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Rating Action:

Moody's Downgrades Prudential Assurance Company to Aa2; Prudential plc and Jackson Ratings Affirmed; Outlook Negative

30 Mar 2009

Prudential Retirement Income Limited (PRIL) upgraded to Aa2

London, 30 March 2009 -- Moody's Investors Service announced today that it had downgraded to Aa2 from Aa1 the insurance financial strength ratings (IFSRs) of Prudential Assurance Company (PAC), the main UK insurance business of Prudential plc, and of Scottish Amicable Insurance Fund (SAIF, a ring-fenced sub-fund of the PAC long-term fund). With regard to the other UK operating entities, Moody's affirmed the Aa2 IFSR of Prudential Annuities Limited (PAL), and upgraded Prudential Retirement Income Limited (PRIL) to Aa2 from Aa3. Moody's also affirmed the A1 IFSR of Jackson National Life Insurance Company (Jackson) and affirmed the group holding company ratings of Prudential plc (A2 senior debt). (A complete list of ratings follows below.) All long-term ratings have a negative outlook.

The downgrade of PAC and the upgrade of PRIL conclude the rating review that was initiated on December 8, 2008.

Notwithstanding a very strong credit profile, the rating downgrade of PAC is prompted by the reduction in solvency surplus levels during 2008, as a result of the extreme market conditions of the last quarter of 2008, as has been the case with other UK life insurance players. Furthermore, Moody's also views PAC's market position as inconsistent with the previously extremely high Aa1 rating.

The reduction in solvency surplus levels is especially relevant given the importance of capitalisation within the previous Aa1 IFSR at PAC. Surplus reduction has been driven by significant falls in equity values and gilt yields, as well as the increase in equity implied volatility, and Moody's MASC (Moody's Adjusted Capital Solvency Capital) ratio is estimated to have declined to around 2x from 3.3x at YE07.

PACs' solvency surpluses remain vulnerable to equity market declines and volatility in 2009, although the company is engaged in an active hedging strategy and is able to make use of a number of management actions to mitigate market effects. Equity securities and portfolio holdings in unit trusts at year-end 2008 represented a still material 40% of PAC's with-profits business investments, excluding Prudential Annuities Limited,

The downgrade also reflects a market position which has been constrained in Moody's opinion by weaker aggregate and relative market share metrics in recent years, reflecting Prudential's focus on higher margin products. This is notwithstanding an increased market share in 2008 with good retail business growth of 10%.

The economy in the UK is currently depressed which together with financial market volatility is meaningfully pressuring the UK Life market as a whole. Against this background, the negative outlook on PAC's rating reflects the potential downside risk in relation to capital, sales, new business margins, as well as the financial flexibility of the Prudential Group although this is currently viewed as excellent. Moody's said that a meaningful reduction in solvency and/or a material deterioration in the Group's financial flexibility (eg financial leverage of over 30% and earnings cover of less than 8x on a long-term basis) may contribute to negative rating pressure.

Moody's Vice President/ Senior Credit Officer Dominic Simpson noted that, despite the downgrade, "The Aa2 still reflects the fact that PAC maintains one of the financially strongest life funds in the UK, with a flexible product design and with-profits liabilities that have substantially less exposure to guarantees and options than the average UK peer."

Moody's continues to view Prudential's market presence in the UK as excellent in certain product lines, such as immediate annuities and the with-profits savings business. Moody's also believes that Prudential's UK policyholder liability profile is relatively stable. The annuity business in PAL and PRIL represents no liquidity risk to the Group in the event of policyholder surrender, and the with-profit contracts in PAC have substantial exit penalties to preserve fund capitalisation and liquidity.

The decision to affirm the IFSR of PAL and upgrade the IFSR of PRIL reflects the fact that these units are increasingly managed and regulated on a consolidated basis with the rest of Prudential's UK Life businesses.

Affirmations of Other Ratings

A significant factor in the affirmation of Jackson National's ratings is the strong support from Prudential plc. The A1 is one notch higher than the rating that would be applied on a stand-alone basis given the uplift provided by the strong demonstrated and implied future support of the Group.

The financial strength of Jackson's life insurance subsidiaries has been diminished on a stand-alone basis. For the year-ended December 31, 2008, Jackson's regulatory capital declined mainly because of impairments. Moody's noted that Jackson's prospective profitability over the medium-term is likely to be constrained given its concentration in equity-based variable insurance businesses, as well as the likely negative impact of the recession on both the investment portfolio and revenues.

The rating agency commented that, in addition to the support provided by the Group over and above the company's stand-alone financial strength, the affirmation also reflects the company's good position in the domestic asset accumulation business. This business position is evidenced in its broad annuity product offering; use of multiple distribution channels, which limits its dependence on any single distributor or channel; and an efficient back office infrastructure. Notably, the company is particularly well established in the individual fixed annuity and equity indexed annuity businesses, and has experienced strong growth and improving market share in the variable annuity business in recent years.

At the Prudential plc level, ratings were affirmed reflecting the still very strong credit profile of its UK operations, together with the continued positive contribution from the Group's Asian business, which help offset the diminishing stand-alone strength of Jackson. Furthermore, Moody's notes the Group's robust capital and liquidity position. The Group's estimated IGD surplus declined to GBP1.7 billion from GBP1.9 billion at year-end 2007, although it will benefit from a GBP800 million increase following the completion of the transfer of the Taiwanese agency business.

The negative outlook on the plc ratings reflects the negative outlooks on PAC and Jackson, which together accounted for around 75% of the Group's 2008 IFRS operating profit.

Prudential plc is an international retail financial services group headquartered in London with total assets of GBP216bn at year end 2008.

The following ratings were downgraded and assigned a negative outlook:

Prudential Assurance Company- insurance financial strength rating to Aa2 from Aa1;

Scottish Amicable Insurance Fund- insurance financial strength rating to Aa2 from Aa1;

Scottish Amicable Finance plc- subordinated debt rating to A1 from Aa3;

The following ratings were affirmed with a negative outlook:

Prudential Annuities Limited- insurance financial strength rating at Aa2

Prudential plc- senior debt at A2

Prudential plc- subordinated debt at A3

Prudential plc- junior subordinated debt at Baa1

Prudential Capital- guaranteed Euro MTN senior debt at A2

Jackson National Life Insurance Company- insurance financial strength rating at A1

Jackson National Life Insurance Company of New York: insurance financial strength rating at A1

Jackson National Life Insurance Company- Surplus Notes at A3

Jackson National Life Funding, L.L.C.- Note Issuance Program at A1

Jackson National Life Global Funding- Note Issuance Program at A1

The following ratings were affirmed

Prudential plc- commercial paper at P-1

Jackson National Life Insurance Company- Short-term Insurance Financial Strength (STIFS) at Prime-1 (P-1)

The following rating was upgraded and assigned a negative outlook:

Prudential Retirement Income Limited; insurance financial strength rating to Aa2 from Aa3.

The last rating action was on 8 December 2008 when PAC and SAIF's ratings were placed on review for possible downgrade, PRIL's rating was placed on review for possible upgrade, and Prudential plc's ratings and PAL's rating were affirmed with a stable outlook.

The principal methodology used in rating PAC was "Moody's Global Rating Methodology for Life Insurers", which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

London
Simon Harris
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Dominic Simpson
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Downgrades Prudential Assurance Company to Aa2; Prudential plc and Jackson Ratings Affirmed; Outlook Negative
No Related Data.
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