Fitch Ratings has affirmed Quilter plc's (Quilter) and Quilter Life & Pensions Limited's Issuer Default Rating (IDR) at 'A-' and Quilter Life & Pensions Limited's Insurer Financial Strength (IFS) Rating at 'A' (Strong).

The Outlooks are Stable.

The affirmation reflects Quilter's strong company profile, very strong capitalisation and leverage and good profitability.

Key Rating Drivers

'Moderate' Business Profile: We assess Quilter's business profile as 'Moderate' compared with that of other UK life insurance companies. Given this ranking, we score Quilter's business profile at 'a' under our credit factor scoring guidelines.

Our assessment of Quilter's competitive positioning as one of the leading UK-based retail wealth-management businesses is supported by resilient net inflows in 1H22 amid volatile financial markets and economic deterioration. In 1H22, Quilter had net inflows of GBP1.4 billion, 30% less than in 1H21, largely due to lower new sales reflecting the heightened risk aversion of savers. Most of the net inflows were generated through the Quilter Investment Platform.

Overall, assets under management and administration (AUMA) decreased to GBP98.7 billion at end- June 2022, a 12% reduction from end-2021, primarily due to adverse market movements. We expect Quilter's high customer retention rate (1H22: 92%) will continue providing support to the business, partially offsetting the potential decline in gross inflows amid financial market turbulence.

Profitability Improving: Quilter's profitability improved in 1H22 as stable revenue and cost discipline led to an improved operating margin of 20% (1H21: 18%). As a result, adjusted profit before tax increased 9% to GBP61 million. We expect further cost reduction to help Quilter achieve its targets on operating margin by 2025. However, achievement of these targets could be delayed if fee revenue remains under pressure following lower AUMA.

The group's IFRS profit after tax from continuing operations increased to GBP151 million in 1H22, compared with a loss of GBP13 million for 1H21, primarily attributable to a policyholder tax credit of GBP145 million in 1H22 (1H21: a tax charge of GBP48 million). Net income return on equity (ROE) increased to an annualised 19% in 1H22 from 9% in 2021, including Quilter International, primarily reflecting net income growth and equity reduction, following capital return to shareholders. To remove the impact of tax volatility we assess profitability based on an expected five-year average ROE of 7%, including the annualised 1H22 number.

Very Strong Liquidity Management: We believe Quilter's liquidity management is very strong, with sufficient liquidity at the holding company to meet debt servicing and other obligations under a 1-in-200 stress scenario. Holding company cash remained stable at GBP386 million at end-June 2022 (end-June 2021: GBP391 million). This exceeded holding company debt, resulting in a net cash position, unchanged from end-2019's. Shareholder assets are invested primarily in cash and highly rated money-market funds, resulting in negligible investment risk.

Very Strong Capitalisation and Leverage: We view Quilter's capitalisation and leverage as very strong. The group's Prism Factor-Based Capital Model (Prism FBM) score was 'Extremely Strong' based on end-2021 figures, unchanged from 2020's. The group's Solvency II (S2) ratio remained high at 219% at end-June 2022 (end-2021: 275%). The decrease in the group S2 ratio from 2021 was primarily due to a GBP328 million capital return from the net proceeds arising from the Quilter International disposal. Quilter's S2 ratio remains broadly insensitive to market movements due to the unit-linked nature of the business. Financial leverage was unchanged at a low 10% at end-2021.

RATING SENSITIVITIES

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

A sustained improvement in earnings, reflected by a ROE above 9% while maintaining a strong business profile could lead to an upgrade

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

A decline in ROE to below 5% for a sustained period

Deterioration in business profile, as measured by a sustained weakening in Net Inflows or a weakening market position

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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