A.M. Best Affirms Ratings of Prudential Financial and Its Subsidiaries; |
Revises Issuer Credit Rating and Debt Outlooks to Stable
A. M. Best
December 10, 2008
OLDWICK, N.J., Dec 10, 2008 (A. M. Best via COMTEX) -- (NYSE: PRU) -- A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of 'aa-' of Prudential Financial, Inc.'s (PFI) (Newark, NJ) [NYSE: PRU] domestic life/health insurance companies. Concurrently, A.M. Best has affirmed the ICR of 'a-' of PFI and all existing debt ratings. The outlook for the FSR is stable, and the outlook for the ICRs and debt has been revised to stable from positive. (See link below for a detailed list of the companies and ratings.)
The outlook revisions reflect A.M. Best's concerns with the group's declining trends in absolute and risk-adjusted statutory capital largely due to higher reserve and capital requirements related to individual variable annuities (VAs); somewhat reduced overall financial flexibility given the dislocations in the U.S. credit markets; and heightened investment risk associated with PFI's general account asset portfolio. Absent a recovery in the U.S. equity markets, A.M. Best expects continued operating and capital volatility within the company's individual annuity and asset management businesses as asset-related fees decline, hedge breakage increases and additional reserves/capital are needed to support VAs with secondary guarantees, mainly GMDB and GMIB. However, A.M. Best notes that management has taken several corrective actions recently to preserve capital, including the suspension of PFI's share repurchase program and reduction of shareholder dividends. PFI's increased use of operating leverage in recent years, which reflects its distinctive business mix, has resulted in reduced fixed charge coverage (including shareholder dividends).
While PFI's balance sheet is sound and its credit exposures are within its risk tolerances, A.M. Best believes the company has moderately higher investment risk relative to peers due to considerable holdings in below investment grade bonds, commercial mortgage loans and subprime mortgage-backed securities relative to capital. PFI's GAAP balance sheet has roughly 25% of its assets invested in structured securities (subprime and other ABS), commercial mortgage-backed securities and direct commercial loans. Consistent with other life companies, PFI is likely to experience additional losses (both mark-to-market and economic) from these asset classes as the recession deepens. U.S. commercial real estate risk is further accentuated by PFI's asset management business, which is dependent on real estate transaction fees. These fees along with public bond related fees are expected to decline, although overall fees remain adequate to support current expense levels and a high percentage of overall asset management revenues are recurring. While overall investment risk is above-average, it is somewhat mitigated by PFI's sizable closed block and seasoned investment management capabilities, namely strong credit expertise and solid overall credit quality within its investment portfolio.
The ratings reflect PFI's highly diversified operating profile; sufficient liquidity to meet near-term maturing debt obligations; and stable overall results in domestic life (individual life and group life), group retirement and international operations. The ratings also reflect the considerable diversity in PFI's business mix within its insurance, investment and international divisions, and a strong global market presence. PFI's existing liquidity sources which include commercial paper programs, committed credit facilities and membership in the Federal Home Loan Bank of New York recently have been supplemented by its participation in the Commercial Paper Funding Facility (CPFF) program and potential involvement in the Troubled Asset Recovery Program (TARP). Prospectively, A.M. Best will evaluate the level of participation in these programs and the use of the proceeds, including a review of any potential acquisitions with these funds. A negative rating action may be warranted if proceeds are utilized to invest in high-risk assets or if statutory capital, financial leverage, operating and investment results deteriorate substantially from anticipated year-end levels.
A.M. Best notes that current U.S. statutory capital levels which were down substantially from year-end 2007 will be bolstered by the contribution of PFI's Wachovia joint venture to The Prudential Insurance Company of America, the group's lead operating company. Going forward, monetization of this investment (which PFI intends to put to Wells Fargo) will be an important factor in supporting the organization's balance sheet strength given the magnitude of capital market uncertainty and rising risks.
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