N@N

A.M. Best Revises Outlook to Stable for Prudential Financial, Inc. and Its Subsidiaries

^{Published on 2010-06-04 16:50:17 - Market Wire}
 

OLDWICK, N.J.--([ BUSINESS WIRE ])--A.M. Best Co. has revised the outlook to stable from negative and affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of aaa-a of the domestic life/health insurance companies of Prudential Financial, Inc. (PFI) (Newark, NJ) (NYSE: PRU). Concurrently, A.M. Best has revised the outlook to stable from negative and affirmed the ICR of aa-a of PFI and all existing debt ratings of the group. All domestic life/health companies of PFI are collectively referred to as Prudential. (See link below for a detailed list of the companies and ratings.)

The revised outlook reflects Prudentiala™s strong market position in its diversified businesses, improved liquidity and capitalization as a result of successful capital raises, positive net operating gains and prospects for improved organic growth. A.M. Best notes steady net flows within PFIa™s group retirement business, which A.M. Best believes is an increasingly important component to the groupa™s overall U.S. business strategy, as well as strong top-line revenue growth within variable annuities. In addition, the rise in the equity markets coupled with narrowing credit spreads has had a positive impact on PFIa™s fee income and has moved its investment portfolio to a net unrealized gain position of approximately $2.4 billion as of March 31, 2010. The companya™s first quarter 2010 results continued this positive momentum, with Prudential garnering solid top line revenue results from its diversified business profile, particularly from sales of its highly successful U.S. variable annuity product offering. Furthermore, Prudential has made strides in its enterprise risk management practices and continues to demonstrate prudent use of hedging, reinsurance and product design techniques.

Partially offsetting these strengths is Prudentiala™s above average holdings of below investment grade fixed income securities, its investments in subprime residential mortgage-backed securities (RMBS) and overall exposure to commercial real estate. On a consolidated basis, PFIa™s Financial Services Business held nearly $8 billion of below investment grade securities as of March 31, 2010. Credit impairments realized to date have averaged roughly $1 billion for each of the last two years; however, these have been substantially offset through the exercise of the Wachovia joint venture put and sizeable capital raises that totaled roughly $9 billion as of year end. Going forward, A.M. Best notes the potential for ongoing impairments at levels roughly equivalent to last year though first quarter 2010 impairment levels for the general account have trended significantly lower. Given the recent volatility in the capital markets, the potential for a second leg down in housing and the unwinding of the commercial real estate cycle, A.M. Best believes uncertainty with respect to the overall economy still remains. This creates the potential for ongoing impairments within below investment grade bonds, non-agency RMBS and commercial real estate, albeit likely to trend at lower absolute levels.

While Prudentiala™s operating earnings should continue to improve, A.M. Best has observed that it has benefited from several one time items, including the aforementioned sale of PFIa™s interest in Wachovia, which benefited statutory and GAAP earnings by roughly $1.4 billion after tax. A.M. Best also notes that Prudential consistent with its business mix utilizes operating leverage at levels exceeding its peers. However, the company has made significant strides in reducing overall leverage by roughly $16 billion since 2007, primarily through reduction of commercial paper borrowings and scaling back of securities lending programs. A.M. Best expects Prudential to maintain prudent levels of overall leverage and a gradual improvement to interest coverage as operating results normalize.

For a complete list of Prudential Financial, Inc.and its subsidiariesa™ FSRs, ICRs and debt ratings please visit [ www.ambest.com/press/060403prudential.pdf ].

The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at [ www.ambest.com/ratings/methodology ].

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit [ www.ambest.com ].