On Friday, rating agency A.M. Best Co. reaffirmed the financial and issuer credit ratings (FSR) & (ICR) of Prudential Financial Inc. (PRU) and its subsidiaries, and placed it at a stable outlook. Accordingly, the company’s ICR of “a-” along with all the existing debt ratings have been reiterated. Its life and health insurance subsidiaries have also witnessed a reaffirmation of their FSR and ICR of “A+” and “aa-” respectively.
The rating agency takes into account the group’s diversified operations, which span across the United States, Asia, Europe and Latin America. Its wide product portfolio encompasses life insurance, annuities, mutual funds, pension- and retirement-related investments, administration and asset management, and securities brokerage services. The right mix of businesses with strong fundamentals and firm risk management capabilities have helped Prudential garner a solid market position with greater business diversification, placing it in a competitive position.
The rating agency also acknowledges Prudential’s actions in bolstering its financial strength and flexibility through long-term debt and equity issues. It had raised approximately $4.4 billion in 2009, thereby strengthening its capitalization ratio and improving liquidity. The company has reduced $16 billion in debt over the past three years. Its leverage ratio rests below the industry average and reflects its inherent capital strength. Further, interest coverage ratio is expected to improve gradually as operating conditions normalize.
A.M. Best is of the opinion that Prudential’s group retirement business, which contributed approximately 27% of 2009 revenues, is a key to its top-line growth. Gradually improving equity markets have led to an increased sale of variable annuities, increasing revenues — a trend that is expected to continue.
Also, the improvements in the equity markets have boosted positive trends in asset management fees as reflected in the latest earnings. Narrowing credit spreads have helped bring in $2.4 billion in unrealized gains on its investment portfolio as of March 31, 2010. Additionally, with gradual improvements in markets, Prudential will not be required to keep additional reserves/capital to support its variable annuities with secondary guarantees, thus relieving the strain on capital.
Factors which counteract the ratings are the group’s above-average concentration of investments in subprime residential mortgage-backed securities and its exposure to commercial real estate. Credit impairments on these assets amounted to $1 billion in 2008 and 2009. A.M. Best is concerned with potential credit impairments in the wake of the recent capital market volatility and an uncertain economy.
Prudential’s financial strength and credit ratings, which are intended to measure its ability to meet policyholder obligations, are important factors affecting investor confidence in most of its products, and as a result its competitiveness. The ratings affirmation and the subsequent upgrade to a “stable” outlook reflect optimism about the company’s future performance.
Read the full analyst report on “PRU”
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