Prudential Plc Boosts Capital by Shedding Taiwan Unit (Update3)

By Kevin Crowley
Bloomberg News
February 20, 2009

Feb. 20 (Bloomberg) -- Prudential Plc, the U.K.'s second- largest insurer, said its capital surplus will increase by 800 million pounds ($1.13 billion) after turning over almost all of its liabilities in Taiwan to China Life Insurance Ltd.

Prudential will transfer its Taiwanese sales force and 94 percent of its liabilities on the island to China's biggest insurer for a nominal sum, the London-based insurer said today in a statement. That will increase Prudential's capital surplus to 2.5 billion pounds from 1.7 billion pounds once the deal is complete. The shares rose as much as 12.7 percent.

"It's fantastic news that they've been able to get rid of all bar 6 percent of their exposure to China Life," said Kevin Ryan, a London-based analyst at ING Groep NV who has a "buy" rating on the stock. "The legacy business was loss-making and always going to be loss-making."

The deal boosts Prudential's capital as the U.K. Financial Services Authority asks life insurers to demonstrate their ability to withstand falling stock markets and increasing bond defaults if the recession worsens. It also allows Prudential to shed products that pay guaranteed returns, which reduced profitability after Taiwan began cutting interest rates in 2001.

Prudential will continue selling insurance products through banks and other marketing operations in Taiwan, Barry Stowe, chief executive officer of Prudential Asia Corp. said during a briefing today in Taipei.

"Taiwan is one of the best places to do business in Asia for insurance companies and we will continue to be here," he said.

No Lay Offs

About 11,000 people who work for Prudential insurance agencies in Taiwan will be transferred to China Life, which has promised not to fire anyone until the deal is completed in six to seven months.

Prudential rose 28.25 pence, or 11 percent, to 284.75 pence as of 12:28 p.m. in London trading as the seven-member FTSE 350 Life Insurance Index rose 1.2 percent. Prudential's market value climbed to 6.9 billion pounds.

The life insurance index has fallen 30 percent this year on speculation insurers may be forced to sell shares or cut dividends to boost reserves to cover potential losses. Prudential said its capital surplus would fall by 350 million pounds if equity markets fall 40 percent from their year-end levels.

Capital Strength

An insurer's capital "is the only thing the market's worried about at the moment," said Trevor Moss, a London-based analyst at MF Global Securities Ltd. who has a "buy" rating on the stock. Prudential's surplus "was substantially stronger than people were expecting and the exit of this Taiwanese business is also helpful to that."

Prudential also said it plans to spend 45 million pounds to buy 10 percent of China Life through a share placement. The stake will be a "source of incremental value," according to the statement.

Beijing-based China Life was Taiwan's seventh-largest life insurer by assets, and Prudential the 12th largest, at the end of the third quarter, according to the Taiwan Insurance Institute.

Prudential's capital surplus was 1.4 billion pounds on Dec. 31, the company said in a separate statement. It increased by 300 million pounds after the FSA agreed to let Prudential include reserves from its U.K. so-called with-profits fund.

The fund, which was worth 1.7 billion pounds at the end of 2008, is meant to smooth returns over time to reduce the impact of market swings.

"The group's capital position has remained strong and robust during 2008 in what was an extraordinary year of equity market volatility, falling interests and high corporate spreads," Chief Financial Officer Tidjane Thiam said in a call with reporters.

AIG Asset Sales

Chief Executive Officer Mark Tucker, who last year expressed interest in buying parts of American International Group Inc.'s Asian business, refused to comment on specific acquisitions during today's call.

"We're seeing a number of opportunities across the world now and we are looking at those," Tucker said.

New life and pension sales for the year to Dec. 31 measured on a so-called annual premium equivalent basis rose 1 percent to 3 billion pounds, matching the consensus of 18 analysts surveyed by the company. Fourth quarter revenue, measured at actual exchange rates, was down 21 percent to 708 million pounds, after sales of insurance products in India, Korea and Singapore declined by at least 30 percent.

Copyright © 2009 FBIC (

Click here to return to FBIC homepage