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

A.M. Best Affirms Ratings ofPrudential Financial Inc. and Its Subsidiaries

OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of "aa-" of the domestic life/health insurance subsidiaries of Prudential Financial, Inc. (Prudential or 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 affirmation of the ratings reflects Prudential's continued strong market positions in its diversified businesses, demonstrated holding company financial flexibility and liquidity, good risk-adjusted capitalization, positive operating performance in most of its business segments and prospects for continued organic growth. A.M. Best notes the highly successful issuance of over $3.0 billion of junior subordinated debt and the execution of sizeable transactions, including the acquisition of The Hartford's individual life block and two sizeable pension risk transfer transactions. Acquired through a reinsurance transaction, the deal with The Hartford added approximately 700,000 life policies with an aggregate face amount of roughly $135 billion, and general account and separate account assets and liabilities of approximately $12 billion. With respect to the pension risk transfer deals done with General Motors and Verizon, Prudential added approximately $32 billion in liabilities. A.M. Best believes PFI continues to be viewed as a qualified counterparty for large transactions due to its ability to finance them and its reputation of successfully and quickly integrating large transactions. The company's financial flexibility is augmented by its strong liquidity profile.

Prudential's diverse business profile continues to be viewed as a strength, led by its strong international profile, which represents close to 50% of its operating earnings. The international life insurance segment has benefitted from strong organic growth as well as the integration of Star/Edison, which has helped to increase earnings and further diversify market risk for the overall liability profile of PFI. In the domestic business, A.M. Best observes that the increasing proportion of variable annuity liabilities with automatic rebalancing features has continued to help dampen the exposure to equity market risk. In addition, Prudential has exceeded $1 trillion of assets under management, while its retirement and annuities businesses have exceeded $400 billion of account value. In addition, 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 Prudential's above average holdings of below investment grade fixed income securities relative to capital and surplus, its $2.2 billion investments in subprime residential mortgage-backed securities and its overall exposure to commercial real estate through commercial mortgage-backed securities and its direct commercial loan portfolio. On a consolidated statutory accounting basis, PFI's domestic operating entities held roughly $8.8 billion of below investment grade securities as of year-end 2012. In addition, the allocation to commercial mortgages has increased, and as a percentage of capital and surplus, is twice the industry average. A.M. Best notes that approximately one-third of its below investment grade holdings are allocated to the closed block of participating life business, where both positive and negative experience can be passed along to policyholders via dividends. While overall investment risk remains sizeable, credit impairments continue to trend lower. 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. Moreover, with the recently executed pension risk transfer transactions, annuities (both group and individual) represent an increasingly large component of total statutory general account reserves. A.M. Best believes that in general, annuities are a less creditworthy line of business compared to ordinary life insurance products. It is noted, however, that 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. Although still relatively modest, these deals materially increase the allocation to alternative investments, which A. M. Best believes has increased overall investment risk. In addition, there is the potential for additional transactions in this space to add even more investment risk.

Finally, A.M. Best also notes that given the breadth and scale of Prudential's diverse organization, capital management remains a key focus. PFI utilizes significant amounts of operating leverage at levels exceeding most of its peers. Although the company made significant strides in reducing overall leverage in the past few years, the use of total leverage remains relatively high. However, financial leverage and interest coverage both remain within the guidelines for the company's current rating category. Going forward, A.M. Best expects Prudential to prudently manage its overall leverage and remains cautious as to the business rationale for future issuances, as well as to the amounts and types of structures utilized. The company also continues to rely on captive insurers to help manage both capital and the volatility of statutory earnings. A. M. Best continues to "look through" these structures in its assessment of capital adequacy.

A.M. Best believes that PFI and its life/health subsidiaries remain well positioned at their current rating levels. Key rating drivers that may lead to negative rating actions include a material deterioration in risk-adjusted capitalization within the group, increased use of total leverage and a significant weakening in overall operating and/or investment performance.

For a complete listing of Prudential Financial, Inc.'s FSRs, ICRs and debt ratings, please visit www.ambest.com/press/050908prudential.pdf.

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.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visitwww.ambest.com.

Copyright © 2013 by A.M. Best Company, Inc.ALL RIGHTS RESERVED.

A.M. Best Company, Inc.
Ken Johnson, CFA, 908-439-2200, ext. 5056
Managing Senior Financial Analyst
ken.johnson@ambest.com
or
Thomas Rosendale, 908-439-2200, ext. 5201
Assistant Vice President
thomas.rosendale@ambest.com
or
Rachelle Morrow, 908-439-2200, ext. 5378
Senior Manager, Public Relations
rachelle.morrow@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com

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