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.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's changes Prudential Plc's outlook to stable following strong financial results in 2010 and resilient group franchise
