Fitch Ratings has affirmed M&G plc's Long-Term Issuer Default Rating (IDR) at 'A+'.

It has simultaneously affirmed M&G's main operating company, The Prudential Assurance Company Limited's Insurer Financial Strength (IFS) Rating at 'AA-'. The Outlooks are Stable.

A full list of rating actions is below.

Key Rating Drivers

The ratings reflect M&G's business profile, capitalisation and leverage, and asset-liability management (ALM), all of which Fitch assesses as 'Very Strong'. In addition, we assess the group's debt service capabilities and financial performance as 'Strong'.

Our view of M&G's business profile reflects the group's assets under management and administration (AUMA) at GBP370 billion at end-2021 (end-2020: GBP367 billion) and resilient, albeit still low, net inflows. M&G's institutional net inflows were strong at GBP5.8 billion in 2021; however, retail net inflows remained negative, albeit reduced to GBP3.8 billion from GBP11.9 billion in 2020. M&G is working on strengthening its retail asset management franchise, and has implemented a series of measures to that end, including developing new propositions, expanding its geographical footprint and reducing prices to levels more in line with competitors. We expect these actions to support our view of M&G's business profile.

M&G's net outflows were GBP6.3 billion in 2021 (2020: GBP13.2 billion), including retail and savings business (traditional with-profit and annuity books in run-off and wealth), as GBP600 million of net inflows on the open book were more than offset by the expected GBP7 billion of net outflows on heritage business. Positive market movements helped to offset the completion of Part VII annuity transfer to Rothesay, which reduced AUMA by about GBP10 billion.

Our assessment of M&G's capitalisation is based on an 'Extremely Strong' score in Fitch's Prism Factor-Based Capital Model (Prism FBM) at end-2021. This is reinforced by a Fitch-calculated Solvency II (S2) solvency capital requirement (SCR) ratio of 254% at end-2021 (end-2020: 211%), including full credit for the surplus in its with-profits fund. We also view its exposure to interest-rate risk as marginal, due to the close match of annuity assets and best-estimate liabilities cash flow on its annuity book.

M&G's financial leverage ratio (FLR) remained low at 13% at end-2021, commensurate with its ratings and significantly stronger than similar rated peers'. The ratio benefits from the high, relative to peers', unallocated surplus in the with-profits funds, which is included in our FLR calculation. We expect M&G's financial leverage to remain within the 'aa' rating category.

We expect that rising interest rates may have an indirect negative impact on M&G's profitability. M&G's asset management operating profit is a function of the charges levied on unit-linked and asset management AUMA and are likely to reduce following the AUMA reduction due to the rising interest rates. Main inflation exposure arises through increasing expenses, although we view this as moderate.

M&G's underlying performance remained strong, although reported adjusted operating profit decreased to GBP721 million in 2021 (2020: GBP788 million), primarily owing to the lower benefits from changes to longevity assumptions in 2021. However, profit after tax is volatile having reduced to GBP92 million compared with GBP1,142 million in 2020, mainly driven by GBP537 million loss from short-term fluctuations in investment return and also reflecting accounting variance stemming from mark-to-market valuations of hedges in place to protect S2 capital positions against lower interest rates and equities market drop. We expect M&G's pre-tax profitability to continue to be volatile.

M&G's fixed-charge coverage (FCC) remained broadly unchanged at about 6x in 2021. We expect the FCC run-rate to remain above 5x in the medium term.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Weakening of business profile as evidenced, for example, by sustained net outflows or significant reduction in operating scale

Sustained weakening of the group's FCC to below 5x

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Significantly increased geographic and product diversification along with business growth that is both profitable and prudently managed

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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