Yesterday, rating agency A.M. Best Co. reaffirmed the financial and issuer credit ratings (FSR) & (ICR) onPrudential Financial Inc. PRU and its subsidiaries, with a stable outlook. Accordingly, the company’s ICR of “a-” and all the existing debt ratings have been reiterated. Also, its life and health insurance subsidiaries have witnessed a reaffirmation of their FSR and ICR at “A+” and “aa-“, respectively.

The rating agency takes into account the group’s diversified operations spanning the United States, Asia, Europe and Latin America. Prudential's broad product portfolio includes life insurance, annuities, mutual funds, pension- and retirement-related investments, administration and asset management, and securities brokerage services. The right mix of business with strong fundamentals and superb risk management capabilities have strengthened its market position and prompted business diversification. This, in turn, has made it more competitive than its peers.

The rating agency acknowledges the successful acquisition and integration of The Hartford Financial Services Group, Inc.’s HIG individual life insurance reinsurance business, which has placed Prudential firmly in the individual insurance business. Also noteworthy are several pension risk transfer (PRT) deals signed by the company in recent times that makes it a big player in the nascent pension risk transfer market.

The rating agency believes that Prudential will emerge as the frontrunner in the PRT market by virtue of its ability to finance the transactions, as well as quickly and successfully integrate them. Nevertheless, the agency believes that growth of PRT transactions have led to a concentration of annuity reserves.

The rating agency also positively views Prudential’s mammoth Japanese business (operating in the country for over a couple of decades) which constitutes approximately half of the company’s total operating earnings. The acquisition of Star Edison has further strengthened the company’s already established presence in Japan thereby solidifying its International business.

Factors, which counter Prudential’s ratings are its above-average concentration of investments in low investment grade fixed income securities and exposure to commercial real estate. Also the low interest rate environment continues to put pressure on investment yields and has also led to capital strain in the form of reserve strengthening as a result of asset adequacy testing.

Also, the company uses a higher amount of operating leverage compared with its peers, but financial leverage and interestcoverage are within the rating agency’s tolerance level.   

Near-term rating movement is unlikely to have a positive action. But an action might be taken if financial and total leverage comes down, sales continue to remain robust, and strong liquidity and risk management remains.

However, a negative rating action may follow an increase in leverage and unfavorable market movements causing capital strain.

Prudential's financial strength and credit ratings, which are intended to measure its ability to meet policyholder obligations, are important factors affecting public confidence in most of Prudential's products and consequently its competitiveness. The ratings affirmation and subsequent outlook upgrade to stable reflect optimism about Pudential's future performance.

Prudential carries a Zacks Rank # 3 (Hold). Other stocks worth considering are Old Republic International Corporation ORI and Cigna Corp. CI. While Old Republic carries a Zacks Rank # 1 (Strong Buy), Cigna carries a Zacks Rank # 2 (Strong Buy).

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