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Prudential - Another good year, M&G to go it alone

Nicholas Hyett | 14 March 2018 | A A A
Prudential - Another good year, M&G to go it alone

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Operating profit for the year rose 10% to £4.7bn, driven by a very strong performance in Asia. Prudential announced an 8% increase in the full year dividend, which is expected to reach 47p per share.

Alongside results, Prudential announced that it would be demerging its UK business to form the standalone M&G Prudential.

The shares rose 5% in early trading.

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Our View

The demerger of M&G Prudential will create two very different businesses.

The first will be a rapidly growing life insurer, with market leading positions in a dozen or so Asian markets, a sizeable US business and early foothold in Africa. The growth potential here is considerable, benefiting from increasing wealth and growing populations in emerging markets.

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. State provision of safety nets, such as healthcare, is low and demand for insurance from the burgeoning middle classes is growing rapidly.

On the other hand is a mature UK/European life insurer and asset manager. Lower capital requirements and a solid base of recurring revenue should combine to deliver solid dividend potential - although growth will be slower.

The business bears a remarkable resemblance to other UK life insurers. The sale of £12bn of annuity assets to Rothesay Life suggest the group may be eyeing up the Standard Life Aberdeen, asset management led route. The success of the DC pension scheme-focused 'PruFund' could provide a vehicle for future growth.

Investors will end up with shares in both companies - although it's likely one will appeal more than the other, depending on individual preferences. We have no timeline on the separation as yet, but is likely to be a protracted process, potentially stretching into 2019 and beyond.

In the meantime it's worth bearing in mind that the fortunes of both parts of Prudential are closely linked to stock markets and the economy more generally. An improving economic outlook means this is a tailwind for now, but the tide can quickly turn.

Prior to the separation announcement, the shares were expected to offer a prospective yield of 2.8% in the coming year.

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Full Year Results (constant exchange rates)

At £2.2bn, the US life business was the largest contributor to group operating profits, and grew by 3% in the year. The combination of rising stock markets and £3.5bn of inflows resulted in a 15% increase in fee income, partially offset by lower spread based income.

Asia remains the fastest-growing business, with operating profits up 15% to £2bn. That reflects strong performance in both the life and asset management business which saw profits rise 15% and 18% to £1.6bn and £149m respectively. The group delivered double-digit profits in 8 of the 12 Asian markets in which it operates.

A strong performance from the M&G asset management operation and steady life insurance results saw total operating profits in the UK and Europe rise 10% to £1.3bn.

Prudential's solvency surplus rose 6% to £13.3bn, taking the Solvency II ratio (a key measure of insurers capitalisation to 202%.

M&G demerger

Prudential's UK business will be demerged to form a separately listed business, M&G Prudential. Both Prudential and M&G Prudential will retain a London listing following the demerger.

Alongside the demerger Prudential has announced the sale of £12bn of UK annuities to Rothesay Life.

On completion Prudential shareholders will hold shares in both businesses.

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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 for more information.