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Ratings agencies
Pru chief attacks rating agencies
Sceptical view of life insurer’s main product is ‘major block’ to US operation

Tidjane Thiam

Alistair Gray, Insurance Correspondent DECEMBER 17 2014

Prudential’s chief executive has accused credit ratings agencies of failing to properly
understand the UK-based life insurer’s US operation, complaining that their sceptical
view of its main product is a “major block” to the division.

Tidjane Thiam said the agencies mistakenly regarded “variable annuities” (VAs) —
among the most popular savings and retirement income products for Americans — as
“low quality” when in fact the returns for the Pru were “extremely attractive”.

Rating agencies, which assess companies’ creditworthiness, are cautious about VAs.
The products tend to offer consumers guaranteed returns even though they invest in
risky assets, such as equities.

Fitch has said some variable annuity products “give rise to risks that are complex,
long-tailed, and difficult to price, hedge and reserve for” while Moody’s has called
them generally “less creditworthy” than traditional policies.
Several competitors to the Pru have shut down or scaled back their VA operations
after running into difficulties in the wake of the financial crisis.
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a te u g to d cu t es t e wa e o t e a c a c s s.

However, Prudential — which operates Jackson National Life in the US — has made
an aggressive push into the VA market while rivals have retreated.

Jackson has become the country’s largest seller of the product ahead of Lincoln
Financial, AIG and TIAA-CREF, according to the financial services trade association
LIMRA.

But although Jackson has strong credit ratings — Standard & Poor’s rates it AA, close
to the top of its scale — Mr Thiam suggested these could be at risk if it sold more VAs.

He said: “Frankly we should be writing a very large volume of business. But then you
have rating agencies. The rating agencies are a major block in this because they
consider it a relatively low quality business.”

“They will only allow you to write so much of it whilst keeping your rating.”

Speaking at Prudential’s investor conference in Singapore, Mr Thiam said that while

other providers had encountered problems writing VAs, those sold by Jackson were a
“good product”.

“I really think it’s a lack of understanding of the product that’s at the heart of all this.”

Prudential’s chief executive also said investors were wary of the business and accused
regulators of “very poor thinking” as they thought “some people who wrote VAs blew
up, therefore VAs are bad”.

Jackson’s advance into the VA market has made the US — alongside Asia and the
asset management arm M & G — an important growth engine for Prudential, whose
shares have more than doubled in three years.

Still, Mr Thiam has been clear that he regards the group’s focus for expansion as Asia,
not the US.

At the same conference, the chief executive said he wanted the UK’s most valuable
insurance group to be “ 30 times bigger” in Asian markets.
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su a ce g oup to be 30 t es b gge sa a ets.

“We do not have a top line growth objective at Jackson,” he added. “We want to grow
the asset base and thus the net flows, but in the market that has had such issues in the
past, I do not think we will ever commit to a growth target.”

Jackson has in recent months been selling more of an alternative product it calls “
Elite Access”, which does not offer guarantees. Sales of these rose 29 per cent over the
first nine months of the year.

Despite this, the rating agency Moody’s said in a report this month that Jackson
“continues to have significant exposure to equity markets via its variable annuity
products, which we generally consider less creditworthy than standard insurance
products”.

Similarly, Fitch said in a report in September: “While Fitch recognises Jackson’s track
record of pricing discipline and effective risk hedging on VAs through economic
cycles, it nevertheless views the rapid growth as negative from a credit perspective.”

Moody’s, Fitch and S&P declined to comment on Mr Thiam’s remarks.

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