Insurer Pacific Life Sees AIG Hangover, Policy Sales Strong

Newport Beach’s Pacific Life Insurance Co. has been on a wild ride with its investments in the past year but its mainstay life insurance business appears to be holding up.

Parent company Pacific Mutual Holding Co. is the county’s largest privately held company with yearly revenue of $5.2 billion.

The 141-year-old company offers life insurance policies and investments for individuals and companies, counting more than half of the 100 largest U.S. companies as customers.

It also leases jets through its Aviation Capital Group subsidiary.

Like all insurers, Pacific Life invests heavily in stocks and bonds to earn money on cash it holds to pay out to policyholders and investors.

A rebound in the stock market through the third quarter helped push Pacific Life’s assets up to about $93 billion, from about $84 billion at the beginning of the year.

Pacific Life’s assets make up about 85% of its parent company’s total assets.

But after losing about $13 billion in investments from 2007 to 2008, some company watchers have developed guarded views about Pacific Life.

Last year’s near collapse of American International Group Inc. also cast a pall over all insurers.

Credit rating company Moody’s Corp. in New York has held an A1 or “good” rating of Pacific Life’s financial strength and ability to pay policyholders.

But it has a negative outlook on Pacific Life in light of the stock market’s turbulence in the past year.

Moody’s also is negative on Pacific Life’s ability to make good on guaranteed returns it has made to investors in its variable annuity retirement investment accounts.

“The market is a little better looking, but everyone is having a challenging time,” said Arthur Fliegelman, a senior credit officer at Moody’s.

Another concern: Pacific Life’s investments in bonds based on home mortgages.

The bonds have received a number of downgrades from analysts who worry borrowers may stop making payments on the underlying loans.

Pacific Life reported $81 million in losses from mortgage bonds in the second quarter, its most recent breakdown of its investments.

The loss represented a small part of the company’s $6.2 billion in mortgage bond investments.

About a quarter of its bonds are considered “non-investment grade,” or junk status, by credit rating agencies.

Pacific Life also has about $1 billion worth of commercial mortgage bonds, of which 1% are considered junk status.

Last year, Pacific Life’s parent had adjusted net income of $209 million, down 68% from 2007.

For the six months through June, net income rebounded with a 31% rise from a year earlier to $445 million.

Pacific Life’s business of selling life insurance policies and annuities has been growing in a stagnant market.

In August, a unit of Thomson Reuters Corp. reported that Pacific Life saw a 19.5% yearly rise to $24.6 billion in life insurance policies issued from 2007 to 2008, even as the industry saw a 1.2% decline to $1.8 trillion.

Pacific Life ranks as the No. 23 life insurer in the nation, according to the report.

For the 12 months through September, Pacific Life ranked third in sales of fixed annuities at $1.4 billion, according to Evanston, Ill.-based market tracker Beacon Research Publications Inc.

It was the first time Pacific Life ranked among the top 10.

Industry sales of fixed annuities were down 21% for the period to $22 billion.

In the second quarter, Pacific Life ranked 14th in sales of variable annuities at $837 million with about 2.7% of the market, according to Chicago-based research company Morningstar Inc.

Industry sales of variable annuities for the 12 months through June were down 24% from a year earlier to $31.2 billion.

Earlier this year, Pacific Life raised $1 billion through sales of 30-year bonds that came with a 9.25% yearly interest rate.

The sale was deemed a success with more investors wanting to buy than it had bonds for, according to the company.

The last time Pacific Life sold bonds was in 2003, when it sold $600 million at 6.6% for 30 years.

“It is prudent to operate with a conservative level of capital during these uncertain times,” Chief Executive James Morris said.

Timeline

Pacific Life began making its holdings public last year to appease investors’ concerns about New York-based AIG, which was bailed out by the government after trouble with credit default swaps.

Pacific Life never got into credit swaps, which were issued to buyers as insurance from companies defaulting on bonds.

Pacific Life also has focused on lowering costs, moving some of its conferences closer to its Newport Beach headquarters.