Prudential Assurance Aa3 IFSR and Jackson's A1 IFSR also affirmed
London, 22 September 2017 -- 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 are stable.
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 Prudential's excellent product and
geographic diversification, brand name recognition and very strong
profitability, with its diverse Asian business to the fore in respect
of new business sales and 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. These strengths are tempered by the high exposure
of the Group to credit risk, and equity market related products
particularly in its US operation which has seen strong growth in variable
annuities for a number of years. Furthermore, the Group has
increasing exposure to operations in less developed Asian countries whose
sovereign ratings are relatively weak.
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 has leading positions in a number
of the key insurance markets in Asia, which remains Prudential's
primary focus for growth. It also owns asset management businesses
including M&G in the UK and Eastspring 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 strong position to take advantage of growth opportunities
in the Asian life market. Growth in Asia remains strong and sales
are oriented towards participating and unit-linked products with
the proportion of protection policies increasing in recent years;
in 2016, health and protection represented 62% of the Asian
new business profit, 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.
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 growing insurance profitability and low risk products from Asia combined
with the high-quality and stable cash flows from the U.K.
with-profits and asset management business, 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 which
it hedges.
Prudential's geographic diversification has enabled it to achieve particularly
strong profit and cash growth over the last few years. In 2016,
the Group's key metrics of free surplus generation, new business
profit, and EEV operating profit increased on a constant exchange
basis by 10%, 11% and 3% respectively.
IFRS operating profit reduced slightly on a constant exchange basis by
2% with negative impacts including a GBP175 million (gross
of any reinsurance recovery) provision related to a UK regulatory review
concerning non-advised annuity sales. The performance of
Asia, which represented 66% and 58% of the Group's
new business profit and EEV operating profit respectively in 2016,
was consistently strong for all these metrics. This strong performance
has continued during H1 17, 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 2012-2016 averaged
9.2% with a high Sharpe ratio of 410% for this period
as a result of the low volatility of returns.
Prudential's financial flexibility is very strong. During
2016, the Group's adjusted financial leverage increased, driven
by an increase in subordinated debt, though remained relatively
low at 22% (YE15: 18.2%). Total leverage
also increased to 31.6% (27.3%) and remains
meaningfully higher than the adjusted financial leverage level reflecting
both the amount of hybrid equity credit, and operating debt.
At H1 17, leverage benefited from a small reduction in debt and
an increase in equity.
Earnings coverage reduced to 7.0x (10.6x) in 2016 driven
by the Group's reduced profit (driven in turn by short-term fluctuations
in investment returns relating to the US business) and higher interest
expense, although the five year average coverage improved to 8.5x
(8.2x). Prudential's financial flexibility also benefits
from its very strong access to capital markets.
PRUDENTIAL ASSURANCE COMPANY -- AFFIRMED AT Aa3 IFSR
The affirmation of the Aa3 IFSR of Prudential Assurance Company Ltd (PAC)
reflects Prudential UK's strong brand name and leading position
in UK with-profits savings business, excellent capitalisation
with PAC maintaining one of the financially strongest life funds in the
UK, and still good profitability on new business. These strengths
are offset by relatively limited business diversification compared to
some other UK peers, longevity risk exposure, the still material
amount of equities in the with-profits fund despite being mitigated
by the flexibility of the product design and the GBP8.4 billion
(as at YE16) of UK with-profits Solvency II own funds, and
the persistence of regulatory headwinds within the UK life industry.
The stable outlook reflects Moody's expectation that the impact
of Brexit on PAC will be moderate over the next 12 to 18 months,
and that PAC will maintain its market leading position and outperformance
in UK with-profits savings business, along with strong capitalisation
and stable core profitability.
The Group proposes to combine its UK life business and M&G to form
M&G Prudential which will focus on the development of capital-light,
customer focused solutions. Going forward, Moody's
will evaluate progress with regard to revenue synergies and the Group's
estimated GBP145 million per annum cost savings by 2022 from this
combination, as well as the implications of any sale of any part
of PAC's in-force annuities book.
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 sizable 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 concentration of variable annuities
with guaranteed benefits and the significant exposure to equity-sensitive
liabilities and asset liability management (ALM) 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
Outlook
The outlook is stable, reflecting 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.
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's Asian business 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
IFSR for PAC or Jackson.
Conversely, negative rating pressure could arise from: 1)
Substantial deterioration in earnings generating ability or if the Group's
geographic diversification reduces significantly 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 IFSR of Jackson, or downgrade of the IFSR of PAC.
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/or 3) substantially
reduced levels of equities and diminished volatility in capitalisation.
Conversely, negative rating pressure could arise from: 1)
Depressed levels of sales with a consequent impact on profitability and/or
2) Capitalisation falls materially.
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 variable annuities with living
benefits; 3) retaining market share in asset accumulation businesses
and maintaining profitability while diversifying into other businesses;
4) 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)
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 GBP470
billion at year-end 2016.
LIST OF AFFECTED RATINGS
Affirmations:
Issuer: Prudential Public Limited Company
....Senior Unsecured Regular Bond/Debenture,
Affirmed A2
....Subordinate, Affirmed A3 (hyb)
....Senior Subordinate, Affirmed A3
(hyb)
....Junior Subordinate, Affirmed Baa1
(hyb)
....Senior Unsecured MTN Program, Affirmed
(P)A2
....Subordinate MTN Program, Affirmed
(P)A3
....Commercial Paper, Affirmed P-1
Outlook Actions:
....Outlook, Remains Stable
Issuer: Prudential Assurance Company Ltd
....Insurance Financial Strength, Affirmed
Aa3
Outlook Actions:
....Outlook, Remains Stable
Issuer: Scottish Amicable Insurance Fund
....Insurance Financial Strength, Affirmed
Aa3
Outlook Actions:
....Outlook, Remains Stable
Issuer: Scottish Amicable Finance Plc
....BACKED Subordinate, Affirmed A2
(hyb)
Outlook Actions:
....Outlook, Remains Stable
Issuer: Jackson National Life Insurance Company
....Insurance Financial Strength, Affirmed
A1
....ST Insurance Financial Strength,
Affirmed P-1
....Surplus Notes, Affirmed A3 (hyb)
Outlook Actions:
....Outlook, Remains Stable
Issuer: Jackson National Life Funding, LLC
....BACKED Senior Secured Regular Bond/Debenture,
Affirmed A1
....BACKED Senior Secured MTN Program,
Affirmed (P)A1
Outlook Actions:
....Outlook, Remains Stable
Issuer: Jackson National Life Insurance Co of NY
....BACKED Insurance Financial Strength,
Affirmed A1
Outlook Actions:
....Outlook, Remains Stable
Issuer: Jackson National Life Global Funding
....Senior Unsecured Regular Bond/Debenture,
Affirmed A1
....Senior Secured Regular Bond/Debenture,
Affirmed A1
....BACKED Senior Secured Regular Bond/Debenture,
Affirmed A1
....Senior Secured MTN Program, Affirmed
(P)A1
Outlook Actions:
....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 , SUBSCRIBERS: 44 20 7772 5454
The person who approved Jackson National Life Insurance Company,
Jackson National Life Funding, LLC, Jackson National Life
Insurance Co of NY and Jackson National Life Global Funding credit ratings
is Marc Pinto, Managing Director, Financial Institutions Group,
JOURNALISTS: 1 212 553 0376 , SUBSCRIBERS: 1 212 553
1653
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
