- Prudential Financial Inc. (PRU) maintains a leadership position in its core markets, strong brand reputation, and a diversified risk profile.
- We expect the group to supplement its business strengths with very strong capitalization redundant at the 'AA' level per our capital model.
- PRU's risk management framework with effective risk controls supports the ratings and somewhat mitigates the insurer's exposure to higher-risk legacy liabilities.
- We are affirming our ratings on PRU and its U.S. operating companies.
- The outlook is stable reflecting our view that it will maintain a very strong competitive position in its core markets, very strong capitalization, and financial leverage in line with our expectations.
On July 23, 2019, S&P Global Ratings affirmed its 'AA-' long-term financial strength ratings on Prudential Financial Inc. (PRU) and its core U.S. operating entities. At the same time, we affirmed our 'A' issuer credit rating on the group's holding company. The outlook is stable.
At the same time, we have affirmed our ratings on all of PRU's outstanding hybrids and debt instruments.
The stable outlook reflects our view that PRU will maintain a very strong competitive position in core markets and very strong capitalization. We expect the group to sustain its market position in its key U.S. and Japanese markets.. We expect financial leverage of about 30%-35%, excluding accumulated other comprehensive income (AOCI), and 25%-30% based on reported equity. Fixed charge coverage (excluding one-time charges) is expected to be near 8x-10x in 2019-2020.
The stable outlook also reflects our expectation that the group will have sufficient capital and liquidity to protect its solvency in a hypothetical Japanese sovereign default stress scenario. Our sovereign rating on Japan does not limit our overall rating on the group, but it limits our ratings on PRU's Japanese subsidiaries.
We may lower the ratings if, contrary to our expectations, PRU's market position declines significantly or capital adequacy deteriorates to less than our 'AA' confidence threshold. We may also lower the ratings if financial flexibility weakens because of a significant increase in leverage or drop in coverage. We could lower the holding company ratings if fixed-charge coverage falls consistently lower than 8.0x, or if the holding company no longer has access to a diversified dividend stream.
If the group no longer passes our hypothetical Japanese sovereign default stress scenario test, we could lower the ratings to the level of our sovereign rating on Japan. This could happen if PRU's assets that are denominated in Japanese yen grow proportionally faster than the overall balance sheet, which could lead us to view the group as no longer having sufficient resources to pass our stress test.
An upgrade is unlikely in the next 18-24 months.
Our rating affirmations follow the implementation of our revised "Group Rating Methodology," "Hybrid Capital: Methodology And Assumptions," and "Insurers Rating Methodology," all published on July 1, 2019.
PRU is a large, global insurance company that has some of the same strengths as several of its global peers: leadership position in core markets, presence in multiple geographies, diversified product portfolio, a relatively large scale, and a very strong level of capitalization. Beyond these strengths, PRU's consistent strategic direction and performance have provided a great deal of stability to its credit profile.
However, this consistency in operations was somewhat interrupted recently. An update to the U.S. corporate tax rate resulted in a write-down of its statutory deferred tax asset at year-end 2017, and assumption changes underlying its LTC business led to reserve charges in second-quarter 2018. In addition to these two financial events, PRU's CEO and Vice Chairman announced their retirements in Sept. 2018. What led us to maintain our ratings and stable outlook on the company, during these events, was related to the active steps taken by PRU to mitigate the negative hits, as well as the credit quality benefits of having a diversified profile that offset some of these isolated hiccups. From a financial standpoint, PRU offset the reserve hit by retaining a higher amount of capital in its operating entities, reducing its dividend to the holding company from its U.S. operations, and raising debt since it had the financial flexibility to do so. From a governance point of view, PRU had in place a management succession plan that resulted in a seamless transition to fill the CEO and Vice Chairman roles from its internal management team.
We expect PRU to have a smoother 2019 than 2018. But as the U.S. returns to a lower-for-much longer rate environment and equity markets show increasing signs of volatility, it will not be an easy ride. Especially for 144 year old insurer like PRU, age brings with it valuable expertise and scale, but also the burden of long-tailed legacy risks. PRU has about $135 billion (account value, as of March 31, 2019) of market-sensitive variable annuities with living benefit features and about $7 billion statutory reserves (as of June 30,2018)of long-term care insurance. Somewhat mitigating these legacy risks is PRU's risk management framework and effective risk controls supporting both sides of its balance sheet.
PRU's ability to maintain its credit strengths, minimize unexpected legacy strain, and withstand potential market challenges--all with a new leadership team at the helm, will remain a key area of focus in our credit analysis. We expect the group to maintain its competitive strengths in core U.S. product lines, as well as its international operations, especially in Japan, South Korea, and Taiwan. PRU continues to benefit from having noninsurance earnings and cash flow from its asset management company (PGIM).
At this time, we are also affirming the 'core' group status of PRU's U.S. insurance companies, PGIM, and the Japanese insurance entities. PRU's Taiwanese operations will remain 'highly strategic' to the group. The group holding company (Prudential Financial Inc.) continues to be rated 2 notches below the group credit profile. This 2-notch differential takes into account the availability of operating company dividends from non-U.S. (less restriction to payments) entities, as well as PRU's non-insurance (asset management) operations.
Ratings Score Snapshot
|Business Risk Profile||Very strong|
|Competitive position||Very strong|
|Financial Risk Profile||Very strong|
|Capital and earnings||Very strong|
|Risk exposure||Moderately low|
|Comparable ratings analysis||0|
|Financial Strength Rating||AA-|
|*Our aa- anchor selection captures PRU's stand-alone credit strengths that are in line with similar rated peers.|
- Criteria | Insurance | General: Insurers Rating Methodology, July 1, 2019
- General Criteria: Hybrid Capital: Methodology And Assumptions, July 1, 2019
- General Criteria: Group Rating Methodology, July 1, 2019
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
- Criteria | Insurance | Life: Methodology: Treatment Of U.S. Life Insurance Reserves And Reserve Financing Transactions, March 12, 2015
- Criteria - Insurance - General: Methodology For Assessing Capital Charges For U.S. RMBS And CMBS Securities Held By Insurance Companies, Aug. 29, 2014
- Principles For Rating Debt Issues Based on Imputed Promises, Dec. 19, 2014
- General Criteria: Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
- Criteria | Insurance | General: Methodology For Assessing Capital Charges For Commercial Mortgage Loans Held By U.S. Insurance Companies, May 31, 2012
- Criteria | Insurance | General: Methodology For Calculating The Convexity Risk In U.S. Insurance Risk-Based Capital Model, April 27, 2011
- Criteria | Insurance | General: Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010
- General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
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Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
|Primary Credit Analyst:||Deep Banerjee, Centennial (1) 212-438-5646;|
|Secondary Contact:||Neil R Stein, New York (1) 212-438-5906;|
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