Best’s News & Research Service - May 07, 2014 11:28 AM (EDT)
A.M. Best Affirms Ratings of Prudential Financial Inc. and Its Subsidiaries
Oldwick //BestWire// - A.M. Best has affirmed the financial strength rating (FSR) of A+ (Superior) and the issuer credit ratings (ICR) of "aa-" of the domestic life/health insurance subsidiaries of Prudential Financial, Inc. (PFI) (Newark, NJ) [NYSE: PRU]. Concurrently, A.M. Best has affirmed the ICR of "a-" of PFI and all existing debt ratings of the group. All domestic life/health subsidiaries of PFI are collectively referred to as Prudential. The outlook for all ratings is stable.
The affirmation of the ratings reflects Prudential's continued strong market positions in its diversified businesses, demonstrated holding company financial flexibility and liquidity, good risk-adjusted capitalization and positive operating performance in most of its business segments. A.M. Best notes the successfully completed integrations of sizeable transactions, including the Star/Edison transaction and two sizeable pension risk transfer transactions. With respect to the pension risk transfer deals done with General Motors and Verizon, Prudential added approximately $32 billion in liabilities. A.M. Best believes PFI continues to be viewed as an attractive counterparty for large transactions due to its ability to finance them and its reputation of successfully and quickly integrating large transactions. The company's financial flexibility is augmented by its strong liquidity profile.
Prudential's diverse business profile continues to be viewed as a strength, led by its strong international profile, which represents close to 50% of its operating earnings. The international life insurance segment has benefitted from the integration of Star/Edison, which has helped to increase earnings and further diversify market risk for the overall liability profile of PFI. In Prudential's domestic business, A.M. Best observes that the increasing proportion of variable annuity liabilities with automatic rebalancing features has continued to help dampen its exposure to equity market risk. In addition, improved group life insurance claims experience has begun to emerge. Furthermore, the company's investment portfolio continues to demonstrate positive trends with respect to impairments and remains in a substantial, albeit somewhat reduced, net unrealized gain position.
Partially offsetting these positive rating factors are Prudential's above average holdings of below investment grade fixed income securities relative to capital and surplus and its overall exposure to commercial real estate through commercial mortgage-backed securities and its direct commercial loan portfolio. In addition, the allocation to commercial mortgages continues to increase and (as a percentage of capital and surplus) is approximately twice the industry average. A.M. Best notes that approximately one-third of Prudential's below investment grade holdings are allocated to the closed block of participating life business, where both positive and negative experience can be passed along to policyholders via dividends. Additionally, A.M. Best notes that Prudential continues to maintain a sizeable amount of liquidity, and its prudent utilization will continue to be monitored by A.M. Best. Moreover, with the pension risk transfer transactions, annuities represent an increasingly large component of total statutory general account reserves. A.M. Best believes that in general, annuities are a less creditworthy line of business compared to ordinary life insurance products. However, Prudential has established a track record of successfully managing, and to some degree, mitigating many of the risks inherent in its various annuity product lines.
A.M. Best also notes that given the breadth and scale of Prudential's diverse organization, capital management remains a key focus. PFI utilizes significant amounts of operating leverage at levels exceeding most of its peers. Although the company has reduced overall leverage in recent years, the use of total leverage remains relatively high. However, financial leverage and interest coverage both remain within the guidelines for the company's current rating level. A.M. Best expects Prudential to prudently manage its overall leverage and remains cautious with regard to the business rationale for future issuances, as well as to the amounts and types of structures utilized. The company also continues to rely on captive insurers to help manage both capital and the volatility of statutory earnings. A.M. Best continues to "look through" these structures in its assessment of capital adequacy.
A.M. Best believes that PFI and its life/health subsidiaries are unlikely to experience positive rating movement over the near to medium term. Longer term, favorable rating actions can come from continued strong sales and deposit activities, which provide additional earnings momentum and diversification, material progress in reducing both financial and total leverage, maintenance of strong liquidity and risk management practices and continuing low levels of credit impairments in the investment portfolio. Factors that could lead to negative rating actions include a return to higher levels of total debt leverage, unfavorable market moves leading to increased portfolio impairments and/or material liability reserve increases as well as the potential for unforeseen risks in such a large and complex global enterprise.
For a complete listing of Prudential Financial, Inc.'s FSRs, ICRs and debt ratings, please visit www.ambest.com/press/050701prudential.pdf.
The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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