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Fitch Affirms Prudential Plc Operating Companies at IFS 'AA'; Outlook Stable
June 26, 2017 / 4:37 PM / 6 months ago

Fitch Affirms Prudential Plc Operating Companies at IFS 'AA'; Outlook Stable

(The following statement was released by the rating agency) LONDON/CHICAGO, June 26 (Fitch) Fitch Ratings has affirmed Prudential Assurance Company Ltd's (PAC) Insurer Financial Strength (IFS) Rating at 'AA'. The agency has also affirmed Prudential Plc's (Prudential) Long-Term Issuer Default Rating (IDR) at 'A+' and senior unsecured debt at 'A'. At the same time, Fitch has affirmed Prudential's US subsidiaries Jackson National Life Insurance Company's and Jackson National Life Insurance Company of New York's (collectively JNL) IFS Ratings at 'AA'. The Outlooks on the group's Long-Term IDRs and IFS ratings are Stable. A full list of ratings actions is available at the end of this commentary. KEY RATING DRIVERS The ratings reflect Prudential's strong and resilient capital position, operational scale and strong business position in each of the group's key markets: the UK, the US and Asia. Prudential has strong cash generation and a strategy focused on high-margin products with short pay-back periods and a profitable asset management business. Prudential's ratings also benefit from the group's geographical diversification across the UK, US and 14 countries in Asia. At end-2016, the group's score on Fitch's Prism factor-based capital model (FBM) was 'extremely strong', its regulatory Solvency II ratio was 171% and its UK with-profits fund Solvency II own funds were GBP8.4 billion. Prudential maintains leading positions in the UK, US and Asia. In the UK, Prudential is a leading company in the with-profits savings market and Prudential's in-house asset manager, M&G, is one of the largest asset managers in the UK. In the US, under the banner of Jackson National Life, Prudential is one of the main sellers of variable and fixed annuities. Fitch believes that variable annuity (VA) products with embedded options and guarantees give rise to risks that are complex, long-tailed, and difficult to price, hedge and reserve for. While Prudential has been effectively managing these risks, continued growth in the group's exposure to the VA business could negatively impact Fitch's assessment of the group's business profile and overall ratings. In Asia, the group has established one of the strongest franchises of a western company. Asia continues to contribute over half of the group's new business sales (2016: 57%) and we believe Prudential is well-placed to exploit the low penetration of the Asian insurance markets and benefit from rising personal wealth across the region. Fitch views Prudential's earnings power and cash generation as strong, reflecting the group's focus on high-margin products with short payback periods. Return on equity was 14% in 2016, reduced from 21% in 2015 due to the negative impact of short-term investment movements. However, this remains commensurate with the rating level. Prudential is exposed to significant credit risk through the credit portfolios backing its non-profit business, including annuities in the US and the UK. A worsening in actual or expected credit defaults or rating downgrades on these portfolios, which had a combined market value of GBP90 billion at end-2016, is an inherent risk. Changes in life expectancy will be a driver of long-term profitability, as the group is exposed to potential longevity improvements on its large in-force annuity book in the UK. We view JNL and PAC as 'core' to the group under our rating methodology, based on a history of supporting group objectives, centralised risk, capital and decision-making functions and the resulting geographical diversification benefits. Both entities are material, with the US representing 47% of the group's insurance operating profit in 2016 and the UK representing 18%. Given JNL's 'core' status within the group and the potential group support that Fitch assumes, JNL is rated at the same level as Prudential. However, JNL's credit profile suggests that the ratings would be lower on a standalone basis. RATING SENSITIVITIES Key rating triggers that could result in a downgrade include a significant increase over time in the group's exposure to VA business; a fall in Prudential's Prism score to the low end of the 'very strong' category; Fitch-calculated financial leverage over 25% (end-2016: 16%); or crystallisation of material credit risk, longevity risk or adverse policyholder behaviour. Following the UK vote to leave the European Union, the UK sovereign rating was downgraded to 'AA'/Negative. A further one-notch downgrade of the UK would not automatically lead to any rating actions on Prudential or its subsidiaries due to the group's global diversification. However, a multiple-notch downgrade of the UK could lead to a downgrade of Prudential's ratings (see: Fitch Affirms Prudential Plc's IFS at 'AA'; Outlook Stable dated 30 June 2016 on A downgrade of Prudential would trigger a downgrade of JNL and PAC. As Fitch factors group support into JNL's rating, which would be lower on a standalone basis, JNL's ratings could also be downgraded if, in Fitch's view, the strategic importance of JNL to Prudential declines. As Prudential has the joint-highest IFS Rating among European insurance groups an upgrade is unlikely in the near term. The rating actions are as follows: Prudential Long-Term IDR: affirmed at 'A+'; Outlook Stable Short-Term IDR: affirmed at 'F1' Commercial paper: affirmed at 'F1' Senior debt affirmed at 'A' Junior subordinated debt and perpetual subordinated capital securities affirmed at 'BBB+' PAC Long-Term IFS Rating: affirmed at 'AA'; Outlook Stable Jackson National Life Insurance Company Long-Term IDR: affirmed at 'AA-'; Outlook Stable Long-Term IFS Rating: affirmed at 'AA'; Outlook Stable Surplus notes: affirmed at 'A+' Short-Term IFS Rating: affirmed at 'F1+' Jackson National Life Insurance Company of New York Long-Term IFS Rating: affirmed at 'AA'; Outlook Stable Jackson National Life Global Funding Medium-term notes: affirmed at 'AA' Jackson National Life Funding LLC Medium-term notes: affirmed at 'AA' Contacts: Primary Analysts Sam Mageed (Prudential group) Director +44 20 3530 1704 Fitch Ratings Limited 30 North Colonnade London E14 5GN Dafina M. Dunmore, CFA (JNL) Director +1-312-368-3136 Fitch Ratings Limited 70 W. Madison St. 13th Floor, Chicago, IL 60602 Secondary Analysts Willem Loots (Prudential group) Senior Director +44 20 3530 1250 Julie A. Burke, CPA, CFA (JNL) Managing Director +1 312 368 3158 Committee Chairperson Keith Buckley Managing Director +1 312 368 3211 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: Additional information is available on In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome. Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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