ANALYSIS ($000) Source of Surplus Growth Pre-Tax Net Realized Unrealized Adjusted Capital Income Capital Year Gain Gains Taxes Gains ,422-71,084 19, , , , , ,103 6,678 47,349-87, ,495-33,197 73, , ,790-88,145 60, ,062 5-Yr Total 2,102,601 1, , ,184 Source of Surplus Growth Change Change % Chg in Other in in Year AVR Changes C&S C&S , , , , , , , , , , , , ,302-14, , Yr Total -437, ,325 1,895, QUALITY OF SURPLUS ($000) Surplus Other Contributed Unassigned Year Notes Debt Capital Surplus ,599,396 1,622,062 2,355, ,599,426 1,613,593 2,962, ,770,861 1,495,955 3,236, ,771,090 1,488,251 3,912, ,771,318 1,480,139 4,511,023 Year-End Asset Valuation Adjusted Year C&S Reserve C&S ,576, ,790 6,237, ,175, ,866 6,900, ,502, ,801 7,034, ,171, ,317 7,801, ,762, ,618 8,443,098 LEVERAGE ANALYSIS Company -Industry Composite- C&S NPW & Dep Change C&S to Surplus to Total in NPW to Surplus Year Liab(%) Relief(%) Capital & Dep(%) Liab(%) Relief(%) CEDED REINSURANCE ANALYSIS Company -Industry Composite- Face Affil Unaffil Total Total Amount Reins Reins Reins Surplus Reins Reins Reins Year Reins Ceded Rec/C&S Rec/C&S Rec/C&S Relief Leverage Rec/C&S Leverage ,153, ,463, ,704, ,665, ,602, Liquidity: Pacific Life proactively manages its investment portfolio so as to maintain a favorable liquidity position. The company s strong cash flows and stable liability structure have provided significant liquidity benefits on an historical basis. Pacific Life s relatively higher proportion of policy loans results in a lower than average allocation to fixed income investments. However, the company does maintain a portfolio of short-term instruments to meet unexpected cash outflows, such as U.S. Treasuries and marketable long-term fixed maturity securities (including 144A securities). In addition, Pacific Life retains additional backup liquidity in the form of internal funding mechanisms and third party sources. Given its current composition of liabilities, A.M. Best believes the company s existing asset allocation provides solid liquidity protection under various stress scenarios to meet its cash flow needs. PLIC maintains a $700 million commercial paper program, utilized from time to time for short-term liquidity needs. A $400 million revolving credit facility serves as a back-up line of credit for the commercial paper program and matures in PLIC is also a member of the Federal Home Loan Bank (FHLB) of Topeka where it has approval to advance amounts up to 40% of its general account assets provided it has available collateral. At year-end 2014, the company had no outstanding borrowings from the FHLB of Topeka. Copyright 2016 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. Printed April 25, Page 8 of 13

9 On October 18, 2013, PL&A entered into a new Advances and Security agreement with Federal Home Loan Bank of San Francisco (FHLBSF) which expands financing availability from FHLBSF. This agreement expands the amount and duration of borrowing and allows PL&A to borrow up to 50% of capital and surplus out to 7 years. Pacific LifeCorp has a revolving credit agreement with various banks for a $600 million borrowing facility, which matures in Additionally, the group also retains the ability to engage in public or private debt capital raising efforts, and could embark on a public sale of up to 49% of common stock in the intermediate stock company as a financing alternative, although there are no plans to do so. LIQUIDITY ANALYSIS Company Operating Non-Inv Delnq & Cash Quick Current Grade Bonds Foreclsd Year Flow ($000) Liquidity Liquidity to Capital Mtg to Capital ,582, ,611, ,163, ,765, ,994, Company Industry Composite Mtg & Cred Affil Ten Lns Invest Quick Current Year & RE to Cap to Capital Liquidity Liquidity Investments: Pacific Life s general account invested assets totaled approximately $62.4 billion at year-end Invested assets are primarily comprised of public/private corporate bonds (56% of invested assets), loan backed and structured securities (7% of invested assets), commercial mortgage loans (18% of invested assets) and cash and other short-term investments (3% of invested assets). Additionally, Pacific Life has allocated a portion of its surplus to private equity. The company also maintains a high level of policy loans, which are very low risk and represent approximately 12% of invested assets. Policy loans generate attractive spread-based income primarily from leveraged COLI business written in 1986 and earlier. INVESTMENT YIELDS Cash & Invest. Net Short- Real Estate Exp. Year Yield