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Announcement:

Moody's changes Prudential Plc's outlook to stable following strong financial results in 2010 and resilient group franchise

08 Apr 2011

London, 08 April 2011 -- Moody's Investors Service today affirmed the A2 senior credit rating on Prudential Plc (Prudential), and changed its outlook to stable from negative. Moody's also affirmed the Aa2 insurance financial strength ratings (IFSRs) for Prudential Assurance Company (PAC) and its UK insurance subsidiaries (see list below) and the A1 IFSR of Jackson National Life Insurance Company (Jackson). A complete list of ratings follows below. All ratings now carry a stable outlook.

Moody's negative outlook, assigned in June 2010, had been primarily concerned with reputational damage and potential business slowdowns, following the attempted AIA acquisition in 2010. "The rating affirmation and revision to stable outlook follows the group strong financial performance in 2010 and reflects the resilience of the group's franchise. The group continued to post profitable growth in its three main markets" said Antonello Aquino, Moody's Vice President / Senior Credit Officer.

Prudential posted strong financial profitability both in terms of IFRS and EEV results, coupled with a strong progress in its ability to generate cash from all of its key geographic areas of Asia, US and UK. New business premiums have been very strong, up 24%, 28% and 13% in 2010 in Asia, the US and UK respectively, with a record second half 2010 in Asia. As such, Prudential retains a well-diversified geographic mix profile, with EEV shareholder's funds in 2010 generated 39% from Asia, 37% from the UK (including M&G) and 24% from the US (calculated excluding central cost). Product composition is also well diversified with operating profit in 2010 deriving 35% from spread income, 24% from fee income, 21% from insurance margin, 12% from with-profit and the remaining 8% from returns on shareholder's assets.

IFRS operating profit for 2010 was up 24% to GBP1.9 billion, reporting double digit growth in all its main markets, and IFRS profit after tax increased to GBP1.4 billion, up 112%, despite the exceptional cost for GBP284 million (post tax) incurred in relation to the AIA transaction. On the EEV basis, new business profit for the year was GBP2.0 billion, up 25%, with a very healthy new business margin of 58% and a fast payback ranging from 1 year (in the US) to 4 years (in the UK). Going forward, we expect margins for the group to continue to be strong on the backdrop of high recurring Asian margin but we believe margins in the US and UK spread business can revert back to more normal levels as competition increases and corporate bond spreads continue to tighten.

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 2010 was GBP1.7 billion, up 21% relative to 2009, representing a 4.6x increase compared to the level of 2005, driven by a considerable reduction in new business strain. Surplus generation was also well diversified geographically, with 22% coming from Asia, 37% coming from US and 41% from the UK (including M&G). Overall net remittances to the holding company as a percentage of net underlying free surplus was 55% in 2010 and we expect this ratio to continue to increase in the coming years.

The company also reported a very strong capital position at year-end 2010 with a GBP4.3 billion of Insurance Groups Directive (IGD) capital surplus (305% cover) against GBP3.4 billion at year-end 2009 (283% cover) ) and strong financial leverage estimated at around 23% at year-end 2010.

Offsetting these strengths are (i) the exposure of the group to equity market related products, particularly in its US operation (see following paragraph on Jackson) and (ii) a low group earnings coverage and high total leverage relative to the rating level, respectively estimated at around 6.1x and 50% for 2010.

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 capitalization and very good control of its distribution channels.

PAC reported profitable growth in 2010: IFRS operating profit increased to GBP673 million, up 11%, and EEV new business profit was GBP365 million, up 59%. We expect new business margin, which increased to 45% in 2010 from 32% in 2009 benefitting from a bulk annuity contract, to return to normal level in 2011. Capital remained very strong with Moody's MASC (Moody's Adjusted Capital Solvency Capital) improving slightly to 2.8x in 2010 from 2.7x in 2009 and realistic surplus in the with profit fund increasing to GBP5.1 billion in 2010 from GBP4.9 billion in 2009.

These strengths are offset by (i) the still material amount of equities in the with-profits fund, despite being mitigated by the reduction in equities recorded in the last two years and the flexibility of the product design and (ii) the significant immediate annuity exposure.

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 equity indexed annuity businesses and has experienced strong growth and improving market share in the variable annuity business in recent years.

Jackson continues to be of strategic importance to its parent company, Prudential Plc, and benefits from a one notch uplift from its stand-alone A2 IFSR. The stable outlook reflects that of the group.

Jackson's strengths are mitigated by its significant exposure to interest sensitive liabilities and to equity-market related products. The company reported a very rapid growth in variable annuity in the recent past and has increased its VA assets by 42% in 2010. Jackson has undertaken hedging programs to better manage the risks in its product offerings; however, continued rapid growth in the VA business could place pressure on the company's risk profile, mainly because of overexposure to the risks associated with VA guarantees.

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. We also expect interest coverage to increase and total leverage to decrease.

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 narrower notching than standard practice for insurance groups. As the non-UK businesses grow, we would 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 close 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.

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;

Scottish Amicable Finance plc- subordinated debt rating at A1;

Prudential Annuities Limited- insurance financial strength rating at Aa2;

Prudential plc- senior debt at A2;

Prudential plc- subordinated debt at A3 (hyb);

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

Prudential Capital- guaranteed Euro MTN senior debt at (P)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;

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

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)

Prudential plc is an international retail financial services group headquartered in London with total assets of GBP261 billion at year end 2010.

The principal methodology used in rating Prudential was "Moody's Global Rating Methodology for Life Insurers", published in May 2010, which can be found on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodologies sub-directory on Moody's website.

The last rating action was on 02 June 2010, when Moody's affirmed Prudential's long-term ratings with a negative outlook and affirmed the short-term ratings at P-1 following the termination of the AIA transaction.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to pay punctually senior policyholder claims and obligations. Please see Moody's website at www.moodys.com/insurance for more information.

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

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

Moody's Investors Service Ltd.
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Moody's changes Prudential Plc's outlook to stable following strong financial results in 2010 and resilient group franchise
No Related Data.
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