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Prudential - new business signs positive, dividend announced

Underlying operating profit rose 8% to $1.7bn in the first half, largely reflecting an increase in life and asset management underlying operating...

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Underlying operating profit rose 8% to $1.7bn in the first half, largely reflecting an increase in life and asset management underlying operating profit, as well as a fall in interest costs. Annual premium equivalent (APE), which is an important measure of new business activity, rose 9% to $2.2bn.

Looking ahead, Prudential said the impacts of Covid-19 are stabilising in its markets, but operating conditions are likely to still be challenging for the rest of the year.

The Board has approved a first interim ordinary dividend of 5.74 cents per share, in-line with the policy of paying one-third of the previous year's full-year ordinary dividend.

Anil Wadhwani will become Group CEO with effect from 25 February 2023, subject to final regulatory approval. After this, the group's executive directors will be based in Hong Kong.

The shares were unmoved following the announcement.

View the latest Prudential share price and how to deal

Our View

Prudential (PRU) is an Asia and Africa-facing life insurance and asset management giant. The incoming CEO will be slipping his feet under the desk of an established, and hopefully growing, business.

PRU is facing some near-term challenges though. Profits moved upwards to the tune of 8% at the half year, but continued Covid-19 disruption in many of its markets means the outlook for at least the rest of the year is rocky.

New business profit, which looks at predicted earnings on newly sold products, fell 5% because of higher interest rates and lower sales in Hong Kong, which is traditionally a more lucrative region. The continued closure of the border between Mainland China and Hong Kong means PRU's missing out on hundreds of millions of dollars' worth of business.

In a move that helps proof PRU's portfolio against disruption, the group's 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.

Looking further ahead, 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. A focus on regular premium products like life and health insurance should also make profits reasonably dependable. We feel there is lots of opportunity with life insurance premiums as a percentage of Asian GDP only at 2.8%.

That puts the onus on new CEO, Anil Wadhwani, who takes the wheel next February, to steer this enormous machine in the right direction to make the most of the situation. Transition risk is high when control changes hands in a company of this size, so while we've no reason for scepticism now, it's something to monitor when the time comes.

The focus on growing the Asian business also limits shareholder returns for now, with the prospective dividend yield of under 1.6% unlikely to be cause for celebration.

We have no qualms over Prudential's financial wellbeing, helped by the $2.4bn equity raise in the final quarter of last year. This has gone on reducing debt, and while some were likely disappointed by the scale of the fundraising, we deem it a good move.

The current price to earnings ratio is broadly in-line with the ten year average, which could be deemed undemanding when you consider PRU's real growth opportunities. Investors should keep in mind though that the medium term looks a little unclear and a low dividend yield means patience isn't likely to be too richly rewarded.

Prudential key facts

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.

Half Year Results

Growth in annual premium equivalent (APE) sales was down to increases in 75% of Prudential's Asian life insurance markets, and balanced growth across different products. Growth in Other Markets, Singapore and China offset declines elsewhere.

The group's core life insurance business saw income rise to $3.7bn from $3.4bn, as all areas grew, including Insurance Margin and Other Income. There was a 15% increase in administration costs, while acquisition costs increased to $1.1bn from $990m, largely because of the higher APE sales. Life insurance underlying operating profit rose around $80m to $1.9bn.

Eastspring, which is Prudential's asset management business, recorded a 12% drop in total funds under management to $222.3bn, with the fall due to adverse market movements. There was a net investment inflow of $2.3bn. Underlying operating profit fell 15%.

The group's net operating free surplus, a key measure of cash generation, rose 12% to $1.2bn. That reflects higher capital generation, partially offset by higher costs.

The group's GWS capital position, which represents capital requirements set by the Hong Kong regulator, was reflected in a coverage ratio of 548%.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 10th August 2022