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Prudential - Holding up, but sales slowdown expected

Nicholas Hyett, Equity Analyst | 14 May 2020 | A A A
Prudential - Holding up, but sales slowdown expected

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Prudential plc Ordinary 5p

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Prudential reported improving sales in the first three months of the year for both the US and Africa. However, the key Asian region saw sales fall 24%, as Hong Kong and China were negatively impacted by the coronavirus outbreak.

Despite the coronavirus headwind the group's capital position improved quarter-on-quarter. However, more recent restrictions on advisers meeting customers is expected to reduce sales levels materially in the short term.

The shares fell 5.5% following the announcement.

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Our view

Prudential is in the process of splitting its Asian and US businesses.

The current plan is for the company to spin-off the US Jackson business through a stock market listing. If successful Pru will retain a majority stake in the separately listed business, although alternatives are under consideration.

We can see the rationale for a long distance relationship between Pru and Jackson. There's little intrinsic benefit to tying the two businesses together, and a high growth Asian business and more mature US division in one package confuses the investment case. The US business is also arguably overexposed to the volatile variable annuity business and diversifying is expensive. Attracting third party capital through an IPO will help spread the risk.

If all goes to plan it would leave the main group focused on what we see as its most attractive opportunity - expansion in Asia. A focus on regular premium products like life and health insurance should make profits reasonably dependable.

Coronavirus has the potential to see a spike in claims, but the fact premiums continue to roll in even when times are tough is reassuring. Economic gloom is hardly a sign to cut back on insurance after all. Long term, a growing and increasingly wealthy population means demographic trends are in the group's favour.

As things stand investors will also retain a sizeable stake in Jackson, and we see efforts to diversify the product offering here as a major positive. The combination of rising stock markets and falling interest rates is a pretty toxic one for Prudential's variable annuity products - extra cash is required to back the guarantee while the variable component is also paying out.

That said we think the US is attractive long term. Pru estimates that 4m Americans reach retirement age each year, creating significant opportunities for retirement income providers. Keeping exposure to that trend is no bad thing.

For all the positives it would be wrong to be complacent about Pru's immediate future.

Efforts to digitise the sales process, including around two-thirds of Asian sales, should provide some insulation, but lockdowns in the US and Asia will dent sales in the second quarter. Meanwhile the Eastspring asset management business as well as the group's own investment portfolios mean its fortunes are intimately linked to the fortunes of global financial markets.

Overall we think Prudential is doing the right things. A divided business structure should improve focus, while digitisation efforts have the potential to deliver long term cost savings. Its end markets mean it's almost certainly the UK life insurer with the most growth potential in our view. That explains the relatively modest prospective yield, by life insurer standards, of 3.2%. Major structural change isn't risk free though, and with the Jackson IPO still somewhat up in the air and coronavirus transforming economies in a matter of weeks the near term could be rocky.

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AGM Trading Statement

Excluding China and Hong Kong Asia sales grew 1% to $544m, with coronavirus related restrictions not in place until mid-March. Despite the difficult first quarter sales are normalising in China, with April's sales actually up year-on-year.

Asian asset manager Eastspring saw net outflows over the quarter as a whole, as inflows during January and February reversed in March. Together with market movements that meant overall assets under management fell 13%.

First quarter operating profits in Asia rose 14% thanks to a strong result from in-force policies.

In the US sales rose 25% in the first quarter to $631m, with retail sales up 30% year-on-year. However, underlying operating profits fell 52% as a result of negative stock market movements. Hedge payoffs offset increased capital requirements stemming from lower interest rates with the result that Jackson's capital position remained similar quarter-on-quarter.

Sales in Africa rose 43% to $30m.

The group's surplus available capital rose from $9.5bn at the start of the year to £11.1bn at the end of the first quarter. Increased regulatory capital requirements meant the group's regulatory coverage ratio declined slightly from 309% to 302%.

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