OREANDA-NEWS. 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 its 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 15 countries in Asia.

The group's score on Fitch's Prism factor-based capital model is 'extremely strong' based on end-2015 results. At end-2015, Prudential's Insurance Groups Directive (IGD) regulatory solvency ratio was estimated at 250%, its Solvency II coverage ratio at 193%, and its UK with-profits fund working capital was GBP7.6bn.

Prudential's leading position and strong brand in the group's core markets are positive rating factors. 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.

Fitch expects "Brexit" to drive widespread credit pressure, as life insurers tend to be sensitive to deterioration of the market values of their assets. Sustained economic weakness leading to material deterioration in the market values of assets or lower demand for business could place UK insurers at risk of downgrades.

In the US, under the banner of Jackson National Life (JNL), Prudential is one of the main sellers of variable and fixed annuities. 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 contributions (2015: 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.

In 2009-2012, Prudential experienced particularly rapid growth in sales of variable annuities (VAs) through its US subsidiary. Fitch believes that VA products with embedded options and guarantees give rise to risks that are complex, long-tailed, and difficult to price, hedge and reserve for. However, Fitch recognises Prudential's record of pricing discipline and effective risk hedging on VAs through economic cycles, and the rebalancing of sales from traditional VAs to the group's lower-risk Elite Access product.

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 21% in 2015, which is more than 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 GBP78bn at end-2015, 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 annuity business in the UK.

We consider 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 41% of the group's insurance operating profit in 2015 and the UK representing 29%.

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 its ratings would be lower on a standalone basis. As the VA business continues to grow and JNL's influence on the group increases in terms of capital and earnings, its lower standalone rating could exert more influence on the overall group's ratings.

RATING SENSITIVITIES

Key rating triggers that could result in a downgrade include a fall in Prudential's Prism score to the low end of the 'very strong' category, triggered for example by rapid growth in the US VA business; Fitch-calculated financial leverage over 25% (end-2015: 17%); or material crystallisation of 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 www. fitchratings. com).

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, there were a decline in the strategic importance of JNL to Prudential.

Prudential has the joint-highest IFS rating among European insurance groups and 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

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'