Pacific Mutual Holding Co.’s climb back to its perch as the largest private company in Orange County was fast, but it didn’t come easy.
Standing in the way of the Newport Beach-based parent of Pacific Life Insurance Co. was a mix of market volatility and soft patches in the national and global economies. All of that was complicated by short-term interest rates that have hovered slightly above zero for more than three years—a big hurdle for insurers that offer long-term benefits to clients and policyholders.
“Persistently low interest rates are a primary risk for life insurance companies, and the low-interest rate environment does have a negative impact on bottom-line results,” said Tod Nasser, senior vice president at Pacific Life, and head of its investment management division. “Throughout the [insurance] industry, the decline in yields is causing declines in sales, revenue, and profitability.”
Yet Pacific Life saw a 15% increase in revenue last year, to $6.7 billion. Net income grew by 41%, to $679 million. Its assets at year-end totaled $116.8 billion, about even with a year earlier.
The strong year put Pacific Life’s parent company back on the No. 1 spot on the Business Journal’s June list of the largest privately held companies in Orange County, which is based on revenue. The company was No. 2 on last year’s list, behind Fountain Valley-based Kingston Technology Co.
It was the first time in 17 years that Pacific Life—one of OC’s largest employers, with about 1,900 workers here and 2,790 companywide—had fallen from the top spot.
Its climb back reflected the company’s recent moves to diversify its product lines—a strategy that began amid the economic meltdown that touched off the recent recession.
“Beginning in 2008, Pacific Life started a process to diversify and expand its retirement products,” President Khanh Tran said.
The retirement division primarily sells annuities and mutual funds. Diversification included a new line of fixed-annuity products, the latest of which was launched last year, dubbed the Pacific Index Choice.
Pacific Life also placed “an increased emphasis on our mutual fund offerings as complementary products to our variable annuity products,” Tran said.
The strategies seem to be working, as Pacific Life saw a 22% increase in revenue for the division, which accounted for $2.9 billion, or about 44% of the company’s total.
Sales of annuities broke a three-year streak of declines with a 13% increase last year. Mutual fund sales jumped more than 33% to notch “our highest sales year ever,” Tran said.
Pacific Life also ramped up new investment products in its real estate business, an area in which the company “consistently outperforms our industry peers,” according to Nasser.
The company originated $2.9 billion of new commercial mortgage loan and real estate securities investments last year. It now holds $4.2 billion in its residential mortgage-backed securities portfolio and $771 million in its commercial mortgage-backed securities portfolio.
“Our performance in the commercial mortgage portfolio continues to be strong, with less than $5 million in loan losses over the past five years,” Nasser said.
It also helps that Pacific Life has subsidiaries that aren’t directly correlated with the movements of U.S. interest rates.
“While all of our businesses are affected by macroeconomic fluctuations, Aviation Capital Group and Pacific Life Re are not as affected by a low-interest rate environment,” Tran said.
Aviation Capital
Aviation Capital is a commercial aircraft leasing company, with more than 240 commercial jets in stock. It leases to 90 airlines in 40 countries.
Pacific Life Re provides reinsurance to international markets including the U.K., Ireland and select countries in Asia. It also engages in the life retrocession business—insuring reinsurance—in the U.S. and Canada. Those lines of business were boosted with the $71.2 million acquisition of a unit of Bermuda-based Scottish Re Group Ltd. in the second half of 2010, and a $287 million deal for the life retrocession business of Manulife Financial Corp. in Canada last summer.
The Manulife Financial deal brought approximately $106 billion of individual life reinsurance to Pacific Life, making it the leader in North America for the segment, with approximately 41% market share, according to the company.
Aviation Capital Group and Pacific Life Re combined to account for 17% of Pacific Life’s total revenue last year.
“In 2012, we expect that number to be closer to 24%,” Tran said. “Both subsidiaries have been consistently profitable through difficult times, and continue to deliver favorable results in the current challenging environment.”
Recent results and a strong balance sheet contributed to a recent upgrade by ratings agencies.
New York-based Standard & Poor’s Financial Services LLC last month affirmed its “A+” financial-strength rating for Pacific Life and its affiliates. It also revised its outlook on the company to stable from negative.
Fitch Ratings Ltd., also in New York, recently gave Pacific Life an “A+” rating. Fitch said the company has “strengthened its variable annuity hedging program” sufficiently to safeguard against a weakening in equities markets.
Stress Tests
Pacific Life regularly conducts stress tests on its assets, liabilities and liquidity, “to ensure the company will survive under virtually any future scenarios,” according to Tran. Different types of risks borne by insurers—on interest rates, credit risk and foreign currency—can be managed through the company’s hedging mechanisms, he said.
“If we know our portfolio rate will be under pressure in a prolonged low-rate environment, it is our responsibility to reflect that in our product features,” Tran said. “Low investment rates are just one side of the story.”
