U.K.’s Prudential Says Low Interest Rates ‘Challenging’ Insurers

Prudential Plc CEO Tidjane Thiam
Prudential Plc Chief Executive Officer Tidjane Thiam said, “The most significant headwind we have had to face in recent times is clearly the current level of interest rates and the shape of the yield curve.” Photographer: Chris Ratcliffe/Bloomberg

Prudential Plc, the U.K.’s biggest insurer by market value, said record low interest rates aimed at boosting global growth have created a “challenging” environment for insurers.

Governments’ continued attempts to resurrect developed economies by lowering borrowing costs is reducing the long-term yield insurers earn from their invested assets and constraining growth, Chief Executive Officer Tidjane Thiam said today on a conference call with reporters.

“The most significant headwind we have had to face in recent times is clearly the current level of interest rates and the shape of the yield curve,” Thiam said. “Prudential benefits in that context from a few specific factors which have allowed us to continue to grow, albeit more slowly in this challenging environment.”

Prudential grew quicker and more profitably than U.K. competitors, including Aviva Plc, in the first half because of its businesses in Asia, where it’s the top seller of life insurance in six of the 12 markets in which it operates. The region contributes almost half its revenue. Still, record low interest rates in Europe and the U.S. and monetary stimuli elsewhere in the world make long-term profitability more difficult, Thiam said today.

Not Immune

“We cannot claim to be immune from the challenging macroeconomic environment in which we all operate,” Thiam said. Demand for health insurance and income-protection products from the growing middle classes of south-east Asia such as Indonesia and Thailand and baby boomers retiring in the U.S. will help offset the tough earnings environment, he said.

The stock declined 0.4 percent to 800.5 pence a share at 12:30 p.m. in London trading, valuing the firm at about 20.5 billion pounds ($32 billion).

Prudential today said first-half operating profit rose 13 percent to 1.16 billion pounds in the first six months of the year, beating the 1.11 billion-pound estimate of 10 analysts surveyed by Bloomberg. Sales in Singapore climbed 37 percent to 141 million pounds and by 30 percent in Indonesia to 206 million pounds.

“This good news is already fully reflected in the share price,” Kevin Ryan, a London-based analyst at Investec Plc with a hold rating on the stock wrote in a note to clients today.

‘On Track’

Prudential is the second-best performer of the FTSE ASX Life Insurance Index this year, rising 27 percent as it avoided the European sovereign debt crisis by focusing on selling life insurance in Asia. The insurer, which gets 80 percent of its revenue from outside the U.K., is “on track” with its plan to double 2009 Asia profit and boost cash generation by next year, Thiam said.

Once Prudential meets these targets, it will have the option to sell or spin off its various divisions, Thiam said in March. Having that potential will help boost the company’s share price even if it is not used, he said.

Prudential increased its first-half dividend 5.7 percent to 8.4 pence a share, matching the analysts’ estimate. Net income increased 15 percent to 952 million pounds.

The company is considering a move into Burma and Cambodia as those nations have the potential to increase gross domestic product rapidly in the coming decade and their populations are relatively under-insured compared to other Asian countries, Thiam said.

Prudential this year threatened to quit the U.K. due to the European Union’s Solvency II regulations, which it says overly penalize European insurers with operations in the U.S. Thiam said in March the new rules would leave the firm unable to compete in the U.S. because it would be forced to hold extra capital reserves.

For the past few months news from Brussels on Solvency II has been “positive” and the U.K. authorities “seem to indicate that we will get U.S. equivalence, which in our jargon means we won’t have a problem with the U.S. business,” Thiam said. Hong Kong would be an option to relocate to if the rules didn’t work out as planned, he said.

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