Friday, February 26, 2010

Prudential Are Asian Lapses a Worry?

 Are Asian Lapses a Worry?

• Protecting Asian growth — Prudential’s Asian embedded value has grown by 27%
CAGR over the last four years, contributing 40% of total new business profits and
group embedded value.
The ability to balance this “accumulated growth” with
future “accumulating growth” will be the key to driving future profitability. This
note conducts a detailed operational risk assessment on Asian lapses. We raise
our Target price to 760p from 747p per share to mainly reflect market movements.

• Asian operational risks overstated — Asian operational risks are overstated with
embedded value being helped by a 3% overall uplift over the last nine years with
positive mortality/morbidity experience offsetting lapse charges. Over the last nine
years, total lapse charges have been an adverse £63m (1% of EEV).

• Marginal lapse impact — Our bottom-up country by country lapse impact
assessment accounts for c90% of Prudential’s exposure in Asia. We believe the
Asian EEV could be diluted in a worst case scenario by 4% (£210m) due to
additional lapse charges. Our best case scenario results in a neutral position with
no charges. At worst we expect restated FY08 lapses to be 12% higher, with FY09
5% higher YoY. Despite higher lapses in FY08, Asian in force, however, has grown
at 17% CAGR over 1H09/FY07. Given the marginal impact, we remain assuaged
about lapse risks within the Asian business.

• Core markets in fine fettle — Prudential’s core Asian markets of Hong Kong,
Singapore and Malaysia (71% of EEV)
have seen stable persistency. Indeed,
across the core markets, lapse rates have declined significantly from the late
90s/early 2000s. Of the other markets, lapses have been higher than market
average in Korea and India, and lower than market average in Indonesia.

•Key risks — Solvency II capital requirements, US credit defaults and macro
uncertainty remain key risks.


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