Two major U.K. insurers--Prudential PLC (PRU.LN) and Standard
Life PLC (SL.LN)--on Tuesday expressed confidence in their
businesses in the coming year despite economic uncertainties, but
they also warned about the possible negative impact of upcoming
Europe-wide capital rules for insurers called Solvency II.
The warning adds to increasing worries that Solvency II wouldn't
be passed into law in time for its scheduled transitional
implementation beginning in January next year.
Tidjane Thiam, chief executive of Prudential, the U.K.'s largest
insurer by market value, said that "we are well-positioned to
deliver continued relative outperformance in the medium-term,"
helped in part by the company's strong presence in the growing
markets of Asia.
Prudential posted a 4% rise in 2011 net profit to GBP1.49
billion from GBP1.43 billion a year earlier. This comes even as
total revenue fell 23% to GBP36.5 billion from GBP47.6 billion a
year earlier.
The revenue figure was hit in part by huge fall in investment
returns. However, the net profit figure was boosted in part by a
smaller amount paid in claims and benefits to customers.
Operating profit, more closely followed by analysts because of
its focus on core business operations, rose 7% to GBP2.07 billion
from GBP1.94 billion in 2010 as the company had a strong
performance in Asia.
The result is higher than a GBP1.99 billion average forecast
from 24 analysts.
For the first time, Prudential's life insurance business in Asia
became the single largest contributor to total operating
profit.
David Nish, CEO of Standard Life, said that though economic
backdrop remains uncertain, "we are well on track to achieve an
ongoing improvement in financial performance," helped by its strong
capital position and continued improvements in operational
efficiency.
Standard Life posted a 31% fall in 2011 net profit to GBP298
million from GBP432 million a year earlier. This came as total
revenue fell by 51% to GBP9 billion due to a huge fall in
investment returns. Standard Life also paid a bigger amount in
claims and benefits to customers compared to the previous year.
However, the key operating profit figure showed a strong 28%
rise to GBP544 million from GBP425 million in 2010, helped by a
stronger performance in its Canadian and asset management
businesses. The result is also higher than a GBP476 million average
forecast from 19 analysts.
Prudential increased its full-year dividend by 5.6% to 25.19
pence a share, while Standard Life raised its dividend by 6.2% to
13.8 pence a share.
At 1317 GMT, Prudential shares were up 1.5% at 739 pence, while
Standard Life was up 0.1% at 238 pence, and the FTSE 100 index was
up 0.7%.
Panmure Gordon analyst Barrie Cornes said Prudential "has
delivered a strong set of year-end results despite the tough
comparator of last year, and has confirmed that it remains on track
to meet stretching targets for 2013 profit growth and cash
generation, which we view as very positive." Cornes kept his buy
rating and target price of 924 pence on the stock.
Shore Capital analyst Eamonn Flanagan said Standard Life's
operating profit and dividend were better than he expected.
He noted that Standard Life warned that new business sales may
be hit by the poor economic backdrop and weak consumer confidence
in the first quarter, but said that "the group's focus on costs
should alleviate some of this pressure on the top-line, with the
group committed to a progressive dividend policy."
Flanagan kept his hold rating on Standard Life.
In separate briefings, Prudential and Standard Life raised their
concerns regarding Solvency II.
Prudential's Thiam said one major question regarding the new
capital regime is whether it should cover the non-EU businesses of
EU insurers like Prudential, AXA SA (CS.FR), Allianz SE (ALV.XE),
ING Groep NV (ING) and Aegon NV (AEG).
"The EU can say, 'We'll allow [E.U. insurers] with companies in
the U.S. to run those companies as they always have.' That is
what's called equivalence. If they say the U.S.'s regime is
equivalent to Solvency II--end of the story. That's what the
industry wants, not just us, but all the people who'd been
successful in the U.S., like AXA, Allianz, ING and Aegon," Thiam
said.
"We think that the U.S. has a reasonable solvency regime and all
we want is for the EU to accept that," he said.
There are concerns that EU insurers would have to hold extra
capital to protect their U.S. businesses if the EU doesn't
recognize the "equivalence" of U.S. solvency rules.
"The EU might ask us to run our businesses in the U.S. on a
Solvency II basis. And I can tell you that fighting U.S.
competitors who don't need to worry about Solvency II--we just
won't have a market, we won't be able to sell our products at all,"
Thiam said.
Thiam reiterated that Prudential is looking at whether it should
move its headquarters away from the U.K. due to the uncertainties
surrounding Solvency II.
Standard Life Chief Financial Officer Jackie Hunt said her
company is also concerned over "equivalence" in Canada, where
Standard Life has strong business.
"For us, clearly, if we don't get equivalence for our Canadian
business, the impact is that it would be quite difficult to compete
with North American insurers on an equal footing in Canada and to
maximize the regulatory capital position from the European
perspective," she said.
"Fundamentally, it would be quite difficult to manage an
insurance company with two regulatory regimes--the local plus the
European," Hunt said.
- By Vladimir Guevarra, Dow Jones Newswires. Tel. +44 (0)
2078429486, vladimir.guevarra@dowjones.com