A.M. Best Affirms Ratings of Prudential Financial Inc. and Its Subsidiaries

  A.M. Best Affirms Ratings of Prudential Financial Inc. and Its Subsidiaries

Business Wire

OLDWICK, N.J. -- May 9, 2013

A.M. Best Co. has affirmed the financial strength rating (FSR) of A+
(Superior) and issuer credit ratings (ICR) of “aa-” of the domestic
life/health insurance subsidiaries of Prudential Financial, Inc. (Prudential
or 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,
positive operating performance in most of its business segments and prospects
for continued organic growth. A.M. Best notes the highly successful issuance
of over $3.0 billion of junior subordinated debt and the execution of sizeable
transactions, including the acquisition of The Hartford’s individual life
block and two sizeable pension risk transfer transactions. Acquired through a
reinsurance transaction, the deal with The Hartford added approximately
700,000 life policies with an aggregate face amount of roughly $135 billion,
and general account and separate account assets and liabilities of
approximately $12 billion. 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 a
qualified 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 strong organic growth as well as the integration of Star/Edison, which
has helped to increase earnings and further diversify market risk for the
overall liability profile of PFI. In the domestic business, A.M. Best observes
that the increasing proportion of variable annuity liabilities with automatic
rebalancing features has continued to help dampen the exposure to equity
market risk. In addition, Prudential has exceeded $1 trillion of assets under
management, while its retirement and annuities businesses have exceeded $400
billion of account value. In addition, the company’s investment portfolio
continues to demonstrate positive trends with respect to impairments and
remains in a substantial net unrealized gain position.

Partially offsetting these positive rating factors is Prudential’s above
average holdings of below investment grade fixed income securities relative to
capital and surplus, its $2.2 billion investments in subprime residential
mortgage-backed securities and its overall exposure to commercial real estate
through commercial mortgage-backed securities and its direct commercial loan
portfolio. On a consolidated statutory accounting basis, PFI’s domestic
operating entities held roughly $8.8 billion of below investment grade
securities as of year-end 2012. In addition, the allocation to commercial
mortgages has increased, and as a percentage of capital and surplus, is twice
the industry average. A.M. Best notes that approximately one-third of its
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. While overall investment risk
remains sizeable, credit impairments continue to trend lower. 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 recently executed pension risk transfer transactions,
annuities (both group and individual) 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. It is noted, however, that 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.
Although still relatively modest, these deals materially increase the
allocation to alternative investments, which A. M. Best believes has increased
overall investment risk. In addition, there is the potential for additional
transactions in this space to add even more investment risk.

Finally, 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 made significant strides in reducing overall
leverage in the past few 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 category. Going forward, A.M. Best
expects Prudential to prudently manage its overall leverage and remains
cautious as 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 remain well
positioned at their current rating levels. Key rating drivers that may lead to
negative rating actions include a material deterioration in risk-adjusted
capitalization within the group, increased use of total leverage and a
significant weakening in overall operating and/or investment performance.

For a complete listing of Prudential Financial, Inc.’s FSRs, ICRs and debt
ratings, please visit www.ambest.com/press/050908prudential.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.

A.M. Best Company is the world's oldest and most authoritative insurance
rating and information source. For more information, visit www.ambest.com.

       Copyright © 2013 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

Contact:

A.M. Best Company, Inc.
Ken Johnson, CFA, 908-439-2200, ext. 5056
Managing Senior Financial Analyst
ken.johnson@ambest.com
or
Thomas Rosendale, 908-439-2200, ext. 5201
Assistant Vice President
thomas.rosendale@ambest.com
or
Rachelle Morrow, 908-439-2200, ext. 5378
Senior Manager, Public Relations
rachelle.morrow@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com
 
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