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Fitch Affirms Prudential Financial's Ratings; Outlook Stable
October 27, 2017 / 2:28 PM / 22 days ago

Fitch Affirms Prudential Financial's Ratings; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, October 27 (Fitch) Fitch Ratings has affirmed the 'AA-' Insurer Financial Strength (IFS) ratings of Prudential Financial, Inc.'s (PFI) primary U.S. life insurance subsidiaries. Fitch also affirmed PFI's Issuer Default Rating (IDR) at 'A' and senior unsecured debt ratings at 'A-'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release. KEY RATING DRIVERS Fitch's ratings on PFI reflect the company's very strong business profile, sustained improvement in capitalization tied to a reduction in total and financial leverage in recent years, and very strong earnings profile. The ratings also consider ongoing challenges due to low interest rates, as well as business and investment exposure to the macroeconomic environment in Japan. PFI's very strong business profile considers the company's market-leading positions in several major life insurance segments in the U.S. and Japan, which provide significant scale advantages associated with expense efficiencies, spread of risk, access to distribution, and the ability to invest in its businesses. Organic and acquisition-related growth in recent years has improved the diversification and stability of earnings, revenues, and risk, and has materially reduced the company's exposure to more volatile businesses, including U.S. variable annuity and run-off long-term care businesses. A key rating factor has been the reduction in financial and operating debt used throughout the organization. Over the past four years, PFI has reduced total debt by over 30% on an absolute basis, and the company's financial leverage ratio has declined to approximately 26% at June 30, 2017, based on Fitch's methodology. Fitch expects PFI to make further progress reducing debt outstanding and anticipates that financial leverage will decline modestly over the intermediate term. PFI's interest coverage metrics are in line with rating expectations and reflect sustained improvement in recent years driven by the company's improved earnings profile and reduced financial leverage. The level and diversification of subsidiary cash flows to the holding company for debt service has improved, with meaningful dividends sourced from domestic insurance, international insurance, and asset management. PFI's ratings continue to reflect the company's strong statutory capitalization. Over the near term, we expect the U.S. insurance subsidiaries to maintain consolidated risk-based capital ratios at around 500%, which is consistent with rating expectations. The U.S. insurance subsidiaries' capital adequacy based on Fitch's Prism capital model is scored at 'Strong', which is somewhat below rating expectations. Fitch expects PFI's Japanese insurance subsidiaries to maintain regulatory capital ratios in excess of rating expectations, with solvency margin ratios above 800%. PFI's Japan life insurance business accounts for over 40% of total company earnings. While the earnings profile of this business has been very favorable and provides strong diversification for the combined organization, the business is exposed to challenging macroeconomic conditions. Exposure to Japan also considers the company's investment concentration in Japan government bonds, which are vulnerable to further downgrade of Japan's sovereign rating. Earlier this year, Fitch affirmed Japan's sovereign rating at 'A' and revised the Rating Outlook to Stable from Negative. RATING SENSITIVITIES Given PFI's proportionally large Japan operations, its ratings are somewhat constrained by the current 'A' Japan sovereign rating. As a result, an upgrade of PFI's ratings is unlikely absent an upgrade of the Japan sovereign rating. A downgrade of the Japan sovereign rating to 'A-' would likely result in a one-notch downgrade of the 'AA-' IFS ratings to 'A+'. Additional key rating sensitivities that could result in an upgrade include: - Reduction in financial leverage to 20% or below; - GAAP fixed-charge coverage ratio in the 12x-14x range; - Regulatory capital ratios in the U.S. and Japan remaining near current levels; - Prism capital score of 'Very Strong' and TFC ratio at or below 0.8x. The key rating sensitivities that could result in a downgrade include: - GAAP return on equity (ROE) below 10%; - Financial leverage above 30%; - TFC above 1.5x; stated NAIC RBC ratio below 450% and Japan solvency margin ratio (SMR) below 700%; - Prism capital score below 'Strong' and GAAP fixed charge coverage ratio below 8x. FULL LIST OF RATING ACTIONS Fitch has affirmed the following with a Stable Outlook: Prudential Financial, Inc. --Long-Term IDR at 'A'; --Senior unsecured notes at 'A-'; --Junior subordinated notes at 'BBB'; --Short-Term IDR at 'F1'; --CP at 'F1'. Prudential Insurance Company of America --IFS at 'AA-'; --Long-Term IDR at 'A+'; --Surplus notes at 'A'; --Short-Term IDR at 'F1+'. Prudential Funding, LLC --Senior unsecured at 'A+'; --CP at 'F1+'. PRUCO Life Insurance Company Prudential Annuities Life Assurance Corp. Prudential Retirement Insurance & Annuity Company PRUCO Life Insurance Company of New Jersey --IFS at 'AA-'. PRICOA Global Funding I --Secured notes program at 'AA-'. Contact: Primary Analyst Douglas L. Meyer, CFA Managing Director +1-312-368-2061 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Bradley S. Ellis, CFA Director +1-312-368-2089 Committee Chairperson James Auden, CFA Managing Director +1-312-368-3146 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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