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Investment losses hit Prudential

19 March 09 13:17 GMT

The UK's largest insurance company, the Prudential, has reported a pre-tax loss of £2.1bn for 2008, a sharp turnaround from its profit of £3.7bn in 2007.

The company said the loss was down to £5.1bn of write-downs on investments.

However, operating profits rose 17% and it said its performance had been "very strong" in "exceptional circumstances".

Prudential chief executive Mark Tucker, who announced he would step down this autumn, said the company was one of the strongest insurers in the world.

The company warned investors that 2009 would be challenging but said it still had very healthy financial reserves.

"Our prudent but proactive approach has ensured our group capital and cash position remains very robust, with an estimated [capital] surplus of £1.7bn, which will increase by £800m on completion of the transfer of our Taiwanese agency business," he said.

"Prudential... maintained a healthy capital position despite the banking liquidity crisis in mid-year and the onset of the most severe worldwide recession in more than a generation," he added.

Prudential's operating profits were up 17% to £2.96bn, much higher than analysts' expectations.

Shares in Prudential were up 25% in lunchtime trade at 316.5p, with many UK financial stocks enjoying a strong gains following the US Fed's decision to buy $1.2tn of debt in order to boost the US economy.

Depression

The Pru explained that it had sufficiently strong reserves to withstand losses on its investments similar to those experienced by investors in the great depression of the 1930s.

It said it could withstand:

• an instant 40% further fall in share prices from their value at the end of 2008

• a 1.5% reduction in interest rates from 31 December 2008

• defaults on bonds at a rate 10 times higher than it was currently expecting.

The insurer revealed that one of its its main problem areas was with the investments made by its US insurance operation Jackson.

There, its £24bn portfolio of bond investments had recorded losses because of bad debts of £624m.

The Pru warned there were further, unrealised, losses in that portfolio of £3.2bn caused by falling bond prices.

But it said that as its policy was to hold these investments until they matured, this "in economic terms limits the impact of current price levels".

Keith Bowman, at Hargreaves Lansdown stockbrokers said: "The group looks to have provided sufficient reassurance short term regarding its financial strength - generating a relatively robust set of results."

"On the downside, a change of management provides further uncertainty down the road, whilst doubts over capital adequacy levels are unlikely to go away any time soon," he added.

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