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19 Feb 1997
MOODY'S LOWERS THE LONG-TERM CREDIT RATINGS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (INSURANCE FINANCIAL STRENGTH TO A1) AND ITS SUBSIDIARIES; CONFIRMS P-1 RATINGS OF PRUDENTIAL AND SUBSIDIARY FOR COMMERCIAL PAPER
New York, 02-19-97 -- Moody's Investors Service lowered the long-term credit ratings of The Prudential Insurance Company of America (The Prudential) and its subsidiaries (insurance financial strength to A1 from Aa3). The rating agency also confirmed the Prime-1 ratings of The Prudential and its wholly owned subsidiary, Prudential Funding Corporation. This completes the review of Prudential and its subsidiaries that was initiated on July 9, 1996.
Moody's stated that the downgrade of Prudential is based primarily on the view that near-term adverse publicity related to the company's market-conduct problems will heighten the challenge of re-building market share in its core business of individual life insurance. In addition, Moody's is of the opinion that Prudential Healthcare faces significant operating and competitive challenges that will likely continue to hurt its financial performance over the near term. The rating agency also stated that Prudential's other core business units -- Prudential Investments and Prudential Securities -- face heightened competition in the retail distribution of financial products using an advice-based platform.
Prudential faces many challenges, but the company continues to benefit from several strengths. Since becoming chief executive officer, Art Ryan has taken several effective measures to refine the company's core businesses, to instill greater financial discipline within those businesses and to strengthen the company's balance sheet. The company still enjoys significant earnings capacity, because of its overall large level of insurance in-force. Earnings could improve significantly with persistent effort to eliminate excess costs and to grow revenues. Moreover, the company has a substantial economic capital position and sound liquidity. Overall, its financial strength remains quite good and the outlook for all of the companies' ratings are stable.
Moody's believes that the publicity attendant to the development of a remediation plan for the settlement of market conduct problems will make it difficult for Prudential's agency force to regain the leadership position in new life insurance sales it once enjoyed. The economic costs of the proposed remediation plan (including legal and administrative costs) will be significant, Moody's says, but will not materially reduce the company's long-term financial strength. That view is subject to change in the event that the ultimate costs related to settlement of market-conduct problems materially differ from current expectations. Moreover, an indirect effect of these highly publicized problems may constain the recruitment, retention, and productivity of insurance agents, particularly as the industry environment for agency operations grows increasingly more competitive and challenging.
The financial performance of Prudential's group health operations have deteriorated over the past two years and is currently poor. The causes are complex, but Moody's believes that they are attributable primarily to the fact that the company has not built sufficient scale in a number of its local and regional markets. Scale on a local level has become increasingly more important for purposes of developing leverage in contracting with health care providers and hospitals -- a situation compounded by faster competitor growth. In addition, the particularly intense competition and industry consolidation trends in several markets contributed to falling per-member/per-month revenues, thus creating a wide gap between medical costs and revenues. Over the near term, we expect Prudential to focus on recontracting with providers and hospitals, on utilization management, and on improving medical-group relationships to achieve competitive levels of cost and access. Moreover, we see the company concentrating on reducing administrative costs and refining its local market strategy.
The market positions of the company's asset management arm -- Prudential Investments, and its broker-dealer, Prudential Securities -- are considered less competitive compared with the operations of several other insurance companies, mutual fund companies, banks, and broker-dealers. In the area of mutual funds, the company has lost market share in recent years because of its emphasis on out-of-favor "value" investment funds and a lack of diversity in sectors that have recently been more attractive such as growth and income funds. The company has addressed this problem with the introduction of new funds, but we anticipate modest market-share improvement over the near term.
Fixed annuity sales have declined over several years for a variety of reasons, including the company's intention to slow surplus strain, limited product offerings, and the use of only proprietary agents to distribute the products. The company has addressed these challenges by introducing new products in 1996, which have been received well. The slower pace of fixed annuity sales contrasts with a more rapid growth in variable annuities. We expect variable annuity sales will continue to rise over the medium term with Prudential's focus on delivering this product through both its agents and through financial advisors at Prudential Securities.
Sales of guaranteed pension products have declined dramatically in the past few years. We anticipate that the assets under management for these products will continue to decrease over time as the company shifts its emphasis to asset management for retail customers and de-emphasizes spread-lending products.
Prudential Securities has regained a portion of the momentum that it had prior to its highly publicized problems surrounding the sales of limited partnership investments, according to Moody's. The renewed momentum at Prudential Securities is encouraging, but the company's asset growth is still lagging behind its leading competitors. The rating agency explains that this has been a function of the modest investment performance of its mutual funds over the past two years, while the broader equity fund market has performed very well. Improved fund performance and more competitive products will drive their future performance, but we anticipate significant improvements along these lines are likely to emerge slowly.
The rating actions were as follows:
The Prudential Insurance Company of America--insurance financial strength rating lowered to A1 from Aa3; capital and surplus notes ratings lowered to A3 from A2.
Pruco Life Insurance Company -- insurance financial strength rating lowered to A1 from Aa3.
Prudential Funding Corporation--senior debt rating lowered to A2 from A1;
Prudential Property and Casualty Insurance Company--insurance financial strength rating lowered to A1 from Aa3.
The following ratings were confirmed:
Prime-1 rating of The Prudential Insurance Company of America for commercial paper.
Prime-1 rating of Prudential Funding Corporation for commercial paper.
The Prudential Insurance Company of America, headquartered in Newark, New Jersey, reported statutory assets of $182 billion and statutory capital of $14.7 billion as of September 30, 1996.
No Related Data.
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