Fitch Ratings Affs Pacific Life's Rtgs; Revises Outlook to Negative.

Business Editors

CHICAGO--(BUSINESS WIRE)--March 24, 2003

Fitch Ratings has affirmed the 'AA+' insurer financial strength ratings of Pacific Life Insurance Company (Pacific Life) and Pacific Life & Annuity Insurance Company. In addition, Fitch has affirmed the 'AA+' rating on the medium-term notes issued by Pacific Life Funding, LLC and Pacific Life's 'AA-' surplus note rating. Pacific Life's commercial paper has been affirmed at 'F1+'. A summary of the rating actions is listed below. Fitch has also revised its Rating Outlook to Negative from Stable.

The current rating rationale reflects the organization's strong financial position that reflects a solid balance sheet and well diversified business lines. Pacific Life's strong balance sheet fundamentals include a high quality asset portfolio, solid capitalization and extensive liquidity supported by sound asset/liability management.

Fitch's primary concern, and the principal driver behind the Negative Rating Outlook, includes the deterioration in statutory capital strength in recent years from an exceptionally strong position to a weaker, though still strong, position reported at year-end 2002. Statutory capital (including surplus and the asset valuation reserve) declined to $2.1 billion at year-end 2002 from $2.4 billion at year-end 2001.

The statutory capital decline has been caused by variable annuity expenses which include large first year commission costs associated with new sales and higher minimum death benefit reserves due to the negative equity market. The company's NAIC risk-based capital ratio fell seventy-three points to 262% at year-end 2002, reflecting the deterioration in statutory capital. Fitch believes that Pacific Life's reported NAIC risk-based capital ratio is understated due to risk based capital requirements on its interest in PIMCO that is higher than the associated true economic risk.

The statutory capital decline in 2002 was also caused by recent investment losses in challenging economic conditions. Fitch's analysis includes stressing unrealized losses within insurers' bond portfolios to understand the ability of capital to withstand potential future other than temporary impairment (OTTI) charges. At year-end 2002, Pacific Life held $435 million in pretax, gross unrealized losses and $1,411 million in pretax, gross unrealized gains in fixed income securities. Reported GAAP shareholders' equity at year-end 2002 was $4,298 million. Fitch does not view the gross unrealized loss exposure as excessive, though the risk of further pressure on capital levels from possible future OTTIs contributes to the Negative Rating Outlook. Favorably, the company has not taken interest rate gains to offset recent credit losses.

As investment losses recorded in 2002 were not a material concern relative to total assets, Fitch has traditionally given the company high marks for credit investment skills and does not anticipate a multi-year run in material realized losses at levels similar to those reported in 2002. While market conditions may remain difficult in 2003, Fitch anticipates that Pacific Life's credit losses has been and will continue to be among the lowest in the industry.

Fitch will pay close attention to capital development in the near term, as favorable development will be important in future rating reviews. Fitch does not believe additional capital deterioration is tolerable for the current ratings.

Fitch also anticipates that improved earnings will be realized during 2003. For the same reasons that have negatively affected surplus, earnings have also been weak in recent years and have steadily declined since 1999.

On a GAAP accounting basis, earnings were impacted by adjustments to the deferred acquisition cost (DAC) amortization in the past two years. Net income in 2002 was $50 million, down from $247 million the prior year. The charge taken in 2003 included a change in DAC assumptions, including an adjustment to future asset appreciation rates, which appears conservative relative to peers. Partially offsetting this conservative adjustment, Fitch recognizes that the company's expansion into the variable annuity market, primarily since 1998, has coincided with poor equity market returns since 2000. Although the company's variable annuity book of business is relatively young and has an above average level of DAC relative to variable annuity assets - meaning that Pacific Life's DAC amortization assumptions need to be conservative to limit the potential future charges. However, offsetting the DAC balance are early surrender charges remaining on its relative new block of variable annuities. Pacific Life has voluntarily established GAAP reserves for death benefits, which is conservative and not a current requirement under GAAP.

Pacific Life is one of the leading providers of individual life insurance, variable annuities and investment products. At year-end 2002, the company held total assets of $51 billion and reported statutory surplus of $1.7 billion. Pacific Life maintains an economic interest in PIMCO, one of the largest asset management operations worldwide.

Entity/Issue/Type                   Action          Rating/Outlook

Pacific Life Insurance Company
-- Insurer financial strength       Affirm          'AA+'/Negative;
-- Surplus notes                    Affirm          'AA-'/Negative;
-- Commercial paper                 Affirm          'F1+'.

Pacific Life & Annuity Insurance Company
-- Insurer financial strength       Affirm          'AA+'/Negative.

Pacific Life Funding, LLC
-- Medium-term notes                Affirm          'AA+'/Negative.