A.M. Best Affirms Credit Ratings of Prudential Financial, Inc. and Its Subsidiaries
January 10, 2018 by Best's News Service
Oldwick – A.M. Best has affirmed the Financial Strength Rating (FSR) of A+ (Superior) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “aa-” of the domestic life/health insurance subsidiaries of Prudential Financial, Inc. (PFI) (Newark, NJ) [NYSE: PRU] referred to as Prudential. Concurrently, A.M. Best has affirmed the Long-Term ICR of “a-” of PFI and all existing Long- and Short-Term Term Issue Credit Ratings (Long- and Short-Term IRs) of the group. The outlook of these Credit Ratings (ratings) is stable. In addition, A.M. Best has assigned Long-Term IRs of “a-” to two recently issued senior unsecured notes, due 2047 and 2049. The outlook assigned to these ratings is stable. (Please see link below for a detailed listing of the companies and ratings.)
The ratings reflect Prudential’s balance sheet strength, which A.M. Best categorizes as very strong, as well as its strong operating performance, very favorable business profile and very strong enterprise risk management.
Prudential’s balance sheet strength is enhanced by favorable financial flexibility as its parent, PFI, has access to various sources of liquidity and a proven ability to access capital markets. Partially offsetting these strengths is Prudential’s extensive use of captives to finance redundant reserves for its term and universal life products.
Prudential’s operating performance is considered strong, as its return metrics are favorable and generated positive statutory income in each of the past five years. Prudential benefits from meaningful economies of scale, which is reflective of its market leading positions in core business lines.
In addition to its growing domestic and international insurance businesses, Prudential has operated in the pension risk transfer (PRT) marketplace over the long term and now has over $65 billion in funded pension account values, as well as a meaningful presence in the unfunded U.K. PRT market. A.M. Best believes Prudential continues to be viewed as an attractive counterparty for large transactions due to its proven ability to effectively administer and fund them.
The rating affirmation of PFI reflects its highly diversified earnings sources, considerable financial flexibility, strong liquidity profile and strong debt service capabilities. Cash and short-term holdings at PFI exceed $4 billion, providing ample liquidity to fund shareholder dividends, share repurchases and possible acquisitions.
PFI, however, employs a significant amount of operating leverage, in part, to fund domestic individual life redundant reserve requirements, as well as for securities lending and other spread-based borrowings. However, financial leverage and interest coverage remain within A.M. Best’s guidelines for the company’s current rating level.
PFI’s international segment, which is dominated by its Japan operations, remains the single-largest segment representing roughly two-fifths of the company’s total operating earnings. The international segment has benefited from acquisition activity, which has helped to increase earnings and further diversify market risk for the overall liability profile of PFI. In PFI’s domestic business, the retirement segment has been the biggest area of growth, primarily due to the successful closing of several large PRT deals. Moreover, despite the recent decline in sales, the company continues to rank among the leaders in the variable annuity (VA) market due to its diversified product offerings. Its unique VA auto-rebalancing feature continues to be positioned well in the marketplace. The rebalancing feature also reduces Prudential’s exposure to equity market volatility. In addition, improved group disability insurance claims experience has begun to emerge in the group insurance segment. Lastly, the company’s investment portfolio continues to exhibit a low level of impairments, and the fixed income portfolio remains in a net unrealized gain position.
Partially offsetting these positive rating factors is the increasingly large concentration of annuity reserves, primarily due to the increasing number of PRT transactions, relative to its total statutory general account reserves. A.M. Best believes that in general, annuities are a less creditworthy line of business compared with ordinary life insurance products. While Prudential has a track record of managing, and to some degree, mitigating many of the risks inherent in its various annuity product lines, the low interest rate environment continues to have a negative impact on net investment yields. Moreover, A.M. Best notes that the allocation to commercial mortgages continues to increase, and relative to capital and surplus, is higher than the industry average. While Prudential’s holdings of below investment grade fixed income securities relative to capital and surplus is somewhat higher than industry totals, A.M. Best notes the exposure relative to capital and surplus has declined significantly over the past few years. PFI continues to maintain sizeable liquidity resources, and its prudent utilization will continue to be monitored by A.M. Best.
A.M. Best notes that its concerns in this area are mitigated somewhat by Prudential’s history of prudently managing its overall leverage. The company also continues to rely on captive insurers to help manage redundant life-reserve financing requirements. A.M. Best will continue to review these structures in conjunction with its operating companies in its assessment of capital adequacy.
For a complete listing of Prudential Financial, Inc.’s FSRs, Long-Term ICRs and Long- and Short-Term IRs, please visit Prudential Financial, Inc.
This press release relates to Credit Ratings that have been published on A.M. Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see A.M. Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and A.M. Best press releases, please view Guide for Media – Proper Use of Best’s Credit Ratings and A.M. Best Rating Action Press Releases.
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BN-NJ-1-5-2018 1650 ET #
