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Prudential - Jackson to be demerged

Nicholas Hyett, Equity Analyst | 28 January 2021 | A A A
Prudential - Jackson to be demerged

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Prudential plc Ordinary 5p

Sell: 1,295.00 | Buy: 1,296.00 | Change -9.00 (-0.69%)
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Prudential has announced that it plans to demerge its US business, Jackson, which will be listed on the New York Stock Exchange going forwards. Prudential shareholders will receive new shares in Jackson, and Prudential will retain a 19.9% interest in the new company.

This will reduce Prudential's exposure to the US faster than the previously planned minority IPO and "complete Prudential's transformation into a group focused exclusively on the high-growth opportunities of Asia and Africa".

Prudential is also considering raising $2.5bn-$3bn of new financing through the sale of shares in London and/or Hong Kong. If completed the proceeds of this sale would be used to repay debt.

Alongside the announcement Prudential said the "overall quarterly sales trajectory in Asia has continued to improve during the second half of 2020" with full year profits expected to be in line with market expectations.

The shares fell 7.1% in early trading.

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Our view

The decision to list Jackson as an independent company accelerates the separation of Prudential's US and Asian businesses.

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 decision to demerge Jackson in one go, rather than the previously planned minority IPO, reflects tough market conditions for the US arm. 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. Demerging the business avoids the need to find a willing buyer by simply handing the business over to Prudential's existing shareholders. But it also means there won't be any extra cash coming into the business - which probably explains why an additional fundraising is under consideration.

Investors will ultimately be left holding shares in two very different businesses, and it's unlikely that both will be a good fit for the same portfolio.

The Asian business should benefit from long term economic development in its markets, driving 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%.

By comparison Jackson is more mature - and while there's still scope for growth, the dividend will be a far more important part of the story. The group's exposure to variable annuities remains something of a headache and will require attention in the years to come.

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. However, this break-up has been messy and with extra fundraising on the horizon the final picture is still unclear.

Prudential key facts

  • Price/Book ratio: 2.68
  • 10 year average Price/Book ratio: 2.66
  • Prospective dividend yield (next 12 months): 1.2%

All ratios are sourced from Refinitiv. 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 - 11/08/20

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.

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 Refinitiv. 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.