Low interest rates dent quarterly profits at Prudential

Prudential has become the latest insurance group to feel the pinch from rock-bottom interest rates, unveiling a dip in quarterly profits less than four weeks before the departure of its chief executive Tidjane Thiam.

In a sign of headwinds facing Mr Thiam's successor Mike Wells, the Pru on Wednesday disclosed an 11 per cent decline in year-on-year new business profits to £496m for the first quarter, assuming currencies had been constant.

The continued push by the London-listed insurer into fast-growing Asian markets failed to offset earnings weakness in the UK and US.

Even so, Mr Wells indicated he would keep the group's structure intact, despite occasional calls from investors and analysts for the London-listed insurer to consider asset sales or spin-offs.

"You'll see our current strategy plus. It's clearly outperforming anything else we see out there. There's nothing material that needs to be done here."

Of the UK and US, he added: "These are two very important markets . . . We like 'em."

Under Mr Thiam, who is leaving to run Credit Suisse, the Pru has coped with the macroeconomic pressures better than many of its rivals. Booming Asian markets have helped the shares almost treble during his six-year tenure.

However, his final set of financial results demonstrate that even the sector's strongest companies are under strain from central banks' loose monetary policies.

Weak bond yields are hurting returns from insurers' fixed income-dominated investment portfolios. Insurers are also under pressure on the other side of their balance sheets, as low interest rates are used to calculate the size of their liabilities.

Mr Thiam highlighted that the Pru had taken steps to become less exposed to movements in bond yields, such as selling more fee-based investment products under which consumers bear investment risks. 

Nevertheless he recognised persistently low interests were a "significant headwind".

"We're not the only ones who hope there will be a normalisation of the yield curve," he added.

"At a global economic level, very low interest rates have a lot of perverse effects . . . We just have to make sure that we're not caught in a spiral of lower investment, lower growth, lower jobs."

In Asia, the Pru's new business profits - a way of measuring life assurers' earnings - rose 22 per cent in the first quarter. The group is selling insurance to an increasingly prosperous middle class in markets such as Thailand, Vietnam and the Philippines.

Elsewhere, investors poured a net £700m into the insurer's asset management arm, M&G, which has been making a push to win retail business in continental Europe. M&G's total funds under management hit a new high of £270bn.

However, earnings came under pressure at the Pru's insurance operations in the UK and US, where the group has sought to "prioritise value over volume".

"As a company we just don't focus on sales," Mr Thiam added. "As an insurance company that's the surest way to get into trouble."

At the US division, run by the incoming group chief executive Mr Wells, earnings fell 28 per cent as the operation wrote less "variable annuities", which offer savers minimum guaranteed returns.

Still, the group highlighted a rise in the division's asset base to £89bn, reflecting business written in prior years.

"The evolution of the asset base is a key driver of profitability and over time is a more meaningful indicator than the volume of quarterly sales," the results statement said.

New business profits at the Pru's UK retail business fell 11 per cent, hurt by a sharp fall in individual annuity sales caused by the government's liberalisation of the pensions system, as well as low interest rates.

An absence of lumpy "bulk" annuities - insurance deals with corporate pension schemes - meant the UK wholesale business wrote no new business during the first quarter.

A year ago the wholesale division generated £50m worth of earnings from pensions de-risking transactions, under which the insurer takes on liabilities from company retirement schemes in return for a fee.

Group-wide sales on "annual premium equivalent" basis - another insurance-specific metric - were broadly flat during the period, but margins came under pressure.

Still, the Pru benefited from favourable foreign exchange movements. On an actual currency basis, the group-wide decline in new business profits was a less steep 6 per cent.

Shares dipped 0.3 per cent to £16.07.

Meanwhile, ahead of the UK general election on Thursday, Mr Thiam reiterated his warnings about the threat of the country leaving the EU.

"You will have heard us over the years complain about [the EU insurance rules] Solvency II and so on but it's not a reason to leave the EU," he said. "The benefits outweigh the disadvantages in the long term."

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation