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Rating Action:

Moody's affirms Prudential plc's A2 senior rating, stable outlook

14 Mar 2018

Affirmation follows planned demerger of M&G Prudential

London, 14 March 2018 -- Moody's Investors Service today affirmed the A2 senior unsecured debt rating of Prudential Public Limited Company (Prudential or Group). Moody's also affirmed the Aa3 insurance financial strength rating (IFSR) of Prudential Assurance Company Ltd (PAC) and the A1 IFSR of Jackson National Life Insurance Company (Jackson). The outlooks remain stable.

This rating action follows Prudential's announcement today that it intends to demerge M&G Prudential, its UK & Europe business, from Prudential plc, resulting in two separately-listed companies. On completion of the demerger, shareholders will hold interests in both Prudential plc and M&G Prudential. Prudential has also announced the sale of GBP12 billion of its UK shareholder annuity portfolio to Rothesay Life.

A list of all affected ratings is available at the end of this press release.

RATINGS RATIONALE

PRUDENTIAL PLC -- AFFIRMED AT A2 SENIOR UNSECURED DEBT

The rating affirmation reflects Moody's views that Prudential will maintain its strong brand name recognition, excellent product profile and strong profitability despite reduced geographical diversity post the de-merger of M&G Prudential. We expect the Group's financial flexibility to remain very strong, with relatively low adjusted financial leverage and strong earnings coverage, aided by re-balancing the debt capital positions across Prudential plc and M&G Prudential.

The Group will retain its leading positions in the US variable annuity (VA) markets and a number of the key insurance markets in Asia, which remain Prudential's primary focus for growth. Moody's views the increasing contribution from Asia as a key strength, through further strengthening of franchise in various markets, continued growth in Annual Premium Equivalent (APE) sales, new business and IFRS operating profits and increasing cash remittances to the Group.

Growth in Asia has remained strong and sales are oriented towards participating and unit-linked products with the proportion of protection policies increasing in recent years, which we view positively given that this business is not directly correlated to capital market volatility. Furthermore, Prudential Asia's strong agency channel allows excellent distribution control together with an increasing diversification of channels through bank partnership and digital channels.

The continuity of the existing senior management and the centralization of the demerger process will also limit operational disruption. Moody's expects the Group will maintain its current strong focus on governance and enterprise risk management.

These strengths are partially offset by the negative impacts from the loss of the UK businesses post-demerger, which have been stable earnings and capital providers. Moody's believes that the de-merger will weaken the Group's capital flexibility and liquidity position in the near term, relative to the previous organizational structure. However, given the Asian and the US operations already accounted for the majority of the capital remittance in the past few years, we expect the Group's ability to allocate capital to fund its business needs to remain strong.

Furthermore, the de-merger will also reduce the geographical diversity of the Group, which will increase the sensitivity of the Group's earnings and capital profile to the US equity market and to sovereign risks in Asia, particularly to less developed economies. However, Moody's views the diversification benefit between US and various Asian operations as remaining significant post the demerger.

In addition, the growth in insurance profitability and low risk products from Asia will balance the greater weighting to fee-based and spread income earnings from the U.S.. Variable annuities with lifetime living benefits remain a significant part of the Group's US in-force business, and the US business continues to have significant exposure to equity markets, albeit product risk is mitigated via hedging programs.

JACKSON NATIONAL - AFFIRMED AT A1 IFSR

The affirmation of the A1 IFSR of Jackson reflects the company's leading position in the US asset accumulation business, as well as the strong growth, sizable market share in the VA business, and the unchanged credit profile following the announced planned de-merger of M&G Prudential. The rating action also reflects Jackson's continued focus on a 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. The company will continue to be of strategic importance to Prudential, adding diversification and a source of liquidity through dividends, with Jackson's IFSR thereby continuing to benefit from one notch of support via its ownership by Prudential.

Jackson's strengths are mitigated by its concentration of VAs with guaranteed benefits and the significant exposure to equity-sensitive liabilities and asset liability management risks. The complexity, risks and volatility of its liabilities necessitates dependence upon an elaborate hedging program which can affect material changes in capital. In addition, Jackson has modest product diversification and the continued growth in the VA business could place pressure on the company's financial profile. Lastly, Jackson has noteworthy exposure to credit risk in its investment portfolio.

