13th Mar 2020 14:44
(Alliance News) - Moody's Investors Service, on Friday, affirmed Prudential PLC's senior unsecured debt rating at A2, but has lowered its outlook to Negative following the company's decision to list a minority stake of its US unit Jackson.
The FTSE 100-listed life insurer and financial services firm on Wednesday announced it is planning a minority initial public offering for its US insurance unit Jackson.
Prudential had been under pressure from activist fund Third Point LLC to demerge the unit. Jackson National Life provides annuities in the US.
As well as the Prudential ratings, Moody's has placed Jackson National Life Insurance Co and Jackson National Life Insurance Co of New York on review on downgrade.
Moody's does not expect it to close before the first quarter of 2021.
In 2019, Pru reported APE sales growth by 8% in the US, driven by fixed income and fixed index annuities, in line with Prudential's diversification strategy. New business profit declined by 28%, however, to USD883 million reflecting lower interest rates and changes in product mix.
"The negative outlook on Prudential's ratings reflects the diminished diversification benefits following completion of the planned minority IPO of Jackson to the group's earnings, cashflows and capital, as well as uncertainty regarding the importance of the US operations to Prudential group in the longer-term," Moody's explained.
This will be Pru's second hive-off in as many years, following the splitting of M&G, its UK & Europe business, back in March 2018, resulting in two separately listed companies. In October 2019, Prudential completed the demerger of M&G, and M&G shares were admitted to trading on the London Stock Exchange's Main Market.
Following Jackson's IPO, the 332-year old UK insurer will operate only in Asia and Africa.
Moody's commented: "The US business is a meaningful component of the group's business with profitability representing approximately half of Prudential's reported earnings in 2019, albeit less on a new business profit basis. Whilst the rating agency expects Jackson will continue to be a material contributor to group earnings and capital generation over the coming 12 to 18 months, longer-term its position in the group is more uncertain.
"Prudential has benefited over the years from Jackson's strong profitability which has been uncorrelated to that of the Asian business and from an operating environment that is more stable. This was evidenced in the group's 2019 year end results, with Prudential reporting a 20% increase in operating profit from continued operations to USD5.3 billion, driven by strong earnings in the US and Asia, excluding Hong Kong, which more than offset the slowdown in Hong Kong business."
The credit ratings agency said the negative outlook also reflects uncertainty related to Pru's ultimate level of capitalisation and leverage following the IPO, but Moody's expects this to remain consistent with the current level.
Moody's was keen to point out, however, that it is not all bad news for Pru as the demerger allows it to reduce its exposure to financial risks given the product characteristics of Jackson. Moody's noted Jackson exposes Pr to "significant asset-liability management risks".
"Additionally the organisational disentangle of Jackson from the group is expected to be limited, and much less complex than the previous spin-off of the UK business. Jackson is relatively independent from the Asian operations, with limited revenue or cost synergies," Moody's added.
The ratings agency also stressed Pru's Asia unit has a "strong" credit profile, and Moody's noted it benefits from market-leading positions in 9 of the 13 insurance markets where it operates.
"We do not expect the minority IPO of Jackson, or any further sale of stake in Jackson thereafter, to have any material impact to the Asian operations, given that the operations are run separately," Moody's said.
"The division has a well-regarded brand in the region and strong sales growth oriented towards lower-risk participating and unit-linked products, with the proportion of protection policies increasing in recent years. The Asian operations have reached a size and scale where they are no longer reliant on group resources to fund strategic initiatives," Moody's added.
The investor service did note the Asia unit is exposed to risks associated with less developed Asian countries where sovereign ratings are "relatively weak".
Moody's said: "Premium growth will also face significant headwinds in 2020 given the distribution channel disruptions from the coronavirus, although the rating agency notes that the Asian operations have strong liquidity and renewal premiums to withstand this negative pressure."
Jackson's review for downgrade reflects the expected diminished implicit support from Pru.
Shares in Prudential are 1.5% higher in London on Friday afternoon at 897.80 pence each.
By Paul McGowan; [email protected]
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