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Prudential - Seventh year of double digit Asian growth

Nicholas Hyett | 14 March 2017 | A A A
Prudential - Seventh year of double digit Asian growth

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Full year operating profits hit £4.3bn at Prudential, down 2% at constant exchange rates (CER), with a final dividend of 30.57p supporting a 12% increase in payments to shareholders for the full year.

The shares rose 1.6% following the announcement.

Our View

Pru's Asian business has been a spectacular success story in the last twenty years, and now accounts for well over a third of group profits. The economic slowdown in early 2016 had little impact; and the outlook remains favourable. This speaks volumes of the quality of Pru's Asian franchise.

A focus on regular instalment, 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 a top three position in 9 out of 12 markets; which confers a major competitive advantage.

A shade over 60% of Pru's profits come from the UK and USA; which include asset management (M&G), retirement products and insurance. In recent years these businesses have been benefitting from ageing populations and the 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. An improving US economic outlook means this is a tailwind for now, but the tide can quickly turn.

The UK operation has taken a hit this year, as pension reforms reduced annuity sales and the group stopped providing bulk annuity services in the UK. A £175m charge for historical mis-selling of non-advised annuities hasn't helped either.

Despite continuing to contribute the majority of profits, the US and UK businesses are a bit of a sideshow at the moment, with steady performances enough to keep investors happy. With a prospective yield of just 2.7%, compared to something closer to 5-6% at rival life insurers, investors are clearly focussed on the long term growth potential of the business. The shares currently trade on around 3.3 times current book value, above the long run average of 2.5 times.

Full year results highlights (CER):

Asia remains the largest contributor to group performance delivering its seventh consecutive year of double-digit growth in new business profit, operating profit and capital generation.

  • Asia: Operating profits rose 15% to £1.6bn, driven by strong performances in both the all-important life business and Eastspring, the Asia focussed asset management operation. Cash paid to group rose 10% to £516m.
  • US: Operating profits rose 8% to £2.1bn, as a significant fall in life new business sales was more than offset by higher fee income from Jackson's separate account asset base. Cash to group fell 11% to £420m.
  • UK: The UK life business saw operating profits fall 32% to £799m, reflecting lower profits from the annuity business, including withdrawal from the bulk annuity market. Cash remittances to group were flat at £300m.
  • M&G: Prudential's asset management business saw net outflows of a little over £8bn, although market movement boosted overall assets under management to £136.7bn. Operating profits sunk 4% to £425m, with remittances to group falling by the same proportion to £290m.

The Group Solvency II ratio rose to 201%, with an estimated surplus of £12.5bn (FY15: 193% and £9.7bn respectively).


The group believes it is on course to meet its 2017 objectives, including:

  • Compound growth of at least 15% between 2012 and 2017 from the Asian life and asset management business (currently 17%)
  • Free surplus generation of £900m to £1.1bn from Asia in 2017 (2016: £859m),
  • Total free surplus generation of £10bn for the 2014-2017 period (currently £9.2bn).

CEO, Mike Wells, commented:

"Our growth prospects are based on clear long-term opportunities in the three markets we are targeting. There are historic demographic shifts taking place in these economies, and we are focused on ensuring that our capabilities develop in line with the evolving needs and preferences of our customers."

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.