A.M. Best Downgrades Ratings of The Prudential Assurance Company Limited and Its Parent, Prudential Plc; Revises Outlook to Stable

Business Wire, Feb 8, 2005

OLDWICK, N.J. -- A.M. Best Co. has downgraded the financial strength rating of The Prudential Assurance Company Limited (PAC) (United Kingdom) to A (Superior) from A (Superior). At the same time, A.M. Best has downgraded the issuer credit rating of PAC's non-operating parent company, Prudential Plc (Prudential) (United Kingdom), to "a " from "aa-". Accordingly, the ratings of the debt issued or guaranteed by Prudential have been downgraded. (See list below.) The outlook for all ratings has been revised to stable from negative.

The rating actions reflect A.M. Best's opinion that Prudential is unlikely to generate sufficient levels of earnings in order to support its growth in the U.K. life market, with prospective capitalisation stabilising at levels commensurate with the current rating. Prudential has a superior business profile, which is under pressure in the U.K.

Superior business profile--A.M. Best believes that Prudential's consolidated insurance gross written premiums (GWP) will increase by approximately 4% in 2005, reflecting the increased demand for annuities and pensions in the U.K. and the stable sales growth in the U.S. and Asia. This is an enforced change in Prudential's U.K. life strategy, which has seen demand for its core with-profits business decline over the last two years. While differentiating itself from main competitors, Prudential's new strategy also increases execution risk as it forces the company to strike a difficult balance between growth and optimal business mix.

Excellent earnings but insufficient to maintain superior risk-based capitalisation--Prudential's pre-tax profit is likely to continue improving in 2005 due to the higher proportion of equity backed U.K. life products written over the last four years. Earnings from the with-profits fund, the group's largest contributor of earnings (46% of 2004 consolidated operating profits), begin to stabilise due to the impact of the reduced bonus declarations of recent years. A.M. Best believes that prospective profit growth is insufficient to provide adequate levels of retained earnings for the new business profile. The growth in the U.K. life business and the Asian operations will increase new business strain and the company's negative cash flow.

Deteriorating risk-based capitalisation--A.M. Best believes that Prudential's consolidated risk-adjusted capitalisation is deteriorating due to the increased volumes of high-risk equity-backed products but will stabilise to levels commensurate with the current rating. Quality of capital is also deteriorating as the strong growth in the U.K. and Asia results in increasing levels of deferred acquisition costs (DAC). Capitalisation of the with-profits fund is stabilised due to depressed new business volumes. A.M. Best is concerned that potential failure to achieve optimum business mix in the U.K. life market will result in reduction in consolidated profits, increasing the need for additional capital.

The following debt ratings have been downgraded:

Prudential plc--

--senior debt to "a " from "aa-"

--subordinated debt to "a-" from "a"

--commercial paper programme to AMB-1 from AMB-1

For Best's Debt Ratings, all other Best's Ratings, an overview of the rating process and rating methodologies, please visit http://www.ambest.com/ratings.> A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at http://www.ambest.com.