A.M. Best Affirms Financial Strength and Debt Ratings of Pacific Life; Revises Outlook to Stable.

OLDWICK, N.J. -- A.M. Best Co. has affirmed the financial strength rating of A++ (Superior) of Pacific Life Insurance Company (PLIC) (Newport Beach, CA) and its wholly-owned subsidiary, Pacific Life & Annuity Company (together known as Pacific Life) (Phoenix, AZ). Concurrently, A.M. Best has affirmed PLIC's issuer credit rating (ICR) of "aa+" and its debt rating of "aa-" on surplus notes. A.M. Best has also affirmed the ICR of "a+" and the senior unsecured debt rating of "a+" of its penultimate holding company, Pacific LifeCorp (Newport Beach, CA). The outlook for all ratings has been revised to stable from negative. (See link below for a complete list of the ratings.)

The ratings reflect Pacific Life's strong risk-adjusted capitalization, excellent liquidity position and prudent financial and risk management practices, as well as the prominent position the company maintains as a provider of choice in the most affluent market segments for individual life insurance, variable annuities and institutional investment products. Pacific Life has consistently achieved revenue growth that exceeds industry averages, while enhancing its financial strength and risk-adjusted capital position over the past two years through a combination of improved operating earnings, a capital contribution from Pacific LifeCorp and the sale of much of its beneficial ownership interest in PIMCO Advisors L.P. (PIMCO, now known as Allianz Dresdner Asset Management of America L.P.).

Pacific Life generates healthy levels of operating cash flow supported by a stable liability structure, a high-quality investment portfolio, extensive liquidity sources and conservative financial leverage. The group's diversified earnings sources provide strong interest coverage in the range of seven to nine times. Additionally, Pacific Life's operating fundamentals have benefited from the impact of positive equity market returns on the variable annuity and variable life lines, continued strong sales in the life insurance segment and recent improvements in the credit markets.

In May 2005, Pacific Life closed on the sale of its group insurance business to PacifiCare Health Systems Inc., freeing up capital within the operating companies and effectively eliminating its exposure to the group medical market. Although earnings have been consistently positive within this line, A.M. Best views the disposition favorably as Pacific Life was not particularly well-positioned to compete in the group medical business due to its lack of scale.

These strengths are partly offset by the ongoing potential for earnings volatility due to the nature of the group's mix of business. Given its competitive position as the market leader in variable life and as a top 10 writer of variable annuities, Pacific Life has a disproportionate exposure to the equity markets relative to the rest of the industry. The earnings volatility associated with this exposure was demonstrated during the recent market downturn. In addition, the group's core universal life and corporate-owned life insurance (COLI) products, as well as its institutional investment products, are sensitive to further changes in interest rates, economic conditions and unfavorable legislation, adding to the potential for earnings volatility.

A.M. Best notes that in recent years Pacific LifeCorp has entered certain non-traditional insurance businesses, including commercial aircraft leasing and asset financing, which exposes Pacific LifeCorp to incremental industry-specific risks.

The group's exposure to the commercial aircraft leasing business will be effectively doubled following the pending acquisition by Aviation Capital Group (ACG) of Boullioun Aviation Services, placing ACG among the top five competitors in this market. However, ACG's non-recourse financing of its assets and Pacific Life's broad product portfolio, diversified and highly productive distribution capabilities and disciplined financial management strategies largely mitigate A.M. Best's concerns in these areas.

Additionally, A.M. Best has assigned a debt rating of "aa+" to $68.3 million of floating rate senior notes secured by separate account funding agreements, which are obligations of PLIC. The notes were issued in November 2004 by Pacific Pilot Funding, a special purpose trust created under the laws of the Cayman Islands. The notes are assigned PLIC's ICR as they are backed by a security interest in the underlying funding agreement, which is an unsecured obligation of PLIC's separate account. In the event of a liquidation or dissolution of PLIC in accordance with California law, the claims of holders of funding agreements would be treated pari passu with most claims under insurance policies and annuity policies or contracts. Therefore, in assigning the above debt rating, A.M. Best believes that the investors in these notes are exposed to the inherent credit, liquidity and business risks of PLIC.

For a complete list of Pacific Life's financial strength, issuer credit and debt ratings, please visit http://www.ambest.com/press/060305pacificlife.pdf.

For Best's Debt Ratings, all other Best's Ratings, an overview of the rating process and rating methodologies, please visit http://www.ambest.com/ratings.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at http://www.ambest.com.