5 September 2016USA analysis

AM Best affirms Prudential Financial due to highly diversified business

AM Best has affirmed the financial strength rating of A+ (Superior) for the domestic life/health insurance subsidiaries of Prudential Financial (PFI).

The outlook for each rating is stable, which reflects Prudential’s highly diversified business and earnings profile, underpinned by strong market positions in its core lines, adequate risk-adjusted capitalisation and favourable longer term operating performance in most business segments.

In addition to its growing domestic and international insurance businesses, Prudential has a large and expanding footprint in the pension risk transfer (PRT) arena. Over the last several years, Prudential has closed a number of large transactions, which in aggregate represent more than $75 billion in pension account values. AM Best believes Prudential continues to be viewed as an attractive counterparty for large transactions due to its capacity to finance them and proven ability to effectively administer and integrate them.

The ratings also reflect PFI’s considerable financial flexibility and strong liquidity profile. PFI’s diverse business profile continues to strengthen the organisation. The international segment, which is dominated by its Japan operations, remains the single largest segment representing nearly a half of the company’s total operating earnings.

The international segment has benefited from acquisition activity, which has helped to increase earnings and further diversify market risk for the overall liability profile of PFI. In PFI’s domestic business, the retirement segment has been the biggest area of growth, primarily due to the successful closing of several large PRT deals and variable annuity sales.

Partially offsetting these positive rating factors is the increasingly large concentration of annuity reserves, primarily due to the increasing number of PRT transactions, relative to its total statutory general account reserves.

AM Best believes that in general, annuities are a less creditworthy line of business compared with ordinary life insurance products. While Prudential has a track record of managing, and to some degree, mitigating many of the risks inherent in its various annuity product lines, the low interest rate environment continues to have a negative impact on net investment yields.

The rating agency notes that the allocation to commercial mortgages continues to increase, and relative to capital and surplus, is nearly 1.8 times the industry average, although this percentage declined slightly during the most recent period.

While Prudential’s holdings of below investment grade fixed income securities relative to capital and surplus is somewhat higher than industry totals, AM Best notes the exposure relative to capital and surplus has declined significantly over the past few years. PFI continues to maintain sizeable liquidity resources, and its prudent utilisation will continue to be monitored by AM Best.

The company continues to rely on captive insurers to help manage redundant life-reserve financing requirement.