Fitch Downgrades Prudential Financial's Ratings Due to Capital Pressures; Outlook Negative

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded Prudential Financial, Inc.'s (NYSE:PRU) senior debt rating to 'A-' from 'A' and the insurer financial strength (IFS) ratings of PRU's life insurance subsidiaries to 'AA-' from 'AA'. The Rating Outlook is Negative. See complete list of ratings actions at the end of this release.

The downgrades reflect higher than expected volatility in earnings and capital, as well as liquidity needs at the holding company level to both meet large debt maturities through year-end 2009, and address subsidiary capital needs, in an environment of capital markets volatility and diminished financial flexibility.

Volatility in statutory capital and earnings is primarily attributed to exposure within the U.S. life businesses tied to variable annuities and direct investment in common equities (principally in the closed block). Fitch estimates that the NAIC risk-based capital (RBC) ratio of PRU's primary U.S. operating subsidiary, Prudential Insurance Company of America (PICA) has declined approximately 175 points at Sept. 30, 2008, to approximately 380% from 551% at Dec. 31, 2007. This reflects an estimated $3.6 billion, or 33% 9-month decline in statutory capital (included $1.5 billion in dividends paid to PRU in the first six months of 2008).

In addition to having to replenish statutory capital at its operating subsidiaries, PRU faces material debt maturities at the holding company level through year-end 2009. Near-term debt maturities (including puts on convertible debt) total $5.8 billion and include $1.9 billion of convertible debt in December 2008 and $3.9 billion of maturing debt in 2009 ($3 billion of which can be put in June). With $3.1 billion in holding company cash (net of commercial paper outstanding) at Sept. 30, 2008, Fitch believes that funding of the $1.9 billion of December 2008 maturities is not problematic.

Management expects to maintain the RBC ratio at approximately 400% at Dec. 31, 2008, solely through internal actions. Management plans to meet 2009 debt maturities through several actions, including winding down some activities that the debt is supporting. For planning purposes management is assuming that access to commercial paper and debt capital markets is unavailable.

Fitch also notes PRU's potential to realize additional balance sheet capital through (1) exercise of a put on its minority interest in Wachovia over the next 18 months, and (2) the ability to apply for preferred capital available through the Troubled Asset Relief Program, as an owner of a thrift institution.

Potential debt financing alternatives include (1) participation in the U.S. government Commercial Paper Funding Facility for up to $11.1 billion, (2) membership in the Federal Home Loan Bank of New York for up to $6.7 billion, and (3) the ability to tap unused bank lines of $5 billion as of Sept. 30, 2008.

Fitch's Negative Outlook reflects:

--Execution uncertainties surrounding the funding of 2009 maturities;

--Fitch's view that near-term conditions in the financial markets will continue for an extended period, which could cause the company to experience further volatility in its financial results and capital adequacy, and thus provide additional challenges and funding needs;

--The potential for greater than expected credit related investment losses;

--The potential need to increase the capital supporting the variable annuity business, driven by the declines in equity markets.

In this regard, Fitch notes that PRU maintains above-average exposure to subprime residential mortgage-backed securities, commercial mortgage backed securities, other asset backed securities and common equities and alternative investments. The company also maintains a still meaningful exposure to unrealized losses on its investment portfolio that under statutory accounting rules are not reflected in capital.

Positively, Fitch notes that U.S. life operating company liquidity appears sound, its securities lending program has shown stability to date, and the policyholder dividend scale remains an important lever in mitigating the impact of poor investment experience on statutory capital for the closed block. PRU's ratings also recognize the organization's strong domestic market positions as a result of increased scale with acquisitions, solid performance in domestic individual life, group insurance and retirement, which have offset in part the earnings declines in variable annuities and fee-based businesses, as well as its profitable international life insurance businesses, particularly as a result of consistently strong performance of life-planner operations in Japan.

Fitch has downgraded the following ratings with a Negative Rating Outlook:

Prudential Financial, Inc.

--Long-term Issuer Default Rating (IDR) to 'A' from 'A+';

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

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

Prudential Funding, LLC

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

--Medium-term notes to 'A+' from 'AA-'.

Prudential Insurance Company of America

--IFS to 'AA-' from 'AA';

--Long-term IDR to 'A+' from 'AA-';

--Surplus notes to 'A' from 'A+'.

PRICOA Global Funding I

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

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 'AA'.

Prudential Bank & Trust, FSB

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

--Long-Term Deposit to 'A+' from 'AA-';

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

Fitch has affirmed the following ratings with a Negative Rating Outlook:

Prudential Financial, Inc.

--Short-term IDR at 'F1';

--Commercial paper at 'F1'.

Prudential Funding, LLC

--Commercial paper at 'F1+'.

Prudential Insurance Company of America

--Short-term IDR at 'F1+'.

Prudential Bank & Trust, FSB

--Short-term IDR at 'F1';

--Individual at 'B/C';

--Support at '1'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.