PRUDENTIAL ASSURANCE COMPANY -- AFFIRMED AT Aa3 IFSR

Moody's said that, as a result of the planned de-merger, its rating on PAC would reflect the anticipated strengths and weaknesses of operating with M&G as a combined UK business under a new holding company, M&G Prudential. The rating affirmation reflects PAC's current Aa3 credit profile, which benefits from its leading position in a strongly capitalized and growing with-profits savings business, combined with M&G, which would add a capital-light, consistently profitable and cash generative asset management business with a good brand name and market position.

Moody's views the combination of M&G and PAC businesses as positive for PAC's product focus and earnings diversification. This is notwithstanding some profit correlation between the life and asset management businesses, and the correlation of M&G's fee-based revenue to market movements. Moody's also expects leverage metrics of M&G Prudential to be consistent with a Aa rating profile.

However, these strengths are partially off-set by the likelihood of a significant proportion of M&G Prudential's adjusted equity to be comprised of with-profits surplus funds which reduces capital fungibility.

Furthermore, M&G Prudential's financial flexibility would be constrained compared with that of Prudential plc, as a result of lower earnings power to service any debt costs and an absence of a track record in the capital markets. In addition, we expect PAC's life product set to remain relatively narrow compared with highly-rated UK life peers.

Separately, Moody's views the sale of GBP12 billion (c.37% of M&G Prudential's total UK shareholder annuity portfolio as at 31 December 2017) of PAC's UK annuity portfolio as credit neutral. Positively, the sale will reduce PAC's longevity and credit risk -- this is reflected in Prudential's estimate of a resulting increase in PAC's YE17 shareholder Solvency II capital surplus of GBP1.1 billion (before the negative solvency impact of the Hong Kong subsidiary transfer to Asia) which includes the estimated c.GBP500 million pre-tax loss for Prudential from the sale. Negatively, the sale will remove a historically stable and important source of cash.

Outlook

The outlook on all entities is stable, reflecting the expectation that the strengths of Prudential's established businesses in the UK, US and Asia, are maintained both before, and after the intended demerger.

WHAT COULD MOVE THE RATINGS DOWN/UP

PRUDENTIAL PLC

In terms of rating drivers going forward, Moody's said that positive rating pressure could arise from: 1) A continued improvement in the earnings generating ability of the Group such that the Group's return on capital (Moody's metric) rises to close to 12% and/or; 2) earnings coverage rises to close to 12x and adjusted financial leverage is consistently below 20% while maintaining a very robust capitalisation and/or; 3) upgrade of the standalone IFSR of Jackson.

Conversely, negative rating pressure could arise from: 1) Substantial deterioration in earnings generating ability and/or; 2) return on capital falls below 8% in the long term and capitalisation falls materially and/or; 3) adjusted financial leverage of over 30% and earnings coverage of less than 8x on a long-term basis and/or; 4) downgrade of the standalone IFSR of Jackson; and/or 5) further reduced geographic diversification; and/or 6) significant disruption to the business operations during the de-merger process.

PRUDENTIAL ASSURANCE COMPANY

Moody's said that positive rating pressure could arise from: 1) Meaningfully increased business diversification without compromising profitability and/or; 2) meaningfully increased profitability on both an operating profit and new business profit basis and M&G Prudential's return on capital (Moody's metric) consistently above 10% and/or; 3) substantially reduced levels of investment in equities and diminished volatility in capitalisation and/or; 4) M&G Prudential's adjusted financial leverage consistently below 20% and earnings coverage above 10x.

Conversely, negative rating pressure could arise from: 1) Depressed levels of sales with a consequent impact on profitability and/or; 2) M&G Prudential's adjusted financial leverage of over 30% and earnings coverage of less than 5x and/or: 3) PAC shareholder Solvency II ratio below 150% and/or; 4) Significant disruption to the business operations during the de-merger process.

JACKSON NATIONAL

Moody's noted that the following could place positive pressure on Jackson's rating: 1) Upgrade of Prudential plc; 2) more balanced growth in new product sales with less emphasis on VAs with living benefits; 3) retaining market share in asset accumulation businesses and maintaining profitability while diversifying into other businesses; 4) VAs, excluding those with no guarantees or only return of premium death benefit guarantees, becoming less than 50% of company's total statutory liabilities (metric adjusted for equity market movements and reflecting mix of liabilities between VAs with/without guaranteed benefits - products with fewer/less risky guarantees place less negative pressure on the company's risk profile).

