LONDON--(BUSINESS WIRE)--Standard & Poor's CreditWire
10/9/98--Standard & Poor's has affirmed its triple-'A' counterparty
credit and insurer financial strength ratings on Pearl Assurance PLC
(Pearl), and its double-'A' senior unsecured rating on AMP (U.K.) PLC.
The outlook on Pearl is negative. These ratings are based on Pearl's
strategic importance to its Australian parent AMP Ltd. (AMP), its very
strong capitalization and financial flexibility, improving operating
performance, and a high-quality, well-diversified investment
Offsetting these factors, Pearl's market position can now be
described merely as good, having deteriorated from an excellent level
in previous years. The debt rating of AMP (U.K.) Ltd. is based on
explicit support from AMP.
MAJOR RATING FACTORS:
-- Extremely strong financial flexibility: Pearl is important to the
global strategy of AMP. AMP considers the U.K. one of the most
fruitful territories in which to allocate its free capital.
Despite its stake in Virgin Direct, and its professed interest in
acquiring a further U.K. life subsidiary, Standard & Poor's
believes that Pearl will continue to represent a significant part
of AMP's U.K. presence for the foreseeable future. Offsetting
this, AMP is pursuing a more aggressive stance toward
capitalization following its demutualization.
-- Capitalization: Pearl currently exhibits extremely strong
capitalization both on a statutory and a realistic basis, but
Standard & Poor's expects free assets to be dissipated, to some
extent, in financing AMP's aggressive acquisition plans or
otherwise leveraging return on equity. Already in 1998 the
Pearl's Long Term Fund has provided UK194 million ($328 million)
to finance the acquisition of Hendersons PLC. Coverage of the
minimum margin reduced to 5.7 times (x) in 1997 from 6.8x in
1996, and the nonlinked free-asset ratio fell to 15.9%. These
levels are still very high, and are achieved, despite using a
relatively strong valuation basis. Pearl's two unit-linked
subsidiaries are also capitalized to a superior level. However,
Pearl's funds may be used to finance some or all of AMP's
acquisition plans, so that its capital could be diluted to some
-- Quality of capital is very good: investment leverage was a
moderate 421.2% at year-end 1997 ,and Pearl has very little debt
on its balance sheet. However, the immediate parent, AMP (U.K.)
Ltd., has debt of UK854 million outstanding, the servicing of
which is largely dependent on dividends from Pearl.
-- Expense performance: despite improving to 18.4% in 1997 from an
astronomical 38% in 1995, Pearl's maintenance expense ratio is
still the worst among rated U.K. life offices. However,
acquisition costs have also reduced considerably and are now
comparable with peers. Overall, relative to the expense
allowances generated out of premiums received, Pearl's cost ratio
has reduced considerably and therefore is no longer eroding
-- Weakened business position: as a long-established Home Service
operator throughout the U.K., with a well-recognized brand name,
Pearl has a strong franchise among its 3.6 million customers.
Nevertheless, Pearl's sales have suffered in line with all Home
Service insurers in the 1990s, and in 1997 it ranked 25th by
sales volume among U.K. life offices. More onerous agent training
requirements and increased product disclosure forced a wholesale
restructuring of the salesforce in 1996. Subsequently, in 1997,
the company achieved a dramatic 49% sales growth, but this still
leaves new business volumes well short of their former glories.
Furthermore, sales in the first half of 1998 have fallen back
again, by 8%.
-- Pearl is well placed to leverage on its strong franchise among
the lower-income groups in selling stakeholder pensions and ISAs
(Individual Savings Accounts). However, depending on the
government's final proposals for these products, the
profitability of stakeholder pensions and ISAs is uncertain, as
is the viability of selling them through a direct salesforce. It
is possible that retailers and direct writers may be the
principal providers of these products, and these may make inroads
into Pearl's traditional stronghold.
-- Capitalization will reduce as AMP makes further acquisitions
using Pearl funds, and as AMP focuses on greater capital
efficiency. However, capitalization is expected to remain in the
double-'A' range in the short to medium term.
-- The maintenance expense ratio will fall substantially in 1998 and
1999, as significant nonrecurring costs cease.
-- No further significant run-off losses from closed MAT (Marine,
Aviation, and Transport) portfolio.
-- Return on equity will remain about 13% per year (fluctuating in
step with U.K. equity markets), Standard & Poor's said.
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