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

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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 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 rating affirmations reflect Prudential’s continued strong market positions in its diversified businesses, adequate risk-adjusted capitalization and positive operating performance in most of its business segments. The ratings also reflect PFI’s considerable financial flexibility and strong liquidity. A.M. Best notes the successfully completed integrations of sizeable transactions, including The Hartford Financial Services Group, Inc.‘s individual life insurance reinsurance transaction and several large pension risk transfer (PRT) transactions during the most recent period. Prudential is considered to be one of the largest providers of PRT solutions in the United States and added over $5 billion in liabilities last year. A.M. Best believes PFI continues to be viewed as an attractive counterparty for large transactions due to its ability to finance them, as well as to quickly and successfully integrate them.

Prudential’s diverse business profile continues to be a strength of the organization. The international segment, which is dominated by its Japanese operations, remains the single largest segment representing close to half of the company’s total operating earnings. The international segment has benefited from the integration of Star/Edison, which has helped to increase earnings and further diversify market risk for the overall liability profile of PFI. In Prudential’s domestic business, the retirement segment has been the biggest area of growth, due to the successful closing of several large PRT deals. Furthermore, the company continues to rank as a leading variable annuity seller due to its diversified product offerings. Its unique auto-rebalancing feature continues to be a market-leading option. The rebalancing feature also reduces Prudential’s exposure to U.S. equity market volatility. In addition, improved group disability insurance claims experience has begun to emerge in the group insurance segment. Furthermore, 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 the increasingly large concentration of annuity reserves, due to the growth 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. However, 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. Additionally, the low interest rate environment continues to have a negative impact on net investment yields and has also led to a recent material reserve strengthening as a result of asset adequacy testing. Moreover, A.M. Best notes that the allocation to commercial mortgages continues to increase, and relative to capital and surplus, is approximately twice the industry average, although this percentage declined slightly during the most recent period. In addition, Prudential has above average holdings of below investment grade fixed income securities relative to capital and surplus. A.M. Best notes that approximately one-third of Prudential’s below investment grade holdings are allocated to the closed block of participating life business, where positive and negative experience can be passed along to policyholders via dividends. 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.

PFI continues to utilize significant amounts of operating leverage at levels exceeding most of its competitors. Although total leverage remains relatively high, financial leverage and interest coverage remain within the 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 capital and the volatility of statutory earnings. A.M. Best will continue to review these structures in conjunction with its operating companies in its assessment of capital adequacy.

A.M. Best believes that PFI is unlikely to experience positive rating movement over the near to medium term. Longer term, favorable rating actions can come from material progress in reducing financial and total leverage, continued strong sales and deposit activities, which provide additional earnings momentum and diversification, maintenance of strong liquidity and risk management practices and continuing low levels of credit impairments in the investment portfolio. Factors which could lead to negative rating actions include higher levels of total debt leverage beyond A.M. Best’s expectations, unfavorable market moves leading to increased material and sustainable liability reserve increases, product related embedded derivative and hedging losses and/or portfolio impairments, in addition to the potential for unforeseen risks in such a large and complex global enterprise.

For a complete listing of Prudential Financial, Inc.’s FSRs, ICRs and debt ratings, please visit Prudential Financial, Inc.

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.

Key insurance criteria reports utilized:

  • A.M. Best’s Liquidity Model for U.S. Life Insurers
  • A.M. Best’s Perspective on Operating Leverage
  • Equity Credit for Hybrid Securities
  • Evaluating Country Risk
  • Evaluating U.S. Surplus Notes
  • Insurance Holding Company and Debt Ratings
  • Rating Funding Agreement-Backed Securities
  • Rating Members of Insurance Groups
  • Risk Management and the Rating Process for Insurance Companies
  • Understanding BCAR for U.S. and Canadian Life/Health Insurers

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 visit A.M. Best’s Ratings & Criteria Center.

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 (c) 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

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