Prudential plc (PRU) Ordinary 5p
HL comment (3 March 2021)
Underlying operating profits from Prudential's core Asian business rose 13% at constant exchange rates to $3.7bn. That reflects a strong performance from the life insurance business and growth in funds under management at Eastspring.
The demerger of the US Jackson business is expected to complete in the second quarter of 2021.
The group announced a final dividend of 10.73 cents per share, taking the full year total to 16.10 cents.
The Prudential share price rose 1.2% in early trading.
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 the tough market conditions the US arm faces. The combination of resilient stock markets and falling interest rates is a pretty toxic one for 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. A decent sized asset management business offsets that to some degree, but the focus on Asia still comes at the cost of a smaller dividend, with a prospective yield of just 0.9%.
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. However, the group's exposure to variable annuities remains something of a headache and will require attention in the years to come. The group has an impressive distribution network, but building expertise outside variable annuities will demand time and capital.
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: 3.0
- 10 year average Price/Book ratio: 2.7
- Prospective dividend yield (next 12 months): 0.9
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.
Full Year Results (Constant Exchange Rates)
The Asian insurance business reported operating profits of $3.4bn over the year, up 14% on 2019. That reflects the strength of recurring premium health and protection products, with the group also benefitting from the development of its digital capabilities when physical sales locations were shut.
Asian asset manager Eastspring saw assets under management rise 3% to $247.8bn, driven by inflows to Prudential insurance products which more than offset external outflows. As a result, operating profits rose 2% to $283m.
Operating profits from Insurance products in the US fell 8% to $2.8bn, with asset management operating profits of $9m. The division increased its variable annuity sales by 13% during the year, but saw the benefit offset by the effect of lower growth assumption going forwards and the reinsurance deal with Athene hit.
The group received cash remittances from its operating companies of $771m, 47% lower than last year reflecting the non-remittance of any cash from Jackson and a 25% decline in cash remitted from the Asian business.
Prudential reported a LCSM ratio of 328%, based on the regulatory capital requirements set out by the Hong Kong regulator. That reflects a surplus of $11.0bn, up from $9.5bn a year ago.
Going forwards dividends are expected to grow broadly in line with Asia free surplus generation. It's intended that the interim dividend will be fixed at one third of the previous year's full year dividend.
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 disclosure for more information.
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