CHICAGO--(BUSINESS WIRE)--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.
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
Insurance Rating Methodology (pub. 15 Sep 2016)
Dodd-Frank Rating Information Disclosure Form
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001