RPT-Fitch Affirms Pan-American Life's IFS Ratings; Outlook Stable

Fri Jan 24, 2014 9:29am EST

Jan 24 (Reuters) - (The following statement was released by the rating agency)

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.

KEY RATING DRIVERS

The rating affirmation reflects the company's continued very strong capitalization, relatively low risk liability profile, improved operating performance, and conservative financial management. The ratings also consider the competitive challenges facing Pan-American when operating in the U.S. and competing with companies that have significantly greater scale, market share, pricing power and distribution capabilities. Pan-American's non-U.S. insurance operations are concentrated in Latin American and Caribbean countries, the majority of which have sovereign ratings that are lower than Pan-American's rating.

Pan-American's very strong balance sheet continues to be a key ratings driver. The company's risk-based capital was estimated at 548% at Sept. 30, 2013 compared to 510% at year-end 2012. In January 2013, Pan-American sold its ownership in a local hotel which had a positive benefit on RBC. Operating leverage of about 5 times (x) compares favorably to an industry average of 9x. Consolidated financial leverage for the Pan-American Life Insurance Group, Inc. (PALIG) is moderate at 8% and the total financing and commitments (TFC) ratio of .1x is among the lowest in Fitch’s life insurance universe.

Fitch believes that Pan-American's earnings have become increasingly stable and predictable as management has successfully streamlined operations and addressed legacy issues. Fitch also notes that Pan-American's target markets are making a larger contribution to earnings, and the company is less reliant on its closed block of ordinary life business in the U.S. Operating results thus far from the recent acquisition of select Latin American and Caribbean businesses of MetLife, Inc. have been strong and have allowed the company to expand its footprint in the region. Fitch believes continued success in the integration of this business will improve the mix of Pan-American’s revenues and earnings between its core segments.

Pan-American has little exposure to equity market volatility or disintermediation risk given its liability structure, which is made up primarily of life insurance and accident and health reserves. Operating cash flow is good, and PALIC is a member of the Federal Home Loan Bank of Dallas, which provides borrowing capacity of roughly $90 million, none of which was utilized as of Sept. 30, 2013.

Fitch does not anticipate an upgrade in the near-to-intermediate term. Fitch 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 very strong balance sheet fundamentals provide Pan-American with an 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%;

--A significant 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 that includes GAAP earnings-based interest coverage falling below 4x;

--Inability to successfully integrate MetLife, Inc. acquisition.

Fitch affirms the following ratings with a Stable Outlook:

Pan-American Life Insurance Company

Pan-American Assurance Company

--IFS at 'A'.

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