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Prudential - Profits tick up, demerger making progress

Nicholas Hyett | 13 March 2019 | A A A
Prudential - Profits tick up, demerger making progress

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Prudential plc Ordinary 5p

Sell: 992.80 | Buy: 993.20 | Change 0.00 (0.00%)
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Prudential reported an operating profit of £4.8bn in 2018, up 6% on the year before at constant exchange rates. That reflects very strong results in Asia and the UK & Europe, partially offset by weakness in the US.

The full year dividend rose 5% to 49.35p.

The shares were broadly flat in early trading.

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Our view

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

The first is 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 £8.5bn of net inflows last year, 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. Progress towards the demerger is said to be good, but it's likely to be a protracted process, and no timeline's been laid out as yet.

In the meantime the fortunes of both parts of Prudential are closely linked to stock markets and the economy more generally. As the US business found in the final quarter of 2018 - conditions can change quickly.

At 3.6%, 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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Full Year Results (at constant exchange rates)

Asia saw operating profits rise 14% to £2.2bn, with strong profit growth in long-term insurance business (up 15% to £2bn) and a 6% increase in profits from asset management, to £182m.

Results in Asia have primarily been driven by increases in in-force policies, with 10 markets in the region delivering double-digit growth in new business profit. The Health and protection business continues to grow strongly, with Hong Kong, Singapore and China Pru's highest growth markets.

Operating profits shrank 11% to £1.9bn in the US , driven by an 11% fall in insurance business. That was despite an increase in fee income in the Jackson business, as equity market falls more than offset gains.

The UK & Europe, which includes the soon to be spun-off M&GPrudential business, saw operating profits rise 19% to £1.6bn. The result was driven by a substantial uplift in life insurance profits, reflecting increased mortality assumptions. Asset management profits in the region fell 5% to £477m. Progress on the demerger of M&G Prudential is said to be good.

Central costs fell 6% to £725m.

The business finished the year with a Solvency II ratio, a key measure of insurers capitalisation, of 232%. That represents a surplus of £17.2bn, up 29% year-on-year.

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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.

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