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Prudential - split moves closer

George Salmon | 14 August 2019 | A A A
Prudential - split moves closer

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Prudential plc Ordinary 5p

Sell: 1,078.00 | Buy: 1,078.50 | Change 4.50 (0.42%)
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Prudential has delivered strong first half profit growth in the US and Asia, while the interim dividend is increased 5% to 16.45p per share.

The shares were little moved on the news.

The group has confirmed it will seek to independently list the M&GPrudential business as M&G plc, in the fourth quarter of this financial year.

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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. There are also meaningful cost savings proposed.

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 3.7%, 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 (changes at constant exchange rates)

The to-be demerged M&GPrudential business is classed as discontinued operations. So with Asian and US underlying operating profits both rising 14% to £1.2bn, group underlying operating profit from continuing operations rose 14% to £2bn after accounting for central and restructuring costs.

In Asia, APE sales (a measure of new business) rose 10%, with the CITIC joint venture also delivering a strong performance. Life profits rose 14% to £1.1bn with profits from the Eastspring asset management unit up 12% to £103m as the group benefitted from acquisitions, net inflows and disciplined cost management.

US profits, almost entirely from the from the Jackson life business, were led upwards by a lower amortisation rate against deferred costs around new business acquisition. APE sales fell 4%. The group is looking at growing its leading retirement income business by adding new distributors.

M&GPrudential generated £716m of operating profit, down 8% from last year, as lower earnings from insurance commission, and a drop in asset management earnings from net outflows more than offset a rise in life business.

Total cash remittances to group were up from £1.1bn to £1.2bn.

While extra capital has been created since this time last year, the solvency capital requirement increased faster, meaning the group's coverage slipped from 232% to 222%. Prudential says the M&GPrudential business had £3.9bn of capital in addition to the requirements, equivalent to a 169% coverage ratio.

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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.