A.M. Best Affirms Prudential's Excellent Rating
A.M. Best Co. has affirmed the "A" (Excellent) rating of Prudential Insurance Company of America and removed it from under review.
The affirmation reflects the Newark-based organization's diverse and substantial sources of revenues and earnings, the prominent market positions of its major business units and its strong financial position. It also recognizes the organization's reduced risk profile and reflects A.M. Best's favorable view of several strategic initiatives being pursued by the organization's new management team. A.M. Best believes the successful execution of these strategies will enhance the company's competitive standing in the financial services arena and improve its operating performance.
While some uncertainty surrounds the ultimate resolution of an outstanding class action settlement relating to past sales practices, A.M. Best notes that the company's conservative provision for the expected cost of settlement is likely to mitigate the financial impact of the class action settlement. However, because a final ruling is awaiting appeal in the Third Circuit Court of Appeals in Pennsylvania, the ultimate outcome of the settlement process, which may not be announced for several months, is uncertain. A.M. Best will re-evaluate Prudential's current rating if an adverse ruling materially affects the cost of the settlement process. If Prudential's competitive standing is further damaged, or if its core business activities are materially disrupted.
Prudential is the largest life insurance company in the United States and a leading provider of life insurance, annuities, retirement services, asset management, health-care and property and casualty insurance. Over the past several years, its operating results have been depressed, lagging behind those of its competitors and its own capabilities. A number of factors-including its high expense infrastructure, large operating losses from its health-care activities and significant one-time charges related to its market conduct problems-have hurt the company's results. In addition, individual life sales have remained depressed, including a lower level of productivity in comparison with its peers.
Nevertheless, Prudential has maintained its relatively strong position in the market and instituted several strategic initiatives focused on reducing its overall risk profile. The company has announced plans to demutualize, invest in technology, improve the efficiency of its administrative systems, restructure its health-care activities and realign its information-service and distribution capabilities to better serve the needs of its customers and others. These strategic plans are work in process and are projected to yield future benefits.
Prudential has enhanced its risk-based capitalization by reducing its overall enterprise risk through the disposition of several non-core risk bearing businesses and higher-risk investments. This improvement is also attributable to Prudential's operating earnings and capital gains from its investments. The improvement has occurred despite significant one-time charges relating to its sales misconduct settlement costs and restructuring initiatives.
The organization has also benefited from the improved results of Prudential Securities-its retail broker dealer and mutual fund subsidiary, PruPAC-its property and casualty subsidiary, and the market-driven shift to less capital-intensive insurance and annuity products.
A.M. Best views favorably the underlying operational improvements under way at Prudential. It also believes the company's recently announced plans to demutualize will offer the organization a number of longer-term strategic benefits. It is likely, however, that the company will remain challenged over the near term to significantly improve its operational performance and cost structure.
Prudential Insurance Company of America's investment portfolio is of excellent overall quality, consisting primarily of investment-grade bonds with reasonable levels of commercial mortgage loans, stocks and other assets. It has been steadily improving its risk-adjusted performance and maintains ample liquidity. The company has employed a sophisticated and disciplined approach to financial management, combining traditional insurance asset-liability management principles with risk-management practices used in other financial service industries.
Because of their strategic relationship with the Prudential, the "A" (Excellent) Best's Ratings of Pruco Life Insurance Co. and Pruco Life Insurance of New Jersey also have been removed from under review.
A.M. Best Co., established in 1899, is America's oldest and most widely recognized insurance rating and information source.