Fitch Affirms Ratings of Prudential Financial Inc.
NEW YORK -- December 06, 2012
Fitch Ratings has affirmed the 'A-' Issuer Default Rating (IDR) of Prudential
Financial Inc. (PFI), the 'A+' Insurer Financial Strength (IFS) ratings of the
U.S. operating entities, and all other ratings of the group. A complete list
of ratings is provided at the end of this release. The Rating Outlook for all
ratings is Stable.
PFI's ratings reflect the group's strong market position and diversified mix
of businesses, strong risk-adjusted capitalization, solid debt service
capability, a strong liquidity profile and good operating performance. The
integration of the Star/Edison acquisition is on track and is expected to
generate meaningful earnings and cash flow over time.
Key rating concerns include PFI's high financial leverage and uncertainty
associated with macroeconomic headwinds, particularly sustained low interest
rates and ongoing financial market volatility.
PFI is one of the world's largest financial services organizations, with
operations in the U.S., Asia, Europe, and Latin America, and just over $1
trillion in total assets under management as of Sept. 30, 2012. The company
has very strong positions in its chosen markets in the U.S. and Japan. Fitch
believes that PFI benefits from a good mix of businesses and diversified
Fitch estimates that PFI's combined NAIC RBC for the U.S. operations was about
475% as of Sept. 30, 2012 net of over $600 million of dividends to the parent.
Fitch expects PFI to manage PICA's RBC to the 400% range going forward
reflecting the impact of recent transactions, including the GM pension risk
transfer contract, which closed in the fourth quarter. Fitch also expects
PFI's solvency margin ratios (SMR) in Japan to remain in the top tier on a
relative basis. The SMRs for POJ and Gibraltar were 811% and 791% respectively
as of Sept. 30, 2012.
PFI's financial leverage ratio (FLR) of 35% as of Sept. 30, 2012 is above
expectations for the rating level. The FLR increased from 32% at year-end 2011
due to higher financial debt, partly related to prefunding of upcoming debt
maturities, and new accounting rules for deferred acquisition costs (DAC),
which alone accounted for about 2% of the increase. The total financing and
commitments (TFC) ratio is also above average at 1.4x as of Sept. 30, 2012.
PFI has maintained significantly reduced reliance on short-term funding of
subsidiary operations. Outstanding commercial paper (CP), including both PFI
and Prudential Funding LLC, was 4% of total debt as of Sept. 30, 2012 and Dec.
31, 2011 compared to a Fitch maximum guideline of 10%. Securities lending has
continued at reduced levels.
PFI had net cash at the holding company of $3.6 billion at the end of the
third quarter, well above the group's $1.2 billion minimum target. Fitch
expects PFI to end 2012 with about the same amount in cash, net of commercial
paper. About half of that amount will be used to prefund maturing debt and to
fund the Hartford acquisition, which closes in the first quarter of 2013.
PFI's credit-related investment losses continued to trend lower through Sept.
30, 2012 in line with rating expectations. The CMBS portfolio continues to
perform well, and was in a net unrealized gain position as of Sept. 30, 2012.
The subprime portfolio, which was the only category of invested assets in a
net unrealized loss position at the end of the third quarter, continues to run
Operating earnings are expected to be relatively flat for the full year 2012
as favorable factors, including improved fee income due to strong equity
market performance and positive net flows in most lines of business, are
offset by declining interest margins and increased reserves driven by the
ongoing low interest rate environment. Results are also affected by higher
short-term expenses, including integration costs related to the Star Edison
acquisition and PFI's exit from the banking businesses.
Key rating triggers that could result in a downgrade of PFI's holding company
ratings (i.e. wider notching from the operating company) include: An increase
in the financial leverage ratio (FLR) above 35%; outstanding CP above 10% of
total debt on a sustained basis; TFC above 1.5x; GAAP interest coverage ratio
below 5x (based on pre-tax adjusted operating earnings). Triggers that could
result in a downgrade of both operating and holding company ratings include: A
stated NAIC RBC ratio below 400%; Japan solvency margin ratio below 600%; and
a more significant breach of the above noted holding company triggers.
Key rating triggers that could result in an upgrade of PFI's operating and
holding company ratings are: Continued reduced reliance on short-term funding;
progress reducing financial leverage to the mid-20% range; total leverage
below 40%; GAAP interest coverage in the 8x-10x range (based on pre-tax
adjusted operating earnings); stated NAIC RBC ratio remaining near current
levels; Japan solvency margin ratio above 700%.
Fitch has affirmed the following ratings with a Stable Outlook:
Prudential Financial, Inc.
--Long-term IDR at 'A-';
--Senior notes at 'BBB+';
--Junior subordinated notes at 'BBB-'.
Prudential Financial, Inc.
--Short-term IDR at 'F2';
--CP at 'F2'.
Prudential Insurance Company of America
--IFS at 'A+'
--Long-term IDR at 'A';
--Surplus notes at 'A-';
--Short-term IDR at 'F1'.
Prudential Funding, LLC
--CP at 'F1';
--Senior unsecured at 'A'.
PRICOA Global Funding I
--Secured notes program at 'A+'.
PRUCO Life Insurance Company
Prudential Annuities Life Assurance Corp.
Prudential Retirement Insurance & Annuity Company
PRUCO Life Insurance Company of New Jersey
--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;
--'Global Financial Institutions Rating Criteria', Aug. 16, 2011.
Applicable Criteria and Related Research:
Insurance Rating Methodology -- Amended
Global Financial Institutions Rating Criteria
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Cynthia J. Crosson
One State Street Plaza
New York, NY 10004
Douglas L. Meyer, CFA
Fitch (Hong Kong) Limited
+852 2263 9942
Brian Bertsch, +1-212-908-0549 (New York)
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