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Prudential - Asia continues to drive growth

Nicholas Hyett | 10 August 2017 | A A A
Prudential - Asia continues to drive growth

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Half Year operating profits rose 5% at constant exchange rates (CER) to £2.4bn. Performance was driven by results from the Asian and US businesses, partially offset by slower growth in the UK. The group announced an interim dividend of 14.5p per share, up 12%.

The shares were broadly flat following the announcement .

Our View

Pru's Asian business has been a spectacular success story, and now accounts for over a third of group profits. Economic uncertainty in the region following the US election and last year's commodity slump has had little impact; and the outlook remains favourable. This speaks volumes of the quality of Pru's Asian franchise.

A focus on regular instalment policies, such as health and life insurance, lends resilience to the Asian business, because most people continue paying their monthly premiums, even if the economy falters. The region also benefits from favourable demographics. State provision of safety nets, such as healthcare, is 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.

Around 65% 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.

At the half year Prudential announced the merger of the UK life and M&G businesses into a single operation, M&G Prudential. Coming amidst rumours that Pru was looking to dispose of its legacy UK annuity book, that was a bit of a surprise. However, the combination should bring cost savings, boosting margins in these more mature businesses.

The combined business would bear a remarkable resemblance to several other UK life businesses, and the success of the DC pension scheme focused 'PruFund' would seem to provide a model for a viable standalone future. A spin-off may not be imminent, but now looks easier.

At present the cash generative legacy businesses are supporting a prospective yield of 2.8%, while still allowing the group to invest in growth. That yield doesn't compare too favourably to the 5-6% on offer at rival life insurers, suggesting investors are focussed on the long term growth potential.

Half Year Results (CER)

At £1.1bn, the US remains the largest contributor to group operating profits, up 8% this half as higher variable annuity balances resulted in higher fee income. However, Asia is rapidly closing the gap as operating profits rose 16% this half to £953m as the division saw growth across both its Life and Eastspring asset management businesses.

Operating profits of £497m were broadly flat in the UK, with the reduction in annuity business continuing to weigh on profits partially offset by the growing popularity of the PruFunds offer in flexible personal pensions and ISAs.

The M&G asset management business saw profits rise 10% to £248m, thanks to a £19.5bn gain in assets under management (AUM) following positive inflows and market movements. Prudential UK & European is to be merged with M&G going forwards.

The group's Solvency II ratio, a key measure of insurers' capitalisation, has increased further to 202%, representing a capital surplus of £12.9bn.

Commenting on results, CEO Mike well said "Our successful strategy, innovative products and strong execution have driven growth across all of our main performance . . . We have achieved our objective of generating over £10 billion of Group cumulative free surplus between 1 January 2014 and 31 December 2017 six months early and we remain on track to achieve the remaining Asia-focused objectives by the end of this year."

Commenting on results, CEO Mike well said "Our successful strategy, innovative products and strong execution have driven growth across all of our main performance . . . We have achieved our objective of generating over £10 billion of Group cumulative free surplus between 1 January 2014 and 31 December 2017 six months early and we remain on track to achieve the remaining Asia-focused objectives by the end of this year."

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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 disclosure for more information.