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

CHICAGO--()--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 Outlook is Stable.

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 Pan-American's relative position within the Fitch-rated universe, which includes companies that have significantly greater scale, market share, pricing power and distribution capabilities.

Pan-American's very strong balance sheet continues to be a key ratings driver. The company's risk-based capital was estimated at 502% at Sept. 30, 2012 compared to 563% at year-end 2011 following a $17 million dividend paid to the holding company. Operating leverage of about 5x compares favorably to an industry average of 9x. Consolidated financial leverage for the Pan-American Life Insurance Group, Inc. (PALIG) is moderate at 16% and the total financing and commitments (TFC) ratio is .19x.

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.

Fitch believes the acquisition of select Latin American and Caribbean businesses of MetLife, Inc. will allow the company to expand its footprint in the region although Fitch acknowledges the inherent execution risk. Fitch believes successful 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 $100 million, of which $50 million was utilized as of Sept. 30, 2012.

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.

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 financial leverage to over 20%;

--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'.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Oct. 18, 2012).

Applicable Criteria and Related Research:

Insurance Rating Methodology - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=692293

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Contacts

Fitch Ratings
Primary Analyst:
Tana M. Higman, +1-312-368-3122
Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Cynthia J. Crosson, +1-212-908-0863
Director
or
Committee Chairperson:
Martha M. Butler, +1-312-368-3191
Senior Director
or
Brian Bertsch, +1-212-908-0549
New York, Media Relations
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Tana M. Higman, +1-312-368-3122
Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Cynthia J. Crosson, +1-212-908-0863
Director
or
Committee Chairperson:
Martha M. Butler, +1-312-368-3191
Senior Director
or
Brian Bertsch, +1-212-908-0549
New York, Media Relations
brian.bertsch@fitchratings.com