OREANDA-NEWS. 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 Prudential's US subsidiaries Jackson National Life Insurance Company 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 13 countries in Asia.

Prudential's score on Fitch's Prism factor-based capital model is 'extremely strong' based on end-2014 results. At end-1H15, the group's Insurance Groups Directive (IGD) regulatory solvency ratio was estimated at 250% and its UK with-profits fund working capital was estimated at GBP7.4bn. In the UK, it also maintains a large credit default reserve (end-1H15: GBP2.2bn). Its US operations have a strong regulatory risk-based-capital ratio (end-2014: 456%).

The group's leading position and strong brand in its core markets are positive rating factors. In the UK, Prudential is a leading company in the retirement market and its in-house asset manager, M&G, is the largest asset manager in the UK retail market. In the US, under the banner of JNL, it is one of the main sellers of variable and fixed annuities. In Asia, Prudential has one of the strongest franchises achieved by a western company and is growing strongly. Asia now contributes more than half of the group's new business value (2014: 55%) and we believe Prudential is well placed to exploit the low penetration of the Asian insurance markets and benefit from the rising personal wealth across the region.

Fitch views Prudential's earnings power and cash generation as strong, reflecting the company's focus on high-margin products with short payback periods. Return on equity was 20.6% in 2014, which is more than commensurate with the rating level.

In recent years, Prudential has experienced high sales of variable annuities (VAs) through its US subsidiary, relative to peers. 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 track record of pricing discipline and effective risk hedging on VAs through economic cycles, and the rebalancing of sales from traditional VAs to its new, lower-risk Elite Access product.

Prudential is exposed to significant credit risk through the credit portfolios backing its non-profit business including annuities in the US and the UK. Any worsening in actual or expected credit defaults or rating downgrades on these portfolios, which had a combined market value of GBP72bn at end-2014, 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 the UK entity Prudential Assurance Company Ltd (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 diversification benefit of exposure to different economies. Both entities are material in size, with the US representing 44% of the group's life operating profit (excluding asset management and other business) in 2014 and the UK representing 23%.

RATING SENSITIVITIES
Key rating triggers that could result in a downgrade include: a fall in Prudential's Prism score to low in the 'very strong' category; Fitch-calculated financial leverage over 25% (end-1H15: 18%); interest coverage below 5x (2014: 10.3x); or material crystallisation of credit risk, longevity risk or adverse policyholder behaviour.

Prudential has the joint-highest IFS rating among European insurance groups and an upgrade is unlikely in the near term.

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 is a decline in the strategic importance of JNL to Prudential.

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
IFS rating affirmed at 'AA'; Outlook Stable
Surplus notes affirmed at 'A+'
Short-term IFS affirmed at 'F1+'

Jackson National Life Insurance Company of New York
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'