Prudential sets out capital reassurances

Insurer Prudential today set out to allay capital strength fears with news of a £1.7 billion buffer and annuity funds that could withstand a repeat of the Great Depression.

The group said even if equity markets plunged by another 40 per cent since the end of last year, its capital surplus would reduce by £350 million.

Pru's assurances came as the group announced better-than-expected full year new business figures, with UK sales ahead by 4 per cent at £947 million in 2008.

The group reported a 5% rise in worldwide insurance sales, to £3.02 billion from £2.87 billion the previous year.

But it revealed a worsening picture in the fourth quarter of 2008 as it battled against "extremely" challenging market conditions.

Pru's total sales plunged by 11% in the final three months of the year to £708 million compared with the previous quarter.

UK sales were worst hit, down by more than a third - 35% - to £201 million.

The figures showed a 95% slump in UK wholesale business between the third and fourth quarters.

Pru said it had taken a number of steps to bolster its capital strength in response to the declining economic and equity market conditions.

It has used part of the annual transfer paid to shareholders from its with profits fund "inherited estate" to boost regulatory capital surplus by £300 million, with clearance from the Financial Services Authority (FSA).

Pru announced in June that it would not go ahead with any surplus payouts to with-profits policyholders as stock markets plunged.

It added today that it has the ability to tap into the inherited estate shareholder income again if needed to increase its capital buffer.

Pru also announced a deal in Taiwan, which it said would further boost its capital strength by another £800 million when it completes.

Insurance stocks have been pounded recently as concerns have mounted over their balance sheet strength, with reports suggesting the FSA was to force firms to put aside even more money to cope with severe market conditions.

Shares in Prudential raced 10 per cent ahead on news of its capital strength and the better-than-expected figures.

Pru claimed that as well as the ability to withstand equity market falls, its £1.4 billion annuity fund reserve could weather a repeat of the defaults seen during the Great Depression every year for 10 years.

Panmure Gordon analyst Barrie Cornes said the Taiwan deal - which sees Pru offload 94 per cent of its liabilities to China Life - should be "taken well".

Pru will retain an interest in the region by buying a near-10 per cent stake in China Life, which is one of Taiwan's fastest growing insurers.

The sale of its agency distribution business to the group will also see Pru's capital excess hiked to around £2.5 billion.

"Overall we think this is a good move - Pru is still very committed to Asia and this disposal removes a thorn in the Asian business," said Mr Cornes.

Pru is also reportedly interested in buying the Asian assets of struggling US insurance giant AIG.

Mark Tucker, chief executive of Pru, declined to comment on any such acquisition plans, but said the group was being "presented with many opportunities in the currency market dislocation".

"We'll see if it makes sense to our shareholders," he added.