Prudential plc posted an 8% year-on-year increase in adjusted operating profit at constant currency in 1H2022, Fitch Ratings notes, rating Prudential’s financial performance as “very strong”.

The focus on higher-margin health and protection products contributes to long-term profitability. Return on equity from continuing operations (Asia and Africa) was 15% in 2021. The group experienced negative investment returns in HY22 due to lower asset prices amid rising interest rates. interest and falling stock markets.

Annualized prime equivalent sales of Asian and African businesses increased 9% year-over-year at constant currency in 1H2022, even amid resurgence of COVID-19 infections and associated disruptions from 1Q2022 on many Asian markets where the group operates. New business income decreased by 5% due to higher interest rates in most markets and a higher share of premiums from savings products sold through bancassurance, which generate lower margins. New business margin was 50%, compared to 56% in HY2021, and averaged 62% in 2019-2021.

Confirmed ratings

Fitch has affirmed Prudential’s long-term issuer default (IDR) rating of ‘A’. The outlook is “stable”. This assertion reflects Prudential’s strong capitalization, stable financial leverage, “most favorable” company profile and track record of financial performance. This is despite a reported investment loss in 1H2022 due to negative movements in financial markets during the period.

Fitch also maintains an opinion on the credit profile of Prudential’s subsidiary, Prudential Corporation Asia, as the global credit rating agency considers it a central operating entity under its group rating methodology.

Main rating factors

In addition to financial performance, Fitch says Prudential’s ratings are determined by the following key rating factors:

Solid capitalization: Fitch considers Prudential’s capitalization to be “very strong” at the end of 1H2022, with the group’s capital score well within the “Extremely strong” category, as measured by the Fitch Prism Model. The group-wide prudential capital position was strong, while the shareholder coverage ratio within the group minimum capital requirements stood at 548%, compared to 545% at the end of 2021, on a proforma. This takes into account the early adoption of the venture capital regime (RBC) in Hong Kong and the phase II of the risk-based solvency system in China.

Prudential has started reporting on its group solvency position based on group prescribed capital requirements as the industry moves to the RBC regime. The group’s shareholder surplus amounted to 16.2 billion dollars, with a coverage rate of 317% at the end of 1H2022.

Stable financial leverage: Prudential repaid $3.0 billion of subordinated notes in December 2021 and January 2022. This was funded by equity raised in October 2021 and the proceeds of $1 billion of subordinated notes issued in November 2021. The ratio of financial leverage of 17% at the end of 1H2022 was well below the guidelines for insurers rated “AA”. Fitch expects this ratio to remain commensurate with short-term ratings, given the group’s plan for its ongoing debt program in response to rising interest rates.

“Most Favorable” Company Profile: The group’s corporate profile reflects a ‘most favorable’ corporate profile and ‘moderate/favourable’ corporate governance compared to other life insurers in Hong Kong. This considers Prudential’s leading business franchise in key Asian markets, its established and less volatile business alongside diversified distribution channels, which include a productive and strong agency force, bancassurance and a digital platform.

High risk asset ratio: The adjusted risky assets ratio remained elevated at the end of HY2022, mainly driven by equity investments held by the profit-making business in Asia. This may expose Prudential’s earnings to stock market volatility. However, a significant separate surplus has been built up over the years to smooth the volatility of investment returns, limiting the impact on the group’s equity in an unfavorable macroeconomic environment.