A.M. Best Assigns Ratings to Prudential's Funding Agreement-Backed Securities and Retail Notes Programs; Affirms Financial Strength and Debt Ratings

Business Wire, Feb 9, 2005

OLDWICK, N.J. -- A.M. Best Co. has assigned a rating of "aa-" to the funding agreement-backed securities (FABS) program established by The Prudential Insurance Company of America (Prudential) as well as an issuer credit rating (ICR) of "aa-" to Prudential, the lead operating company of Prudential Financial, Inc. (PFI) (NYSE: PRU) (Newark, NJ). A.M. Best has also assigned senior unsecured debt ratings of "a-" to PFI's $1 billion retail notes program and its $1 billion 10-year notes, used for general corporate purposes including primarily a loan to one of its domestic insurance subsidiaries. The $1 billion 10-year note transaction eliminated rollover and repricing risks associated with letters of credit guarantees, which had been previously used to support reserve credits on selected individual life-term business.

Concurrently, A.M. Best has affirmed the financial strength rating of A (Superior) of Prudential and its life/health affiliates, extending the rating to Prudential Arizona Reinsurance Captive Company (PARCC) (Phoenix, AZ), a recently formed captive. Additionally, A.M. Best has affirmed the existing ratings on the organization's outstanding debt securities. All ratings have a stable outlook.

The ratings reflect the group's diversified earnings profile, its prominent market position within its core business lines, its superior level of risk-adjusted capitalization, strong financial discipline and improved operating returns. A.M. Best expects Prudential's operating performance, which has traditionally lagged similarly-rated peers, to continue its positive trend toward a level that is commensurate with its current rating. Capital and liquidity levels remain quite strong, and PFI's financial leverage and interest coverage is within A.M. Best's expectations.

Partly offsetting these strengths is the insurer's challenge to expand operating margins while sustaining revenue and asset growth, optimization of revenue and expense synergies with regard to the American Skandia and CIGNA Retirement acquisitions, and its assertive emphasis on capital management. A.M. Best notes that Prudential's overall leverage--financial and operating leverage--will most likely increase due to expansion of its FABS and retail notes programs, future Regulation XXX reserve funding requirements and share repurchase. While leverage is expected to increase, A.M. Best believes Prudential will continue to maintain total leverage consistent with its peers and manage its balance sheet prudently in conjunction with its overall capital management program.

Prudential's FABS are issued through PRICOA Global Funding I (PGF), a Delaware statutory trust, and consist of global medium-term notes (GMTN), of which approximately $6 billion have been authorized and roughly $3 billion have been issued to date. These notes have been sold to institutional investors and are secured by funding agreements issued to PGF by Prudential. Based on A.M. Best's analysis of the FABS structure utilized by the company, the GMTN program and notes will carry the ICR of "aa-" of Prudential. This reflects that each series of notes is secured by a security interest in the underlying funding agreements, which are unsecured obligations of Prudential's general account. In the unlikely event of insolvency, the claims for principal and interest under the funding agreements would be paid equally in priority (i.e. pari passu) with Prudential's policyholders. Therefore, in assigning the ICR above, A.M. Best believes that investors in Prudential's FABS are exposed to the inherent credit, liquidity and business risks of the sponsoring insurance company, Prudential.

In addition to the FABS program, PFI has established a $1 billion senior unsecured retail note program, which has been issued to U.S. retail investors under PFI's existing April 2003 shelf registration. A.M. Best has assigned an "a-" rating to these securities, which reflects a senior unsecured position at the holding company. This program complements the group's institutional spread business by adding liquidity and stability to net flows.

For a complete listing of The Prudential Insurance Company of America's debt and financial strength ratings as well as a list of issuances under its FABS and retail programs, please visit http://www.ambest.com/press/020901prudential.pdf.> For Best's Debt Ratings, all other Best's Ratings, an overview of the rating process and rating methodologies, please visit http://www.ambest.com/ratings.> For additional insight, please refer to A.M. Best's methodology, Rating Funding Agreement-Backed Securities at http://www.ambest.com/ratings/methodology.html.> A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at http://www.ambest.com.