TEXT - Fitch affirms Prudential Financial Inc ratings
Dec 6 - Fitch Ratings has affirmed the 'A-' Issuer Default Rating (IDR) of Prudential Financial Inc. (PFI), the 'A+' Insurer Financial Strength (IFS) ratings of the U.S. operating entities, and all other ratings of the group. A complete list of ratings is provided at the end of this release. The Rating Outlook for all ratings is Stable. PFI's ratings reflect the group's strong market position and diversified mix of businesses, strong risk-adjusted capitalization, solid debt service capability, a strong liquidity profile and good operating performance. The integration of the Star/Edison acquisition is on track and is expected to generate meaningful earnings and cash flow over time. Key rating concerns include PFI's high financial leverage and uncertainty associated with macroeconomic headwinds, particularly sustained low interest rates and ongoing financial market volatility. PFI is one of the world's largest financial services organizations, with operations in the U.S., Asia, Europe, and Latin America, and just over $1 trillion in total assets under management as of Sept. 30, 2012. The company has very strong positions in its chosen markets in the U.S. and Japan. Fitch believes that PFI benefits from a good mix of businesses and diversified income streams. Fitch estimates that PFI's combined NAIC RBC for the U.S. operations was about 475% as of Sept. 30, 2012 net of over $600 million of dividends to the parent. Fitch expects PFI to manage PICA's RBC to the 400% range going forward reflecting the impact of recent transactions, including the GM pension risk transfer contract, which closed in the fourth quarter. Fitch also expects PFI's solvency margin ratios (SMR) in Japan to remain in the top tier on a relative basis. The SMRs for POJ and Gibraltar were 811% and 791% respectively as of Sept. 30, 2012. PFI's financial leverage ratio (FLR) of 35% as of Sept. 30, 2012 is above expectations for the rating level. The FLR increased from 32% at year-end 2011 due to higher financial debt, partly related to prefunding of upcoming debt maturities, and new accounting rules for deferred acquisition costs (DAC), which alone accounted for about 2% of the increase. The total financing and commitments (TFC) ratio is also above average at 1.4x as of Sept. 30, 2012. PFI has maintained significantly reduced reliance on short-term funding of subsidiary operations. Outstanding commercial paper (CP), including both PFI and Prudential Funding LLC, was 4% of total debt as of Sept. 30, 2012 and Dec. 31, 2011 compared to a Fitch maximum guideline of 10%. Securities lending has continued at reduced levels. PFI had net cash at the holding company of $3.6 billion at the end of the third quarter, well above the group's $1.2 billion minimum target. Fitch expects PFI to end 2012 with about the same amount in cash, net of commercial paper. About half of that amount will be used to prefund maturing debt and to fund the Hartford acquisition, which closes in the first quarter of 2013. PFI's credit-related investment losses continued to trend lower through Sept. 30, 2012 in line with rating expectations. The CMBS portfolio continues to perform well, and was in a net unrealized gain position as of Sept. 30, 2012. The subprime portfolio, which was the only category of invested assets in a net unrealized loss position at the end of the third quarter, continues to run off. Operating earnings are expected to be relatively flat for the full year 2012 as favorable factors, including improved fee income due to strong equity market performance and positive net flows in most lines of business, are offset by declining interest margins and increased reserves driven by the ongoing low interest rate environment. Results are also affected by higher short-term expenses, including integration costs related to the Star Edison acquisition and PFI's exit from the banking businesses. Key rating triggers that could result in a downgrade of PFI's holding company ratings (i.e. wider notching from the operating company) include: An increase in the financial leverage ratio (FLR) above 35%; outstanding CP above 10% of total debt on a sustained basis; TFC above 1.5x; GAAP interest coverage ratio below 5x (based on pre-tax adjusted operating earnings). Triggers that could result in a downgrade of both operating and holding company ratings include: A stated NAIC RBC ratio below 400%; Japan solvency margin ratio below 600%; and a more significant breach of the above noted holding company triggers. Key rating triggers that could result in an upgrade of PFI's operating and holding company ratings are: Continued reduced reliance on short-term funding; progress reducing financial leverage to the mid-20% range; total leverage below 40%; GAAP interest coverage in the 8x-10x range (based on pre-tax adjusted operating earnings); stated NAIC RBC ratio remaining near current levels; Japan solvency margin ratio above 700%. Fitch has affirmed the following ratings with a Stable Outlook: Prudential Financial, Inc. --Long-term IDR at 'A-'; --Senior notes at 'BBB+'; --Junior subordinated notes at 'BBB-'. Prudential Financial, Inc. --Short-term IDR at 'F2'; --CP at 'F2'. Prudential Insurance Company of America --IFS at 'A+' --Long-term IDR at 'A'; --Surplus notes at 'A-'; --Short-term IDR at 'F1'. Prudential Funding, LLC --CP at 'F1'; --Senior unsecured at 'A'. PRICOA Global Funding I --Secured notes program at 'A+'. PRUCO Life Insurance Company Prudential Annuities Life Assurance Corp. Prudential Retirement Insurance & Annuity Company PRUCO Life Insurance Company of New Jersey --IFS at 'A+'.
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