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Fitch Affirms Pan-American Life's IFS Ratings; Outlook Stable
[October 25, 2016]

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


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. Fitch also affirmed the 'A' IFS rating of Mutual Trust Life Insurance Company (MTL). The Rating Outlook is Stable.

KEY RATING DRIVERS

Pan-American's ratings reflect its very strong capitalization, relatively low-risk liability profile and modest operating performance. The ratings also consider that Pan-American Life Insurance Group's (PALIG) non-U.S. insurance operations are concentrated in Latin America and the Caribbean, the majority of which have sovereign ratings that are lower than Pan-American's rating.

The ratings also consider the successful integration of the MTL merger. MTL strengthened PALIG's position in the U.S. life insurance market and represents its primary growth engine in this market. However, Fitch believes the company will continue to face competitive challenges in the U.S. from companies with significantly greater scale, market share, pricing power and distribution capabilities.

Pan-American's strong balance sheet continues to be a key rating driver with very strong capitalization and low leverage. PALIC and MTL maintain statutory capital well in excess of rating expectations with an NAIC risk-based capital (RBC) ratio of 592% and 652%, respectively, at Dec. 31, 2015. Pan-American and MTL's combined Prism capital model score is 'Extremely Strong'. Outside the U.S., PALIG's insurance subsidiaries maintain statutory capital that well exceeds regulatory minimums.

Fitch views PALIG's consolidated operating leverage (defined as GAAP liabilities-to-capital excluding unrealized investment gains and losses) of 5x as very strong and among the lowest in Fitch's rating universe. Additionally, PALIG's financial leverage remains low at 9% as of June 30, 2016.

Pan-American generates relatively stable earnings due to its relatively low-risk product profile. MTL writes primarily participating whole life insurance in the U.S., which contributes to earnings stability. The liability profiles of both companies have minimal exposure to equity market risk.

PALIG's below-investment grade (BIG) bond exposure declined to 9% of total fixed-income assets as of June 30, 2016, compared with approximately 15% as of June 30, 2015, which is primarily attributable to the higher asset quality of MTL's bond portfolio.

PALIG's BIG exposure is largely driven by the company's foreign government exposure to Latin American and Caribbean countries, whose securities are generally rated 'BB' or lower. These securities are used to fulfill local regulatory requirements in the jurisdictions where Pan-American operates or to currency-match insurance liabilities in those countries.

PALIG's overall risky asset ratio of 64% remains below the industry average of 80%. PALIG's extremely low asset leverage contributes to its relatively low risky assets ratio. However, given its exposure to bonds rated 'BBB', the company is susceptible to rating migration in the next credit market downturn.

Fitch has revised its view of MTL's strategic importance to the Pan-American enterprise to 'core', based on the successful integration of MTL and its positioning as the primary growth engine in the U.S. life insurance market. Based on Fitch's group rating methodology, the assigned rating is unchanged at 'A', which is consistent with MTL's stand-alone credit profile.

RATING SENSITIVITIES

Fitch does not anticipate an upgrade in the near- to intermediate-term. The company's ratings are constrained due to its modest operating scale and sovereign risk exposure.

The key rating triggers that could result in a downgrade include:

--A decline in capitalization, such as RBC below 450% for PALIC or MTL or a Prism capital model score below 'Extremely Strong;

--An increase in consolidated financial leverage to over 20%; ---An increase in GAAP consolidated operating leverage (defined as liabilities to capital excluding unrealized investment gains and losses) to over 7x; or

--A decline in GAAP consolidated return on equity to below 4%.

Fitch has affirmed the following ratings with a Stable Outlook:

Pan-American Life Insurance Company

Pan-American Assurance Company

MTL Insurance Company

--IFS at 'A'.

Additional information is available on www.fitchratings.com.



Applicable Criteria

Insurance Rating Methodology (pub. 15 Sep 2016)


https://www.fitchratings.com/site/re/887191

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013691

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013691

Endorsement Policy

https://www.fitchratings.com/regulatory

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