A.M. Best Affirms Ratings of Prudential Financial Inc. and Its Subsidiaries
September 6, 2016 by A.M. Best
OLDWICK, N.J.–(BUSINESS WIRE)–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 issue ratings of the group. All domestic life/health subsidiaries of PFI are collectively referred to as Prudential. The outlook for each rating is stable. (Please see link below for a detailed listing of the companies and ratings.)
The rating affirmations reflect Prudential’s highly diversified business and earnings profile underpinned by strong market positions in its core lines, adequate risk-adjusted capitalization and favorable longer term operating performance in most business segments. In addition to its growing domestic and international insurance businesses, Prudential has a large and expanding footprint in the pension risk transfer (PRT) arena. Over the last several years, Prudential has closed a number of large transactions, which in aggregate, represent more than $75 billion in pension account values. A.M. Best believes Prudential continues to be viewed as an attractive counterparty for large transactions due to its capacity to finance them and proven ability to effectively administer and integrate them.
The ratings also reflect PFI’s considerable financial flexibility and strong liquidity profile. PFI’s diverse business profile continues to be a strength of the organization. The international segment, which is dominated by its Japan operations, remains the single largest segment representing nearly one-half 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 and variable annuity sales. Moreover, the company continues to rank as a leading variable annuity seller due to its diversified product offerings. Its unique variable annuities auto-rebalancing feature continues to be a market-leading option. 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 manageable trends with respect to 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 nearly 1.8 times the industry average, although this percentage declined slightly during the most recent period. 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.
PFI continues to utilize significant amounts of operating leverage at levels exceeding most of its competitors. Operating leverage has been employed, in part, to fund domestic individual life redundant reserve requirements, as well as used in 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. 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 requirement. 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, ICRs and issue ratings, please visit Prudential Financial, Inc.
This press release relates to rating(s) 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.
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