Broker snap: Nomura has doubts about Pru's acquisition of Swiss Re unit

31st May 2012 11:33

Nomura says that Prudential's acquisition of Reassure American Life Insurance Company (REALIC) from Swiss Re will indeed provide a short-term boost to earnings, but raises some 'strategic questions' for the UK-listed insurance giant.Jackson National Life Insurance, an indirect wholly-owned subsidiary of Prudential, on Wednesday entered into an agreement to buy SRLC America Holding Corp for $621m (£398m) in cash, financed from its own resources. SRLC America Holding Corp, the holding company for REALIC, is a life insurance business working within the US division of Swiss Re's Admin Re.Nomura says that the purchase appears to be "well-timed" and "opportunistic" taking advantage of Swiss Re's strategy to reduce is US Admin Re exposure. Prudential says that the acquisition will be accretive to pre-tax earnings by £100m in the first year "which we view as an impressive short-term return on investment".However, the broker says that its main concerns is that "it is a closed book transaction that will run off over time (probably over half of the book will run off within the next 10 years). This means that, although it provides a strong short-term earnings boost, this will turn into an earnings drag over the longer term as the book runs off.""A key question, in our view, is whether Pru will need to make further Admin Re deals in order to replace the reducing earnings going forward and to avoid the earnings drag from the book over the longer term. This begs the question of whether Admin Re is now strategically important to Pru or not."The broker has maintained its reduce rating and 740p target price for Prudential, saying that it sees better value elsewhere.By 11:31 on Thursday, Prudential was trading 1.04% higher at 680p.BC