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Rating Action:

Moody's affirms the A2 senior rating of Prudential Plc, stable outlook

15 Jul 2013

Note: On July 29, 2013, the press release was revised as follows: in the list of affirmed ratings for Prudential Plc, a “(hyb)” indicator was added to the rating of subordinated debt. Revised as follows:

London, 15 July 2013 -- Moody's Investors Service today affirmed the A2 senior credit rating on Prudential Plc (Prudential). Moody's also affirmed the Aa2 insurance financial strength ratings (IFSRs) of Prudential Assurance Company (PAC) and the A1 IFSR of Jackson National Life Insurance Company (Jackson). A complete list of ratings follows below. All ratings carry a stable outlook.

RATINGS RATIONALE

The rating affirmation reflects the group's diversified business profile as well as its very strong profitability. The group also enjoys very strong financial flexibility given its strong earnings coverage and excellent ability to access capital markets in Asia and Europe. These strengths are tempered by the significant exposure of the group to equity market-related products in its US operation and high exposure in the UK to risk assets in the with-profit business and longevity risk.

Prudential is market leader in most of the product lines it writes in Asia, US and the UK and benefits from its approach of focusing on the most attractive and high margin products in these three markets. Moody's views the group's ability to allocate capital to the highest return and shortest payback opportunities across the group as a key strength of Prudential. The insurer also enjoys a very strong brand name, particularly in Asia and the UK with respectively 13 and 7 million customers.

Prudential posted very strong profitability both in terms of IFRS and EEV results in 2012, coupled with strong progress in its ability to generate cash from all of its key geographic areas of Asia, US and UK. Under IFRS, operating profit was up 25% to GBP2.5 billion in 2012 supported by the very strong performance of the Asian and US operations. We expect profitability to be resilient despite the low interest environment given the company's ability to change the mix and features of its products and its strong position for growth in Asia. As a testament to this, the management has been able to shift the business mix of the group towards insurance income and fee income, representing 57% of IFRS operating profit in 2012 (39% in 2008), with a lower reliance on spread income business and with-profit.

Over the last three years Asia has more than doubled its operating profits to GBP913 million in 2012 and has become the largest contributor of cash to the group, remitting GBP341 million in 2012. Jackson reported an operating profit of GBP964 million and remitted GBP249 million to the group in 2012 while the UK business posted an operating profit of GBP736 million (excluding M&G) and remitted GBP313 million to the group. Further diversification to the insurance business is provided by the asset management business which recorded record total retail and institutional net inflows of GBP16.9 billion in 2012 in Europe and reported global operating profit of GBP485 million, remitting GBP297 million to the group.

As a result of the high profitability, the group's earnings coverage was a very strong 10.7x in 2012, which is one of the highest among European insurers, with an adjusted financial leverage of 17.4%. Prudential also benefits from its very strong access to capital markets in both Europe and Asia, even during periods of high market volatility.

As a result of the group's strategy of focusing on value, Prudential has also accelerated its generation of net free surplus, an indicator of the group's ability to generate cash and capital. Net free surplus generated in 2012 was GBP2.1 billion, up 5% year-on-year, representing a 3.6x increase compared to the level of 2006, driven by a considerable reduction in new business strain in relative terms. The net free surplus generated was also well diversified geographically, with 26% coming from Asia, 37% coming from US and 37% from the UK (including M&G). Overall net remittances to the holding company as a percentage of net underlying free surplus generated was a high 58% in 2012.

Affirmation of PAC

The affirmation of the Aa2 IFSR of PAC reflects its very strong credit profile in the UK. PAC maintains one of the financially strongest life funds in the UK, has excellent capitalisation and stable cash flow generation. With its focus on higher-margin businesses, such as annuities, PAC also maintains good profitability, as evidenced by its new businss profit margin of 37% in 2012.

Capital is very strong with Moody's MASC (Moody's Adjusted Capital Solvency Capital) improving to 2.9x in 2012 from 2.4x in 2011 and realistic surplus in the with-profit fund increasing to GBP5.5 billion in 2012 from GBP4.0 billion in 2011.

