A.M. Best Co. reiterated the issuer credit ratings (ICR) of ‘a-’ on Prudential Financial, Inc. (PRU - Free Report) . Concurrently, the rating agency reiterated the financial strength rating (FSR) of A+ (Superior) and ICR of ‘aa-’ of the domestic life/health insurance subsidiaries of Prudential. It also affirmed the debt ratings. Outlook remains stable.
The rating affirmation came on the back of solid market presence, strong operational performance in most of the business, potential for sustained organic growth, sturdy risk-adjusted capitalization, and financial flexibility and liquidity.
The rating also account for over $3.0 billion of junior subordinated debt issuance as well as the acquisition of The Hartford Financial Services Group, Inc.’s (HIG - Free Report) individual life block and two significant pension risk transfer transactions. While the Hartford deal added nearly 0.7 million life policies having face value of $135 billion and general account and separate account assets and liabilities of nearly $12 billion, the pension risk transfer transactions with General Motors Company (GM - Free Report) and Verizon Communications Inc. (VZ - Free Report) added nearly $32 billion in liabilities for Prudential.
A.M. Best noted that Prudential’s diversified portfolio is represented by its international exposure. While solid organic growth and the integration of Star/Edison augmented the international life insurance segment’s performance, domestic business benefited from higher variable annuity liabilities with automatic rebalancing features. Additionally, asset under management of Prudential exceeded the $1 trillion mark.
Nevertheless, above average holdings of below investment grade fixed income securities relative to capital and surplus, $2.2 billion investments in subprime residential mortgage-backed securities and overall exposure to commercial real estate via commercial mortgage-backed securities and direct commercial loan portfolio dwarfs the positives. A.M Best noted that though there remains considerable investment risk, credit impairments continue to trend lower.
According to A.M. Best, life insurance business is a more proven line of business than annuities. At the same time, it noted that Prudential not only effectively managed but also to some extent mitigated inherent risks in its various annuity products.
However, the ratings might be subject to downgrade if risk-adjusted capitalization erodes, operating or investment results soften, or the usage of leverage increases.
Prudential carries a Zacks Rank #2 (Buy).