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Prudential - Asia beats US into second

Nicholas Hyett | 8 August 2018 | A A A
Prudential - Asia beats US into second

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Operating profits in the half rose 9% to £2.4bn, driven by double digit percentage growth in Asia, which overtook the US as the largest contributor to group profits. Prudential announced an 8% increase in its interim dividend, to 15.67p per share.

The demerger of M&G Prudential - the UK and European business - is said to be progressing well.

The shares were trading up 1.2% shortly after the announcement.

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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 an 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.

This business will bear a remarkable resemblance to other UK life insurers. The sale of £12bn of annuity assets to Rothesay Life suggest the group may be thinking of following Standard Life Aberdeen down the asset management-led route. If so, the success of the DC pension scheme-focused 'PruFund', with £4.4bn of net inflows this half, could provide an avenue 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.

At 2.9%, Pru's prospective yield is well below that of rival UK listed life insurers - reflecting the Asian's business's greater growth potential.

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Half Year Results (Constant Currency)

Operating profits in the Asian business rose 14% year-on-year to a shade over £1bn. Growth was broad based, with a 14% improvement in operating profits from the life insurance business and 13% growth in asset management - to £927m and £89m respectively. Within life, the focus remains on recurring health and protection business, which has helped operating profits grow 33% and 22% in Hong Kong and China respectively.

The US business reported £1bn of operating profit, up 2% year-on-year. The asset management business just about scraped a profit in the half, versus a £6m loss last year, with 1% growth in life insurance to £988m.

A strong performance from the M&G asset management operation (where profits rose 10%), steady life insurance results and 12% growth in profit from general insurance sales saw total operating profits in the UK and Europe rise 4% to £778m.

Loss associated with the corporate centre fell 14% to £329m, with restructuring costs of £62m including costs from the demerger of M&G Prudential.

Prudential's solvency surplus rose 8% to £14.4bn, taking the Solvency II ratio (a key measure of insurers capitalisation) to 209% from 202% a year ago.

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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 disclosure for more information.