These strengths are offset by (i) the still material amount of equities in the with-profits fund, at GBP25.1 billion at year-end 2012 despite being mitigated by the flexibility of the product design and the GBP7 billion inherited estate and (ii) the significant immediate annuity exposure, which exposes the Group to longevity risk, with annuities representing 25% of PAC liabilities at year-end 2012, when excluding unit-linked liabilities.

Affirmation of Jackson

The affirmation of the A1 IFSR of Jackson reflects the company's good position in the domestic asset accumulation business, as seen by 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 fixed indexed annuity (FIA) businesses and has experienced strong growth and improving market share in the variable annuity business in recent years. The company's rapid growth in variable annuities, a product we generally consider less creditworthy than standard insurance products, places pressure on the company's standalone credit profile.

Jackson continues to be of strategic importance to its U.K.-based parent company, Prudential Plc. Jackson consistently accounts for roughly one-third of its parent's consolidated operating earnings. Prudential Plc (PUK) demonstrated its commitment to Jackson in years past with substantial capital infusions when needed.

Jackson's strengths are mitigated by its significant exposure to equity-sensitive liabilities and asset liability management (ALM) risks, which necessitates dependence upon an elaborate hedging program. Jackson also has modest product diversification and noteworthy exposure to credit risk in its investment portfolio.

Outlook

Moody's stable outlook reflects our expectation that Prudential will continue to maintain the strengths of its established businesses in the UK and US, and that Asia continues to mature and provide an enhanced source of cash flows to the holding company. We expect the net remittance to the holding company to continue to be a key strategic focus for the management and the amount remitted to increase in the coming years, driven by an acceleration of net cash flows from the Asian operation.

Negative rating pressure on the group would emerge if the group were to see market positions and earnings generating ability decline in any of its main markets, if profitability (return on capital) falls below 8% in the long term, capitalization falls materially or if the group's geographic diversification reduces significantly. Additional reasons for rating pressure on the group are a medium term failure to generate sustained positive cash flows to be remitted to the holding company and a downgrade of the IFSR for PAC or Jackson.

In addition Prudential's holding company debt ratings currently benefit from a well diversified set of cashflows from operating subsidiaries. As the non-UK businesses grow, we will continue to evaluate the holding company notching in light of the increasing proportion of revenues/cash-flows which are expected to be derived from outside of the UK, which today is the most highly-rated operation of the group.

Conversely, a change to positive outlook could emerge if interest coverage rises to 12x and total leverage declines below 20% while maintaining a very robust capitalization in a Solvency II regime. Positive rating pressure on the group may also arise subsequent to an upgrade of the IFSR for PAC or Jackson, which, at this stage, is unlikely.

The following ratings were affirmed with a stable outlook:

Prudential Assurance Company- insurance financial strength rating at Aa2;

Scottish Amicable Insurance Fund- insurance financial strength rating at Aa2;

Prudential Annuities Limited- insurance financial strength rating at Aa2;

Prudential Retirement Income Limited- insurance financial strength rating at Aa2;

Scottish Amicable Finance plc- subordinated debt rating at A1(hyb);

Prudential plc- senior debt at A2;

Prudential plc- subordinated debt at A3 (hyb);

Prudential plc- junior subordinated debt at Baa1(hyb);

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(hyb);

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 principal methodology used in these ratings was Moody's Global Rating Methodology for Life Insurers published in May 2010. Please see the Credit Policy 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

The person who approved Prudential Plc, Prudential Assurance Company, Scottish Amicable Insurance Fund, Prudential Annuities Limited, Prudential Retirement Income Limited and Scottish Amicable Finance plc credit ratings is Simon Harris, MD - Financial Institutions, Financial Institutions Group, JOURNALISTS: 44 20 7772 5456, SUBSCRIBERS: 44 20 7772 5454

The person who approved Jackson National Life Insurance Company, Jackson National Life Insurance Company of New York, Jackson National Life Funding, L.L.C and Jackson National Life Global Funding credit ratings is Robert Riegel, MD - Insurance, Financial Institutions Group, JOURNALISTS: 212-553-0376, SUBSCRIBERS: 212-553-1653

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 analyst and the Moody's legal entity that has issued the ratings.

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

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.

Antonello Aquino
Senior Vice President
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Simon Harris
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms the A2 senior rating of Prudential Plc, stable outlook
No Related Data.
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