Bonds Stocks Mortgages Term Gross Net Ratio Investments - Bond Portfolio: On a statutory basis, Pacific Life s $34.5 billion bond portfolio, as of year-end 2015, included 5% in below investment grade securities (BIG) bonds, and the overall bond portfolio represented roughly 63% of general account invested assets. While below investment grade bonds are well within industry averages, its exposure to NAIC class 2 bonds is elevated relative to the industry. The bond portfolio yield remains strong, despite a low yield environment, and was 85% invested in corporate and government bonds, 10% in RMBS and ABS and 5% in CMBS. The sector allocation to corporate bonds remains well diversified with a GAAP book value of $32.8 billion, at year end, invested as follows: Utilities (20%), Industrials (18%), Consumer Noncyclical (20%), Financials (13%), Energy (9%), Telecom (10%), Real Estate (7%), and Consumer Cyclical (3%). The net unrealized gain position of the portfolio was $1.3 billion at year-end 2015 on a statutory basis. The corporate bond portfolio has global diversification in primarily developed economies outside of the U.S. Pacific Life s structured security portfolio includes residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS). The vast majority of RMBS was invested in prime non-government agency backed bonds with modest amounts of sub-prime and Alt A investments. The absolute level of RMBS and CMBS continues to decline over time and credit losses have remained modest. INVESTMENTS - SECURITIES Current Year Distribution of Bonds By Maturity Years Yrs-Avg Maturity Government Gov t Agencies & Muni Industrial & Misc Hybrid Securities Total Copyright 2016 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. Printed April 25, Page 9 of 13

10 Bonds (000) 34,523,849 30,013,106 27,693,978 25,711,427 24,127,203 US Government Foreign Government Foreign - All Other State/Special Revenue - US Industrial & Misc - US Hybrid Securities Affiliated Private Issues Public Issues Bond Quality (%) Class Class Class Class Class Class Investments - Equity Portfolio: Pacific Life s equity related investments represented less than 1% of its investment portfolio at year-end INVESTMENTS - EQUITIES Stocks (000) 2,428,050 2,338,404 2,035,421 1,954,062 1,879,081 Unaffiliated Common Affiliated Common Unaffiliated Preferred Investments - Mortgage Loans and Real Estate: The commercial mortgage portfolio represents roughly 15.5% of assets at year-end 2015 on a statutory basis, and the amount of direct real estate investments was minimal, comprising less than 1% of total investments. The company maintains a well-diversified mortgage loan and real estate portfolio diversified among office buildings, resorts, apartment complexes, retail properties and hotels with modest amounts of mixed use, industrial and mobile home communities. INVESTMENTS - MORTGAGE LOANS & REAL ESTATE Mortgages (000) 8,811,938 8,073,647 7,942,674 7,241,694 7,403,735 Commercial Residential Real Estate (000) 182, , , , ,430 Property Occupied by Co Property Held for Inc INVESTMENTS - OTHER INVESTED ASSETS Other Inv Assets (000) 10,709,972 11,782,993 10,509,934 10,472,581 10,426,975 Cash Short-Term Schedule BA Assets All Other HISTORY Date Incorporated: 01/02/1868 Date Commenced: 05/01/1868 Domicile: NE Originally incorporated in 1868 as The Pacific Mutual Life Insurance Company of California, the company was reincorporated in 1936 as Pacific Mutual Life Insurance Company (Pacific Mutual Life) and officially became a mutual company in Following the passage of California s mutual holding company legislation, Pacific Mutual Life converted to a mutual holding company structure in 1997 through the formation of Pacific Mutual Holding Company. Concurrently, Pacific Mutual Life converted to a California domiciled stock life insurance company, issued all of its capital stock to an intermediate stock holding company named Pacific LifeCorp and continued its corporate existence under the name Pacific Life Insurance Company (PLIC). Pacific Mutual Holding Company is controlled by members who are policyholders and currently own 100% of the voting stock of Pacific LifeCorp. Pacific Mutual Holding Company is legally required to retain not less than 51% of the voting stock of Pacific LifeCorp, and Pacific LifeCorp must hold all of the voting stock of PLIC. The remaining voting stock of Pacific LifeCorp may be sold to the public, although this is not contemplated in the foreseeable future. This structure provides the group with greater financial