Fitch Upgrades Prudential Financial, Inc.'s Ratings

CHICAGO--()--Fitch Ratings has upgraded Prudential Financial, Inc.'s (PFI) Issuer Default Rating (IDR) and senior debt ratings to 'A' and 'A-', with a Stable Outlook, respectively, from 'A-' and 'BBB+'. In addition, Fitch has upgraded the Insurer Financial Strength (IFS) rating assigned to Prudential Insurance Company of America and certain other affiliated insurance companies to 'AA-' from 'A+', with a Negative Outlook. A full list of ratings can be found at the end of this release.

The IFS ratings encompass PFI's insurance companies operating in the U.S. and Japan, which are considered "core" based on Fitch's criteria, and are rated on a consolidated basis. The Negative Outlook reflects the consolidated group's large exposure to Japan, whose sovereign rating is 'A'/Negative Outlook. A downgrade of Japan's sovereign rating would likely result in the downgrade of PFI's IFS ratings.

The Rating Outlook pertaining to PFI's holding company ratings is Stable, and reflects Fitch's view that a downgrade of the IFS ratings triggered by a Japan sovereign downgrade would not impact PFI's holding company ratings as directly.

KEY RATING DRIVERS

The upgrade of PFI's ratings reflects a sustained improvement in the company's business and earnings profile in recent years, as it has benefited from recent acquisitions in the U.S. and internationally. Further, PFI has made material progress in recent years to reduce both total and financial leverage, and it is expected that the company will continue to take steps to further reduce leverage across the organization over the intermediate term.

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 PFI 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 diversification and stability of earnings, revenues, and risk, and has materially reduced the company's exposure to more volatile businesses, such as U.S. variable annuity and run-off long-term care businesses.

A key rating sensitivity in recent years has been PFI's persistently high levels of financial and operating debt used throughout the organization. Over the past four years, PFI has reduced total debt by almost 30% on an absolute basis, and financial leverage ratio has declined to approximately 26% at Sept. 30, 2016, based on Fitch's methodology. Fitch expects PFI to make further progress reducing outstanding debt and anticipates that financial leverage will decline further over the intermediate term.

Based on PFI's improved earnings profile and reduced financial leverage, the company's interest coverage metrics have improved in recent years to levels consistent with current rating expectations. 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 in the 500% range, 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. Further, we expect PFI's Japanese insurance subsidiaries to maintain regulatory capital ratios in excess of rating expectations, with solvency margin ratios above 800%. Fitch expects statutory capital will be maintained at current levels over the near term subject to further clarity on pending prudential standards associated with PFI's designation by the Financial Stability Oversight Council (FSOC) as a systemically important financial institution (SIFI).

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 continued weak macroeconomic conditions. The exposure to Japan also includes the company's investment concentration in Japan's government bonds, which are vulnerable to further downgrade of the Japan sovereign rating.

RATING SENSITIVITIES

Fitch views PFI's ratings as partially constrained by Japan's sovereign rating, and does not envision PFI's ratings being set at levels more than two notches higher than the Japan sovereign. Thus, a one-notch downgrade of Japan's sovereign to 'A-' would likely result in a one-notch downgrade of the 'AA-' IFS ratings to 'A+'. Fitch's criteria allow for some compression of traditional notching when a sovereign constraint is applied, so a one-notch sovereign downgrade would likely result in an affirmation of PFI's holding company ratings.

Key rating triggers that could result in an upgrade include: sustained reduction in financial leverage to 20% or below; GAAP interest coverage in the 12x-14x range (based on pre-tax operating income); stated regulatory capital ratios in the U.S. and Japan remaining near current levels; Prism capital score of "Very Strong"; and total financing and commitments ratio (TFC) ratio at or below 0.8x.

Triggers that could result in a downgrade include: GAAP ROE below 10%; financial leverage above 30%; TFC above 1.5x; stated NAIC RBC ratio below 450%; Japan solvency margin ratio below 700%; Prism capital score below "Strong"; and GAAP interest coverage ratio below 8x.

FULL LIST OF RATING ACTIONS

Fitch has upgraded the following ratings with a Stable Outlook:

Prudential Financial, Inc.

--Long-Term IDR to 'A' from 'A-';

--Senior notes to 'A-' from 'BBB+';

--Junior subordinated notes to 'BBB' from 'BBB-'.

--Short-Term IDR to 'F1' from 'F2';

--CP to 'F1' from 'F2'.

Prudential Insurance Company of America

--Long-Term IDR to 'A+' from 'A';

--Surplus notes to 'A' from 'A-';

--Short-Term IDR to 'F1+' from 'F1'.

Prudential Funding, LLC

--Senior unsecured to 'A+' from 'A'.

--Commercial paper to 'F1+' from 'F1'.

Fitch has upgraded the following ratings with a Negative Outlook:

Prudential Insurance Company of America

PRUCO Life Insurance Company

Prudential Annuities Life Assurance Corp.

Prudential Retirement Insurance & Annuity Company

PRUCO Life Insurance Company of New Jersey

--IFS to 'AA-' from 'A+'.

PRICOA Global Funding I

--Secured notes program to 'AA-' from 'A+'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 15 Sep 2016)

https://www.fitchratings.com/site/re/887191

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014803

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014803

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https://www.fitchratings.com/regulatory

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hannah.james@fitchratings.com
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or
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Director
or
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Contacts

Fitch Ratings
Media Relations
Hannah James, New York, +1-646-582-4947
hannah.james@fitchratings.com
or
Primary Analyst
Douglas L. Meyer, CFA, +1-312-368-2061
Managing Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bradley S. Ellis, CFA, +1-312-368-2089
Director
or
Committee Chairperson
James Auden, +1-312-368-3146
Managing Director