LONDON, Oct. 9 /PRNewswire/ -- 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 portfolio.
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 extent.
-- 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
-- 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 capital significantly.
-- 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
-- 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
-- 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. -- CreditWire
SOURCE Standard & Poor's
/CONTACT: Martin Lees, 44-171-826-3651, or Corinne Cunningham,
44-171-826-3550, both of Standard & Poor's, London/
/Web site: http://www.ratings.standardpoor.com/
CO: Pearl Assurance PLC
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