flexibility in its capital management, including access to additional funding from the public markets. At the time of the company s conversion to a mutual holding company, PLIC established a closed block for certain individual life policies, with related assets of $271 million at year-end In 1999, PM Group Life Insurance Company, a wholly-owned subsidiary of PLIC, domiciled in Arizona, secured its license to conduct business in the state of New York and changed its name to Pacific Life & Annuity Company (PL&A). In 2005, the company sold the group insurance businesses of PLIC and PL&A to an unrelated third party. The business included medical, dental and life coverage for small and large group employers. The transaction was structured as a coinsurance arrangement and effectively eliminated the company s exposure to the group medical market. Also in 2005, ACG, then a subsidiary of Pacific LifeCorp, acquired Seattle-based Boullioun Aviation Services from WestLB AG. The transaction effectively doubled the size of ACG s commercial aircraft leasing business, placing it among the largest operating lessors in the industry. On December 31, 2009, Pacific LifeCorp contributed its entire ownership in ACG to PLIC. On September 1, 2005, PLIC transferred its legal domicile from the State of California to the State of Nebraska. On June 29, 2007, Pacific Mutual Copyright 2016 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. Printed April 25, Page 10 of 13

11 Holding Company transferred its legal domicile from the State of California to the State of Nebraska. In 2005, Pacific Alliance Reinsurance Ltd. (PAR Bermuda) was formed to provide reinsurance exclusively to PLIC for no lapse guarantee benefits. PAR Bermuda is a Bermuda-based life reinsurance company 100% owned by Pacific LifeCorp. In 2007, Pacific Alliance Reinsurance Company of Vermont (PAR VT) was incorporated and is a wholly owned subsidiary of PLIC. PAR VT is licensed as a special purpose financial insurance company under the laws of the State of Vermont and was formed to reinsure certain no lapse guarantee benefits issued by the Company. Effective October 1, 2010, all the reinsurance ceded to PAR Bermuda was novated to PAR VT, consolidating the in force no lapse guarantee reinsurance into one captive entity. In 2013, Pacific Baleine Reinsurance Company (PBRC) was incorporated and is a wholly owned subsidiary of PLIC. PBRC is licensed as a special purpose financial insurance company under the laws of the State of Vermont and was formed to reinsure certain level term insurance policies issued by the Company as well as certain no lapse guarantee rider benefits not ceded to PAR VT Ṗacific Life Re Limited (PL Re) was formed in 2008 following the acquisition by Pacific LifeCorp of the International Life Reinsurance segment of Scottish Re Group Limited. PL Re provides reinsurance to insurance and annuity providers in the United Kingdom, Ireland, and selected markets in Asia. In August 2011, PLIC and Pacific Life Reinsurance (Barbados) Limited (PLRB), a newly formed insurer and wholly owned subsidiary of Pacific LifeCorp, acquired Manulife Financial (Manulife) domestic and international life retrocession businesses, respectively. Upon closing the transaction, PLIC retroceded to PLRB, the majority of the domestic retrocession business it assumed from Manulife. In October 2012, the Company formed Pacific Annuity Reinsurance Company (PARC), which is organized and licensed as an Arizona-domiciled pure captive reinsurance company and is subject to regulatory supervision by the Arizona Department of Insurance. PARC was formed to reinsure benefits provided by variable annuity contracts and contract rider guarantees issued by PLIC. Base annuity contracts are reinsured on a modified coinsurance basis and the contract guarantees are reinsured on a coinsurance with funds withheld basis. The effective date of the reinsurance was December 1, PLIC initially ceded 5% of its existing variable annuity business to PARC with plans to cede 5% of new business issued. Depending on how the business develops, PLIC may increase the quota share ceded to PARC over time until 100% of the variable annuity business is reinsured. PARC was initially formed as a wholly owned subsidiary of PLIC. On December 28, 2012, PLIC distributed all of PARC s outstanding shares of common stock as a non-cash dividend to Pacific LifeCorp of $63 million. MANAGEMENT Officers: Chairman, Chief Executive Officer, President; James T. Morris, Executive Vice President, Chief