Broker snap: Nomura neutral on the Pru

The determination by the management of Prudential to boost its presence in Asia may pay off in the long term for the insurer but Nomura Securities thinks that insurers with a greater UK focus than the Pru may do better in the near to medium term.Although Nomura agrees with the conventional wisdom that Asia offers more growth in the long term, analyst Nick Holmes thinks the market is underestimating the UK's medium term prospects, "which are likely to see cash earnings materially boosted by lower new business strain (consequent upon the retail distribution review and benign annuity pricing) and the potential release of annuity credit provisions."Nomura prefers both Legal & General (L&G) and Aviva to the Pru, and rates both of them as worth buying, whereas Prudential has no more than a neutral rating. Although it continues to regard Prudential's Asian franchise as "highly attractive" Nomura recognises this is already factored into the price."We see more medium-term risks to Prudential's IFRS [international financial reporting standards] earnings growth than with L&G and Aviva, in particular owing to its optimistic US DAC [deferred acquisition costs] assumptions: we highlight that Prudential's US DAC equity growth assumption in its variable annuity book is at a high level of 15% for the next five years (Aegon uses 8% and AXA 9%)," Holmes notes. "If markets fail to achieve this level of growth, there could be a material drag on earnings (worth we estimate 17% of earnings to correct)," Holmes added. L&G and Aviva do not write variable annuities and are not exposed to this risk, the broker said.Nomura is expecting a slow down in Prudential's sales after the company had a strong second half to 2009, and said this trend was already evident in the first quarter 2010 figures, which were lower than the final quarter of 2009."Both L&G and Aviva are undervalued by the market and have a higher likelihood of providing positive earnings surprises than Prudential. Consequently, they remain our top picks," Nomura concludes.