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(Alliance News) - Moody's Investors Service affirmed Prudential PLC's long-term credit ratings at A2, on Tuesday, and maintained its negative outlook.
Prudential on Tuesday said it is planning to offload its US unit Jackson and posted sharp drop in profit during a "challenging" first half.
Prudential back in March said it was eyeing a minority initial public offering for its US insurance arm, after the company had been under pressure from activist fund Third Point LLC to demerge the subsidiary.
Prudential Chief Executive Mike Wells said Tuesday, however: "The board of Prudential PLC has decided to pursue the full separation and divestment of Jackson to enable the group to focus exclusively on its high-growth Asia and Africa businesses."
Wells, who led Jackson before taking over as CEO of all of Prudential in 2015, noted the company expects to commence separation by way of a minority IPO, targeting the first half of 2021, followed by future sell-downs over time, subject to market conditions.
Moody's commented: "The negative outlook on Prudential's ratings reflects the diminished diversification of the group's earnings, capital and cashflows following the planned sale of Jackson. Moody's anticipates the ultimate full disposal will only take place in the second half of 2021, or later, as the group expects to commence the minority initial public offering (IPO) in the first half of 2021, followed by future sell-downs over time, potentially subject to a lock-down period and market conditions.
"In parallel, Moody's will continue to monitor developments in the group-wide supervisory framework by the Hong Kong Insurance Authority, which could be beneficial for the credit profile at the holding company level by including the holding company within regulatory oversight."
The Jackson offload follows Pru's spin-off of its UK and European business M&G PLC, which started trading on the London Stock Exchange in October 2019.
The FTSE 100-listed life insurer and financial services firm said, going forward, it will focus on the "low" insurance penetration in Asia and Africa and the "rapidly developing" demand for savings solutions among the "growing populations" in the two continents.
Moody's continued: "The US business is a meaningful component of the group's operations with profitability representing approximately half of Prudential's reported earnings in 2019, and which has been uncorrelated to that of the Asian business and from an operating environment that is more stable."
Prudential's pretax profit slumped 43% year-on-year to USD663 million from USD1.16 billion. Gross premiums earned slipped 5.9% to USD19.84 billion from USD21.08 billion a year earlier.
Adjusted operating profit in Asia rose by 14% to USD1.73 billion, although issues relating to the Hong Kong operation, most notably the travel restrictions of the lockdown, let alone any geopolitical concerns, resulted in a painful decline of 45% in new business profits.
Group adjust operating profit was down 3% year-on-year at USD3.00 billion, following a 19% drop in its US unit.
Annual premium equivalents - a measure of the new policies sold - fell 27% to USD2.64 billion from USD3.64 billion.
While Prudential Asia benefits from good diversification amongst various Asian markets, Moody's believes there is "meaningful intra-regional correlation", with respect to political, economic and financial markets risk, that "limits the extent" to which the diversified Asian portfolio results in reduced risk to the holding company's earnings and capital.
Moody's added: "More positively, the relatively low capital intensity product mix of Prudential's Asian business limits its balance sheet exposure to financial markets risks, although not to the extent of compensating fully for risk and correlations within the region."
At a group level, Prudential reported a capital surplus of USD12.4 billion and a cover ratio of 334% - up from a previous 309%.
"The rating affirmation reflects Prudential Asia's strong financial profile and Moody's view that the sale of Jackson is not expected to have any material impact on the Asian operations, given that the operations are run separately, or to the group's capitalisation and leverage," Moody's said.
Shares in Prudential closed 2.8% higher in London on Tuesday at 1,267.00 pence each.
By Paul McGowan; paulmcgowan@alliancenews.com
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