Fitch Ratings has affirmed Prudential Plc’s (Prudential) Long-term Issuer Default Rating (IDR) at ‘A+’ and senior unsecured debt at ‘A’. The agency has also affirmed Prudential Assurance Company Ltd’s (PAC) Insurer Financial Strength (IFS) rating at ‘AA’. At the same time, Fitch has affirmed the IFS ratings of Prudential’s US subsidiaries Jackson National Life Insurance Company and Jackson National Life Insurance Company of New York (collectively, JNL) at ‘AA’. The Outlooks on all of the group’s Long-term IDRs and IFS ratings are Stable. A full list of ratings actions is at the end of this comment.
The affirmation reflects Prudential’s very strong and resilient capital position, operational scale and strong business position in each of its key markets: the UK, the US and Asia. Prudential has strong cash generation and a strategy focussed on high-margin products with short pay-back periods.
Partially offsetting these positive rating factors is the company’s relatively high exposure to credit risk, longevity risk and adverse policyholder behaviour risk. This exposure includes the rapidly increasing variable annuity business in the US, which contributed to the downgrade of the group’s ratings in October 2010. While Fitch recognises JNL’s track record of pricing discipline, effective risk hedging on this business through economic cycles and the recently announced measures to further manage the growth of its variable annuity book, it nevertheless views such rapid sales growth as negative from a credit perspective.
“Prudential has a large backbook of UK policies that are highly cash generative,” says Clara Hughes, Director in Fitch’s Insurance team. “However, the future profile of the group will be increasingly driven by the growing business in Asia and US variable annuities.”
Asia and the US accounted for 74% of the group’s sales in 2010. Prudential has a strong track record and a diversified portfolio but a key factor in the group’s future profitability is the emergence of future profits in line with current assumptions in Asia and the US as the business matures. “In Fitch’s view, the main risks to profitability are risks from underperforming hedges and adverse policyholder behaviour on US variable annuities, and increased pricing competition and higher policyholder surrender rates in Asia,” say Hughes.
Factors that could lead to a downgrade of Prudential’s ratings are the crystallisation of credit risk, longevity risk, adverse policyholder behaviour, or if leverage increases or interest coverage falls below 5-6x. An upgrade is unlikely in the near term. However, the rating could be considered for an upgrade if, over an extended period, the company demonstrates sustainable, strong earnings across all geographical regions with sustained capital strength and lower financial leverage.
Fitch views JNL as ‘core’ to the Prudential group (as defined in “Fitch’s Approach to Rating Insurance Groups”, dated 14 December 2010 and available at www.fitchratings.com) and is factoring group support into JNL’s ratings, which would be lower on a standalone basis.
Prudential has the joint-highest IFS rating among European insurance groups. Its ratings continue to reflect its excellent capitalisation and profitability, and its geographical diversification with particularly strong market positions across Asia.
Source : Fitch Ratings