S&P revises its outlook on Prudential entities

Our Banking Bureau
26 July 2002
London: Following its change in ratings of the UK life insurance market to negative from stable, Standard and Poors (S&P) has revised its outlook on the operating entities of the Prudential insurance group. S&P has revised the outlook for the group as well as the group holding company Prudential Plc to negative from stable.

The outlook revision reflects concerns about the impact of continued fall in equity markets on the UK life sector and on requirements for the Prudential group to support increased credit risk in its US operations through Jackson National Life Insurance Company.

The negative outlook is not a precursor to a downgrade, says Hans Wright, director, S&P Financial Services Group, London. Financial flexibility the ability of companies to source capital relative to capital requirements is reduced as life fund capital is used to smooth investment losses to policyholders and shareholders capital to cover credit exposures in the US. In addition, while liquidity is available, it will prove more difficult to raise long-term capital in the current market conditions, whether by means of fresh equity, debt, or reinsurance.

Although Prudential Assurance remains very strong relative to most other players in the UK life market, the support from shareholders capital required for the core US operations and financial leverage at the holding company level creates an additional strain for the group.

If equity markets continue to fall and Prudentials capitalisation significantly weakens with no prospect of recovery in the short to medium term, the ratings on the group could be lowered, but would remain very strong in the double-A range, adds Wright.