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Rating Action:

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

30 Sep 2015

Jackson's A1 IFSR also affirmed; Prudential Assurance IFSR downgraded to Aa3 - outlooks stable

London, 30 September 2015 -- 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 A1 insurance financial strength rating (IFSR) of Jackson National Life Insurance Company (Jackson), and downgraded the IFSR of Prudential Assurance Company Ltd (PAC) to Aa3 from Aa2. The outlook on all long-term ratings is stable.

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

RATINGS RATIONALE

PRUDENTIAL PLC -- AFFIRMED AT A2 SENIOR DEBT

The rating affirmation reflects Prudential's excellent product and geographic diversification, brand name recognition and very strong profitability. The Group's financial flexibility is also very strong with relatively low adjusted financial leverage, strong earnings coverage and excellent ability to access capital markets in Asia and Europe. These strengths are tempered by the high exposure of the Group to equity market related products, particularly in its US operation which has seen rapid growth in variable annuities for a number of years, and by the increasing exposure to risks in Asian countries with lower sovereign ratings.

Prudential is a market leader in most of the product lines it writes in Asia, the US and the UK, with a very strong brand name particularly in Asia and the UK. The Group holds significant market positions in a number of major countries in Asia, which remains Prudential's primary focus for growth. It also owns asset management businesses including M&G in the UK and Eastpring in Asia. Moody's views the Group's ability to allocate capital to the highest-return product and geographical location with the shortest payback period as a key strength.

A key advantage for Prudential compared to its European-based life insurance peers is its geographic diversification and the Group's strong position to take advantage of growth opportunities in the Asian life market. Growth in many markets in Asia remains strong, and sales which have been oriented towards unit-linked products historically, have in recent years seen an increasing proportion of protection policies. Furthermore, the Asian operations have strong and diversified distribution capabilities compared with its peers. Notably, in addition to Prudential's strong Asian bancassurance relationships, its strong agency channel allows excellent distribution control.

Further Asian growth should continue to benefit the quality and resilience of Group earnings which have consistently shifted towards less volatile sources such as fee income and especially insurance margin. The high-quality and stable cash flows from the U.K. with-profits and asset management business, combined with growing insurance profitability and low risk products from Asia, offset the higher proportion of spread- and fee-based earnings derived from the U.S. The Group's US business continues to sell a substantial share of variable annuities with living benefits and continues to have significant exposure to equity markets which it hedges.

Prudential's geographic diversification has enabled it to achieve particularly strong profit and cash growth over the last few years. In 2014 the Group's key metrics of IFRS operating profit, free surplus generation, new business profit and EEV operating profit all increased by 14%, 9%, 10% and 4% respectively. The performance of Asia, which represented 55% and 42% of the Group's new business profit and EEV operating profit respectively in 2014, was consistently strong for all these metrics, and the US showed the largest growth in free surplus generation at 22%. The Group's strong performance has continued during H1 15, and Moody's expects the Group's return on capital (Moody's metric, ROC) to continue to compare well with peers. Prudential's ROC from 2010-2014 averaged 8.6% with a high Sharpe ratio of 398% for this period as a result of the low volatility of returns.

Moody's also views Prudential's financial flexibility as very strong. At YE 2014, the Group's adjusted financial leverage reduced to a relatively low 17.8% (YE13: 20.6%) and total leverage also reduced to 27.9% (30.8%) but remains meaningfully higher than the adjusted financial leverage level, reflecting both the amount of hybrid equity credit and operating debt. Notwithstanding the issuance by Prudential of GBP600 million subordinated notes in June 2015, adjusted leverage is estimated to have remained below 20% at H1 15.

The Group's earnings coverage improved to 8.3x (5.9x) in 2014, benefiting from the Group's increased profit which outweighed the higher interest expense, and the five year average coverage also improved to 7.3x (6.4x). Prudential's financial flexibility also benefits from its very strong access to capital markets in both Europe and Asia, even during periods of high market volatility.

PRUDENTIAL ASSURANCE COMPANY - DOWNGRADE OF IFSR TO Aa3 FROM Aa2

The downgrade of PAC's IFSR to Aa3 from Aa2 reflects: 1) the impact of the UK pension reforms which highlighted Prudential UK's (Pru UK) historical reliance on high margin individual annuity business; 2) relatively limited business diversification compared to some other UK peers, with an orientation towards with-profit products; 3) notwithstanding good progress made to-date, still significant execution risk with regard to Pru UK's accelerated retail strategy. The Aa3 IFSR reflects Pru UK's strong brand name, excellent capitalisation and still good profitability on new business.

Moody's said that as a result of the UK pension reforms announced in March 2014, Pru UK's sales of individual annuities, which historically represented a meaningful amount of its new business profit, declined by 49% and 56% during 2014 and H1 15 respectively. The majority of its annuity sales were also internally generated from vesting policies which provided Pru UK with a very reliable and predictable stream of profitable business. The effective demise of individual annuities as the main product for such internally vesting policies means that Pru UK faces a high level of product innovation and competition from the external market.

Pru UK's response has been to accelerate its 'retail strategy', including new product development, although Moody's notes that Pru UK remains very reliant on its with-profit PruFund chassis with respect to further developing its product offering. At H1 15, following a 92% increase in sales, PruFund represented 60% of Pru UK's retail APE. Given this focus and the relatively narrow product set, which currently lacks, for example, a protection and a growing corporate pensions business, Moody's views Pru UK's business diversification as more limited than some of its peers.

Moody's also sees execution risk in Pru UK's retail strategy as it continues to build out PruFund, transform its customer service propositions and enhance its distribution avenues. Nevertheless, Pru UK has made good initial progress in replacing lost sales and value from individual annuities with overall APE sales and new business profit increasing by 22% and 12% respectively during H1 15.

