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Prudential - Jackson on the way out, growth in Asia

Nicholas Hyett, Equity Analyst | 11 August 2020 | A A A
Prudential - Jackson on the way out, growth in Asia

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Prudential plc Ordinary 5p

Sell: 982.60 | Buy: 982.80 | Change 51.60 (5.52%)
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Prudential reported an underlying operating profit in the first half of $2.5bn, down 2% year-on-year once currency movements are excluded. However the Asian businesses reported a 14% increase over the same period.

Alongside half year results Prudential announced that it would be listing a minority stake in its US life business, Jackson, in the US in the first half of 2021, with full divestment planned over time.

The group announced a new in dividend policy to reflect the imminent changes. Going forward reinvestment in Asia will be prioritised over dividends. As a result the board has announced an interim dividend of 5.37 cents, representing a third of the expected full year dividend. Under the group previous policy the dividend would have been 12.28 cents. In future dividends will grow broadly in line with operating free surplus generation in Asia.

The shares were up 3.2% following the announcement.

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Our view

Prudential has set the clock ticking on the complete separation of its US and Asian businesses. Starting early next year Prudential will gradually sell its entire stake in US life insurer Jackson - leaving investors holding shares in an established and rapidly growing Asian business and emerging African operation.

We can see the rational for the separation. 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.

Simplifying the business also creates cost saving opportunities. As well as lower head office costs the group is targeting savings through increased digitisation. Digital customers are cheaper to recruit and cheaper to serve, boosting margins or making product pricing more competitive - both ultimately good news for the bottom line.

We suspect the length of time it takes to complete the exit from Jackson will depend a lot on market conditions. The combination of resilient stock markets and falling interest rates is a pretty toxic one for Jackson's variable annuities - extra cash is required to back the guarantee element while the variable component is also paying out. That hardly makes it an ideal time to be selling, and with no pressing need to raise extra capital the group can hold out for a better price if conditions remain unchanged.

However, investors should really be focussed on the performance of the Asian business going forwards. It will drive profit and, under the new dividend policy, will be the determining factor in dividend growth.

Long term, economic development in these markets is likely to see increased demand for Pru's insurance products - since in many cases state sponsored social security has never got off the ground in a meaningful way. A focus on regular premium products like life and health insurance should also 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.

In the world of insurance selling more products means holding more capital. As a result the focus on Asia comes at the cost of a smaller dividend, with a prospective yield of just 1%. However, unlike other UK insurers Prudential's never really been a dividend story.

Overall we think Prudential's doing the right thing. It's good to see management putting the business's, and investors' long term interest front and centre.

Prudential key facts

  • Price/Book ratio: 2.5
  • 10 year average Price/Book ratio: 2.6
  • Prospective yield: 1.0%

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half Year Results (Constant Exchange Rates)

Asia generated underlying operating profits of $1.7bn in the first half, up 14% year-on-year. That reflects growth in both the insurance business (up 14% to $1.6bn) and Asset Management (up 10% to $143m). The division generated an operating free surplus of $988m.

Asian operating profit growth reflects progress in health and protection products, although coronavirus restrictions have reduced new business sales. Asian asset management saw total assets under management rise 2% to $219.7bn at reported exchange rates.

In the US Prudential reported underlying operating profits of $1.3bn, down 19%. The division generated an operating free surplus of $1bn, down 4%. That was driven by reduced sales, down 9%, and reduced investment returns implied by lower interest rates.

Prudential's regulatory capital surplus attributable to shareholders came in at $12.4bn, compared to $9.5bn at the start of the year. That reflects reduced investment in new business, the Athene investment in Jackson and derivative gains in Jackson.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.