Prudential defends rules on ‘fair value’.
By ANDREA FELSTED
15 March 2008
(c) 2008 The Financial Times Limited. All rights reserved
Prudential has defended accounting rules that force companies to state assets at the latest market prices, potentially putting the UK’s second-biggest life assurer on a collision course with some of its big US and European rivals.
American International Group and Axa, two of the world’s biggest insurers, have blamed so-called “fair value” rules for exacerbating the financial market turmoil.
Philip Broadley, outgoing finance director of Prudential and former chairman of the 100 Group of Britain’s finance directors, said he took a “pragmatic” approach to accounting and would present the group’s figures in the way demanded by users of accounts to secure the lowest cost of capital.
“It seems to me from conversations with users of accounts that the balance of opinion is in favour of fair value,” he said.
Although users recognised that fair value was not perfect and that insurers held assets to back very long liabilities, “observable market data seems to be preferred by users to management estimates”, he said.
The comments came as Prudential reported net credit losses of Pounds 78m in the US from writedowns and losses on bond sales, mostly in areas other than subprime mortgages. It took a Pounds 30m writedown on an investment in an Asian collateralised debt obligation fund.
Mr Broadley remained comfortable with the group’s Pounds 912m exposure to assets backed by subprime or by mortgages between prime and subprime as well as with its Pounds 27m exposure to monoline insurers and Pounds 377m in CDO funds, out of its total debt securities portfolio of Pounds 84bn.
But the credit writedowns contributed to a fall in pre-tax profit, calculated under International Financial Reporting Standards, from Pounds 2.22bn to Pounds 1.19bn.
Operating profit, calculated under European em-bedded value principles, rose 25 per cent to Pounds 2.54bn. This was struck after a Pounds 312m charge for holders of annuity contracts living longer, offset by releasing money set aside as a contingency.
Mark Tucker, chief executive, said Prudential might look at a secondary listing in Asia but ruled out spinning off the Asian business into a separately listed entity.
It is prepared for a Chinese insurer such as Ping An attempting to take a stake, although no contact is thought to have been made.
A final dividend of 12.3p (11.72p) makes a total payout for the year of 18p (17.14p), payable from earnings per share of 41.7p (36.2p).
The shares fell 32p to 622p.