The following factors could result in a downgrade of Jackson's rating: 1) Downgrade of Prudential plc's ratings or weakening of implied support from U.K. parent; 2) company Action Level RBC ratio falling below 325% at Jackson, excluding VOBA; 3) declining profitability on GAAP or statutory basis with ROCs < 6%; 4) VAs, excluding those with no guarantees or only return of premium death benefit guarantees, becoming greater than 60% of the company's total statutory liabilities (metric adjusted for equity market movements and reflecting mix of liabilities between VAs with/without guaranteed benefits - products with fewer/less risky guarantees place less negative pressure on the company's risk profile).

SUMMARY PROFILE OF AFFECTED GROUP

Prudential plc is an insurance and financial services holding company that operates primarily in the life insurance and asset management sectors. The Group is headquartered in London and had total assets of around GBP494 billion at year-end 2017.

LIST OF AFFECTED RATINGS

Issuer: Prudential Public Limited Company

..Affirmations:

....Senior Unsecured Regular Bond/Debenture, affirmed A2

....Senior Unsecured Medium-Term Note Program (Local Currency), affirmed (P)A2

....Senior Subordinated Regular Bond/Debenture, affirmed A3(hyb)

....Subordinate Regular Bond/Debenture, affirmed A3(hyb)

....Subordinate Medium-Term Note Program, affirmed (P)A3

....Junior Subordinated Regular Bond/Debenture, affirmed Baa1(hyb)

....Commercial Paper, affirmed P-1

..Outlook Action:

....Outlook remains Stable

Issuer: Prudential Assurance Company Ltd

..Affirmation:

....Insurance Financial Strength, affirmed Aa3

..Outlook Action:

....Outlook remains Stable

Issuer: Scottish Amicable Insurance Fund

..Affirmation:

....Insurance Financial Strength, affirmed Aa3

..Outlook Action:

....Outlook remains Stable

Issuer: Scottish Amicable Finance Plc

..Affirmations:

....Backed Subordinate Regular Bond/Debenture, affirmed A2(hyb)

..Outlook Action:

....Outlook remains Stable

Issuer: Jackson National Life Insurance Company

..Affirmations:

....Insurance Financial Strength, affirmed A1

....Short-term Insurance Financial Strength, affirmed P-1

....Surplus Notes, affirmed A3(hyb)

..Outlook Action:

....Outlook remains Stable

Issuer: Jackson National Life Funding, LLC

..Affirmations:

....Backed Senior Secured Regular Bond/Debenture, affirmed A1

....Backed Senior Secured Medium-Term Note Program, affirmed (P)A1

..Outlook Action:

....Outlook remains Stable

Issuer: Jackson National Life Global Funding

..Affirmations:

....Senior Secured Regular Bond/Debenture, affirmed A1

....Senior Secured Medium-Term Note Program, affirmed (P)A1

....Backed Senior Secured Regular Bond/Debenture, affirmed A1

....Senior Unsecured Regular Bond/Debenture, affirmed A1

..Outlook Action:

....Outlook remains Stable

Issuer: Jackson National Life Insurance Co of NY

..Affirmation:

....Backed Insurance Financial Strength, affirmed A1

..Outlook Action:

....Outlook remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Life Insurers published in April 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

The person who approved Prudential Public Limited Company, Prudential Assurance Company Ltd, Scottish Amicable Insurance Fund and Scottish Amicable Finance Plc credit ratings is Antonello Aquino, Associate Managing Director, Financial Institutions Group, JOURNALISTS: 44 20 7772 5456, Client Service: 44 20 7772 5454. The person who approved Jackson National Life Insurance Company, Jackson National Life Funding, LLC, Jackson National Life Global Funding and Jackson National Life Insurance Co of NY credit ratings is Marc Pinto, Managing Director, Financial Institutions Group, JOURNALISTS: 1 212 553 0376 , SUBSCRIBERS: 1 212 553 1653.

The relevant office for each credit rating is identified in "Debt/deal box" on the Ratings tab in the Debt/Deal List section of each issuer/entity page of the website.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Dominic Simpson
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Antonello Aquino
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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