Financial Officer; Adrian S. Griggs, Executive Vice President; Mary Ann Brown(Investment, Corporate Risk Management, Fund Advisory & Reinsurance), Executive Vice President; Dewey P. Bushaw(Retirement Solutions Division), Executive Vice President; Richard J. Schindler(Life Insurance Division), Senior Vice President, Chief Risk Officer; Joseph E. Celentano, Senior Vice President, Chief Marketing Officer; Christopher van Mierlo(Retirement Solutions Division), Senior Vice President, Chief Accounting Officer; Edward R. Byrd, Senior Vice President, General Counsel; Sharon A. Cheever, Senior Vice President; Kevin R. Byrne(Finance & Risk Management, Retirement Solutions Division), Senior Vice President; Thomas Gibbons(Corporate Treasury, Tax & Enterprise Consulting), Senior Vice President; Tod M. Nasser(Investment Management), Senior Vice President; Andrew Oleksiw(Corporate Development), Senior Vice President; T. Anthony Premer(Real Estate Investments), Senior Vice President; Kevin M. Roddy(Finance, Life Insurance Division), Senior Vice President; Carol R. Sudbeck(Corporate ), Senior Vice President; Philip A. Teeter(Technology, Retirement Solutions Division), Senior Vice President; Dawn M. Trautman(Product & Strategy Management, Life Insurance Division), Vice President, Secretary; Jane M. Guon, Vice President, Treasurer; Joseph W. Krum Directors: Sharon A. Cheever, Adrian S. Griggs, Jane M. Guon, Lawrence F. Harr, James T. Morris. REGULATORY An examination of the financial condition was made as of December 31, 2012, by the insurance department of Nebraska. The 2015 annual independent audit of the company was conducted by Deloitte & Touche, LLP. The annual statement of actuarial opinion is provided by Gary L. Falde, Vice President and Chief Actuary. Reserve basis: (Current ordinary business): From the Life Division CSO 2.0%, 2.5%, 3.0% and 3.5%; CRVM. (Current annuity business): Annuity % and 2012 IAR 4.50%. From the Corporate Division GAR 2.00%. From the Retirement Solutions Division - (Current annuity business): Annuity %; 1994 VA MGDB 3.75%; 2012 IAR 3.5% to 4.0%; 1994 GAR 4.0%. REINSURANCE Pacific Life has ceded and assumed life reinsurance programs in place with a number of professional reinsurers and life insurance companies. The life reinsurance ceded is well diversified among more than 15 companies, including RGA Reinsurance Company, Swiss Re Life & Health America, Inc., M Life Insurance Company and London Life Reinsurance Company. Maximum net retention, effective June 1, 2007, is $12,000,000 on individual life plans and $20,000,000 on survivorship life plans. In 2005, Pacific Alliance Reinsurance Ltd. (PAR Bermuda) was formed to provide reinsurance exclusively to Pacific Life for no lapse guarantee benefits. PAR Bermuda is a Bermuda-based life reinsurance company 100% owned by Pacific LifeCorp. In 2007, Pacific Alliance Reinsurance Company of Vermont (PAR VT) was incorporated and is a wholly owned subsidiary of Pacific Life. PAR VT is licensed as a special purpose financial captive insurance company under the laws of the State of Vermont and was formed to reinsure certain no lapse guarantee benefits issued by the Company. Effective October 1, 2010, all the reinsurance ceded to PAR Bermuda was novated to PAR VT, consolidating the no lapse guarantee reinsurance into one captive entity. Copyright 2016 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. Printed April 25, Page 11 of 13

12 Pacific Life Re Limited (PL Re) was formed in 2008 following the acquisition by Pacific LifeCorp of the International Life Reinsurance segment of Scottish Re Group Limited. PL Re provides reinsurance to insurance and annuity providers in the United Kingdom, Ireland, and selected markets in Asia. In August 2011, PLIC and Pacific Life Reinsurance (Barbados) Limited (PLRB), a newly formed insurer and wholly owned subsidiary of Pacific LifeCorp, acquired Manulife s domestic and international life retrocession businesses, respectively. Upon closing the transaction, PLIC retroceded to PLRB, the majority of the domestic retrocession business it assumed from Manulife. FINANCIAL INFORMATION BALANCE SHEET ($000) - December 31, 2015 Assets Liabilities Total bonds 34,523,849 +Net policy reserves 46,710,661 Total preferred stocks 21,103 Policy claims 663,921 Total common stocks 2,406,946 Deposit type contracts 2,134,561 Mortgage loans 8,811,938 Interest maint reserve 199,928 Real estate 182,386 Comm taxes expenses 224,926 Contract loans 7,324,669 Asset val reserve 680,618 Cash & short-term inv 1,517,653 Contingency reserve 2,701 Other invested assets 1,405,119 Other liabilities 395,744 Prems and consids due 224,637 Accrued invest income 455,526 Tot liab w/o sep accts 51,013,059 Other assets 1,901,711 Separate account bus 54,466,300 Tot assets w/o sep accts 58,775,539 Total liabilities 105,479,359 Separate account bus 54,466,300 Common stock 30,000 Surplus notes 1,771,318 Paid in & contrib surpl 1,185,439 Unassigned surplus 4,511,023 Other surplus 264,700 Assets 113,241,838 Total 113,241,838 +Analysis of reserves; Life $26,799,781; annuities $19,672,736; supplementary contracts with life contingencies $3,278; accidental death benefits $34; disability active lives $154,423; disability disabled lives $10,719; miscellaneous reserves $50,515; accident & health $19,175. SUMMARY OF OPERATIONS ($000) Premiums: Death benefits 1,356,076 Ordinary life 2,846,783 Matured endowments 713 Individual annuities 5,750,201 Annuity benefits 616,857 Group life 34 Disability benefits 1,285 Group annuities 440,078 Surrender benefits 6,394,131 Acc & health other 2,593 Acc & health benefits 3,212 Total premiums 9,039,689 Int on policy funds 65,853 Supplementary contracts 735 Supplementary contracts 473 Net investment income 2,461,008 Other benefits 6,969 Amort interest maint res 32,276 Incr life reserves 3,409,552 Comm & exp reins ceded 168,650 Incr a & h reserves -2,665 Res adj on reins ceded -1,108,752 Change in reserves 389 Other income 1,330,812 Commissions 808,649 Mgt and/or service fee 100,085 Comm exp reins assumed 20,447 Insur taxes lic & fees 81,767 General ins expenses 611,071 Net transf to sep acct -2,039,627 Misc operating expense 6,777 Other disbursements 0 Total 12,024,503 Total 11,341,930 Gain from operations before FIT & div to policyholders ,572 Dividends to policyholders: life... 13,782 Gains from operations after dividends to policyholders ,790 Federal income taxes incurred... 60,893 Net gain from operations after FIT and dividends ,897 CASH FLOW ANALYSIS ($000) Funds Provided Funds Applied Gross cash from oper 11,617,326 Benefits paid 8,242,865 Transf from sep account 2,092,019 Comm, taxes, expenses 1,507,261 Long-term bond proceeds 2,780,582 Long-term bonds acquired 7,315,680 Mortgage loan proceeds 840,724 Other invest acquired 2,691,201 Other invest proceeds 1,209,289 Other cash applied 163,727 Other cash provided 111,160 Decr cash & short-term 1,269,634 Total 19,920,735 Total 19,920,735 Copyright 2016 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. Printed April 25, Page 12 of 13

13 Why is this Best s Rating Report important to you? A Best s Rating Report from the A.M. Best Company showcases the opinion from the leading provider of insurer ratings of a company s financial strength and ability to meet its obligations to policyholders, as well as its relative credit risk. The A.M. Best Company is the oldest, most experienced rating agency in the world and has been reporting on the financial condition of the insurance companies since A Best s Financial Strength Rating is an independent opinion of an insurer s financial strength and ability to meet its ongoing insurance policy and contract obligations. The Financial Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance policy and contract obligations. The rating is not assigned to specific insurance policies or contracts and does not address any other risk, including, but not limited to, an insurer s claims-payment policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. The rating is not a recommendation to purchase, hold or terminate any insurance policy, contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. In arriving at a rating decision, A.M. Best relies on third-party audited financial data and/or other information provided to it. While this information is believed to be reliable, A.M. Best does not independently verify the accuracy or reliability of the information. The company information appearing in this pamphlet is an extract from the complete company report prepared by the A.M. Best Company or A.M. Best Europe Rating Services Limited. For the latest Best s Financial Strength Ratings along with their definitions and A.M. Best s Terms of Use, visit the A.M. Best website at You may also obtain AMB Credit Reports by visiting our site or calling our Customer Service department at , ext To expedite your request, please provide the company s identification number (AMB#). Copyright 2016 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. Printed April 25, Page 13 of 13