Today's life insurance topic --

Prudential Life Insurance Downgraded to BB


-- Fitch Ratings has downgraded Prudential Financial, Inc.'s (NYSE:PRU) senior unsecured debt rating to 'BBB' from 'A-' and commercial paper rating to 'F2' from 'F1', as well as the insurer financial strength (IFS) ratings of PRU's primary domestic life insurance subsidiaries to 'A+' from 'AA-'. The Rating Outlook is Negative. Today's ratings actions reflect Fitch's updated review of PRU's exposure to the volatile credit and investment market conditions, which are negatively impacting its investment results, earnings performance and capital levels.

The two notch downgrade of PRU's parent company ratings reflects what Fitch views as potential future pressure on the financial flexibility of the consolidated enterprise as a whole. Fitch notes PRU carries high levels of debt. This includes significant amounts of operating debt at the PRU parent holding company level. While Fitch does not envision any near-term liquidity problems related to this debt, Fitch views the high level of debt as potentially limiting PRU's financial flexibility in the current environment.

PRU has a high degree of sensitivity to the equity markets through its variable life and annuities businesses, common equities in its statutory operating entities, as well as its remaining equity exposure to operating joint ventures in its international asset management businesses. In addition, PRU has an above average exposure to subprime residential mortgage-backed securities and commercial mortgage backed securities relative to peers.

Related to these exposures, PRU reported a 36% decline in consolidated GAAP shareholders' equity (which includes AOCI of negative $5.2 billion) in its Financial Services Business during 2008 from $22 billion to $14.3 billion, due mainly to unrealized and realized investment losses. Excluding AOCI, shareholder equity declined 10% ($21.2 billion to $19.5 billion). In addition, PRU recorded a consolidated GAAP net loss of $1.1 billion for the year 2008, including pre-tax realized investment losses of $2.2 billion. Fitch notes that no new equity capital has been raised at the parent company level in 2008 or 2009 to offset this loss.

For the full year 2008, Fitch expects total adjusted statutory capital (TAC) of the primary U.S. operating subsidiary, Prudential Insurance Company of America (PICA) to fall approximately 10%-15%. The decline in statutory capital in 2008 was primarily driven by investment losses, increased reserving associated with the company's variable annuity business, and a planned dividend of $1.5 billion that PICA made to the parent company. Favorably, the decline was somewhat mitigated by a $2 billion capital contribution from PRU in the fourth quarter of 2008, which contributed its ownership interest in the Wachovia Securities joint venture to PICA. Fitch notes that exercise of a put on the 38% interest in the Wachovia JV over the next 12 months is expected to produce a gain on sale of $1.7 billion after-tax, which provides further enhancement to the statutory capital position.

The company expects to report a RBC ratio at PICA at or above 400% at Dec. 31, 2008. The ability of the parent company to support statutory capital at the operating company level helped limit the downgrade in the IFS ratings to just one notch.

Somewhat mitigating high debt leverage, Fitch notes that with a cash position, net of commercial paper outstanding, of $3.2 billion at the holding company, as well as committed bank lines of $4.4 billion, there is sufficient liquidity to meet 2009 debt maturities. The suspension of PRU's share repurchase program and a reduction of its shareholder dividends in the fourth quarter of 2008 eased some pressure. Fitch also believes that domestic life insurance is unlikely to be a significant source of dividends to the parent company in 2009, due to the need to maintain statutory capital levels in view of additional potential investment impairments and reserves for variable annuities.

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