Aside from PruFund, Pru UK's market position benefits from its leading position in the bulk annuities market where barriers to entry are high, and growing sales have recently boosted profitability. Writing bulk annuities brings associated longevity risk although Pru UK will benefit in this regard from the reduction in its individual annuity sales. Moody's views Pru UK's significant exposure to longevity risk as a credit challenge, although Moody's expects it to continue to use longevity reinsurance to manage this risk and capital requirements, and Pru UK's risk profile will benefit from the lower risk nature of the PruFund products.

Pru UK's credit profile also benefits from strong profitability with a still high, though reduced new business margin of 30% at H1 15, and improved IFRS profitability benefiting from bulk annuities and the unlocking of value in its in-force business. Furthermore, Pru UK's capitalisation is viewed as excellent; it maintains one of the financially strongest life funds in the UK.

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 and improving market share in the variable annuity business experienced by the company in recent years. The rating action also reflects Jackson's 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 continues to be of strategic importance to its U.K.-based parent company; and consistently accounts for roughly one-third of its parent's consolidated operating earnings.

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

The outlook is stable on all long-term ratings. Moody's stable outlook reflects the expectation that Prudential will continue to maintain the strengths of its established businesses in the UK, US and Asia, the latter providing an increasing source of cash flows to the holding company in the future.

RATING DRIVERS

PRUDENTIAL PLC

In terms of rating drivers going forward, Moody's said that positive rating pressure could arise from: 1) Earnings coverage rises to close to 12x and total leverage decreases below 20% while maintaining a very robust capitalisation in a Solvency II regime and/or 2) upgrade of the IFSR for PAC or Jackson which, at this stage, is unlikely.

Conversely, negative rating pressure could arise from: 1) Substantial deterioration in the Group's market positions and earnings generating ability in any of its main markets or if the Group's geographic diversification reduces significantly and/or 2) return on capital (Moody's metric) falls below 8% in the long term and capitalisation falls materially and/or 3) financial leverage of over 30% and earnings coverage of less than 8x on a long-term basis and/or 4) medium term failure to generate sustained positive cash flows to be remitted to the holding company and/or 5) downgrade of the IFSR of Jackson, or downgrade of the IFSR of PAC

PRUDENTIAL ASSURANCE COMPANY

Moody's said that positive rating pressure, whilst unlikely in the short-term, could arise from:1) Substantially reduced levels of equities and diminished volatility in both capital and profitability and/or 2) meaningfully increased product diversification without compromising profitability and/or 3) Group earnings coverage rises to close to 12x and total leverage decreases below 20% while maintaining a very robust capitalisation in a Solvency II regime.

Conversely, negative rating pressure could arise from: 1) Depressed levels of sales with a consequent impact on profitability and/or 2) capitalisation falls materially and/or 3) Group financial leverage of over 30% and earnings coverage of less than 8x on a long-term basis

JACKSON NATIONAL

Moody's noted that the following could place positive pressure on Jackson's rating: 1) upgrade of Prudential plc, 2) retaining market share in asset accumulation businesses and maintaining profitability while diversifying into other businesses, 3) variable annuities, 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) variable annuities, 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)

The following ratings were affirmed with a stable outlook:

Prudential Public Limited Company - A2 senior unsecured debt

Prudential Public Limited Company - A3(hyb) senior subordinated debt

Prudential Public Limited Company - A3(hyb) subordinated debt

Prudential Public Limited Company - Baa1(hyb) junior subordinated debt

Prudential Public Limited Company - (P)A2 senior unsecured MTN

Prudential Public Limited Company - (P)A3 senior subordinated MTN

Prudential Public Limited Company - (P)A3 subordinated MTN

Prudential Public Limited Company - (P)Baa1 junior subordinated MTN

Jackson National Life Insurance Company - IFSR at A1

Jackson National Life Insurance Company - surplus notes at A3(hyb)

Jackson National Life Insurance Company of New York- IFSR at A1

Jackson National Life Funding, L.L.C.- senior secured funding agreement-backed debt rating at A1

Jackson National Life Funding, LLC - senior secured funding agreement-backed MTN at (P)A1

Jackson National Life Global Funding- senior secured funding agreement-backed debt rating at A1

Jackson National Life Global Funding - senior secured funding agreement-backed MTN at (P)A1

The following ratings were downgraded and assigned a stable outlook:

Prudential Assurance Company Ltd - IFSR to Aa3 from Aa2

Scottish Amicable Insurance Fund- IFSR to Aa3 from Aa2

Prudential Retirement Income Limited- IFSR to Aa3 from Aa2

Scottish Amicable Finance plc- subordinated debt rating to A2(hyb) from A1(hyb)

The following ratings were affirmed:

Prudential Public Limited Company - commercial paper at P-1;

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

The following rating was withdrawn:

Prudential Annuities Limited -- IFSR withdrawn (previously Aa2)

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 GBP369 billion at year-end 2014.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Life Insurers published in August 2014. 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 Public Limited Company, Prudential Annuities Limited, Prudential Assurance Company Ltd, Scottish Amicable Insurance Fund, Prudential Retirement Income Ltd and Scottish Amicable Finance Plc credit ratings is Simon Harris, Managing Director, 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, LLC and Jackson National Life Global Funding credit ratings is Robert Riegel, Managing Director, Financial Institutions Group, JOURNALISTS: 212-553-0376, SUBSCRIBERS: 212-553-1653

The relevant Releasing Office for each rating is identified under the Debt/Tranche List section on the Ratings tab of each issuer/entity page on moodys.com

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.

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
SUBSCRIBERS: 44 20 7772 5454

Simon Harris
MD-Gbl Ins and Mgd Invests
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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