Despite the uncertain economic backdrop, Prudential delivered a 22% rise in full year operating profit and a 20% increase in new business profit at constant exchange rates (CER). Annual Premium Equivalent sales increased 17%, led by Asia; while internal cash generation and cash remittances both grew by double-digits. The Board has announced a special dividend of 10p per share, alongside a 5% increase to the full-year ordinary dividend. The shares rose by 3% in early morning trading.
Business highlights (CER):
- Asia: operating profit of £1,324 million was up 17%, with strong growth in both life insurance and Eastspring Investments, the Asia-based asset management business.
- US: operating profit of £1,702 million increased by 9%, driven by higher fee income from growth in Jackson's separate account asset base.
- UK: operating profit was 59% higher at £1,195 million, reflecting good growth in with-profits and a one-off benefit of £339 million from balance sheet restructuring related to Solvency II.
- M&G made an operating profit of £442 million, in line with 2014, with good cost control offsetting a 7% reduction in funds under management.
Pru's Solvency II internal model was approved by the regulator in December 2015, underscoring the "strength and resilience of the Group's capital position". The Solvency II capital surplus is estimated at £9.7 billion, equivalent to a Group Solvency II capital ratio of 193%.
The Pru says its high quality recurring income and strong balance sheet are helping it to contend with a more uncertain economic environment and market instability (a headwind for the fee-based businesses). In Asia, demand for long-term, regular premium protection and savings products continues to be supported by a fast growing, but under-insured middle class population. In the US and UK, the Pru continues to prioritise earnings and cash.
Pru's Asian business has been a spectacular success story in the last twenty years, and the proportion of group profits coming from Asia has grown to around a third. The economic slowdown in South East Asia has had little impact; and the outlook remains favourable. This speaks volumes of the quality of Pru's Asian franchise.
A focus on regular premium, protection policies such as health and life insurance lends resilience to Pru's Asian business, because most people continue paying their monthly premiums, even if the economy turns down. South East Asia also benefits from favourable demographics. State provision of safety nets such as healthcare is very low and demand for insurance from the burgeoning middle classes is growing rapidly. The Pru has one of the largest sales forces in the region, and leadership positions in 9 out of 12 markets; which confers a major competitive advantage.
The remaining two thirds of Pru's profits come from the UK and USA; which includes asset management (M&G), retirement products and insurance. These businesses are also benefitting from favourable demographics such as retirement of the baby boomers. However, profits in the US retirement business and M&G, in particular, are closely linked to stock markets and the economy more generally. This probably explains the c. 20% fall in the share price over the last year.
Following recent falls, the shares now trade on a price to book ratio of 2.3x, a slight discount to the long run average of nearer 2.4x. The yield for the current year is 3.3%. While a slowing global economy and volatile stock markets create potential headwinds for Pru's UK and US businesses, long term prospects ought to be supported by the favourable demographic trends alluded to above; particularly in Asia.
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