Company Reports

On June 23, Prudential answered some investor concerns around excess capital with the announcement of a $2 billion capital return to shareholders. The buyback takes advantage of what management considers to be an undervalued share price with $700 million in share repurchases to be completed by the end of this year and the remainder completed over the course of 2025 and to mid-2026. The capital return comes with the announcement of a new metric for monitoring the capital available to distribute to shareholders, the free surplus ratio, which stood at 242% at the end of 2023. This free surplus ratio was made up of $8.5 billion of free surplus, excluding distribution rights and other intangibles, and $6.0 billion of European embedded value required for the life business. In deducting around $389.5 million for the 2023 second interim dividend, and June 23's announced $2.0 billion buyback, we think that the free surplus ratio would stand at around 202%—at the top end of a newly announced 175%-200% preferred range. Free surplus ratio above this range over the medium return, taking into account opportunities for reinvestment, should indicate further capital returns to shareholders.

Prudential has reported decent key performance indicators in its business earnings update for the first quarter of this year. The headline number is the mid-single-digit percentage rise in the annual premium, equivalent to $1.625 billion, one of the highest sales numbers delivered. New business profit excluding economic hits for the first quarter came in at $810 million and that low-double-digit growth places the company in a good position to meet its 15%-20% compound annual growth target by the end of 2027. We maintain our fair value estimate and no moat rating.

With the divestment of Prudential PLC's U.K. and European operations, followed by the sale of its Jackson business in North America, Prudential is now a life and health insurer that is fully focussed on Asia and Africa, with one of the region’s largest asset management businesses.

Prudential has reported earnings for 2023 that are slightly below our forecasts. We think the broad takeaway from these results is that the business is continuing to focus on investments over shareholder distributions. Adjusted operating profit for the year came in at $2.893 billion and that 8% year-on-year rise is a smidge below our forecast of $2.905 billion. The announcement that Prudential’s board is proposing a $0.1421 per-share dividend, resulting in $0.2047 for the full year, is a tad better than the $0.20000 that we predicted. The IFRS 17 net profit for the year of $1.712 billion means that the business has generated a 9.52% return for shareholders. While below the company’s cost of capital, we think in the background that return is improving. We maintain our fair value estimate and no moat rating.

With the divestment of Prudential PLC's U.K. and European operations, followed by the sale of its Jackson business in North America, Prudential is now a life and health insurer that is fully focussed on Asia and Africa, with one of the region’s largest asset management businesses.

Prudential shares have sunk to a five-year low and we believe they are still undervalued. Prudential is a company that is now fully focused on selling life and health insurance and savings in Asia and Africa, so the shares of this company have been tied to the economic development and prospects of these regions. Further, Prudential is not the biggest nor the best here, playing second fiddle to AIA, a business it tried to buy a few years ago. However, we still believe this company allocates capital well and that sales of life and health insurance and investment products have started to return after a prolonged set of postcoronavirus lockdown conditions. While not quite at its prepandemic lockdown peak of 5 million visitors, monthly mainland Chinese visitors to Hong Kong are approaching 3 million. Prudential has also taken a novel approach to building scale in the business by rolling out its Pulse mobile app. This allows the company to: (1) build out its customer base in a cost-efficient way, (2) develop those customers into loyal ones who buy more products and become lifetime partners with the business and, (3) collect data about these customers' behavioral habits to help them live healthier lives and underwrite them more efficiently. This investment has been a cornerstone of its capital allocation after a bigger set of initiatives that streamlined the business. Uncertainty over the recovery of the Chinese economy remains high and other geopolitical tensions add to this headwind. However, Prudential has demonstrated an ability to rise above low gross domestic product growth rates historically and we think its diversification and technology will be key to this. We maintain our GBP 13.20 fair value estimate and no moat rating.

Prudential is continuing its strong rebound in sales and new business as it has come out of the prolonged China coronavirus lockdown. At constant exchange rates, the company has announced $4.4 billion in annual premium equivalent sales in the first 9 months of 2023. Against the $3.1 billion reported for the first 9 months of 2022, that stacks up very well. Prudential has generated new business profit of $2.1 billion over the same time frame. Again, this is versus $1.6 billion over the same period in 2022, so the business is performing well again.

Prudential PLC reported earnings for the first half of 2023. We believe these earnings are good. Our full-year earnings estimate for Prudential is $1.8 billion in net income. In the Aug. 30 disclosures for the first half of the year, the business reported net income of $944 million and this implies net income of $1.9 billion for the full year. Versus the 11% cost of equity that we apply, Prudential’s results on Aug. 30 suggest that the company is earning exactly this. Prudential announced a $0.0626 dividend per share. That dividend is a 9% increase on the interim dividend paid last year, in line with its 7% to 9% dividend growth target.

With the divestment of Prudential PLC's U.K. and European operations, followed by the sale of its Jackson business in North America, Prudential is now a life and health insurer that is fully focussed on Asia and Africa, with one of the region’s largest asset managers.

Prudential reported key performance numbers for the first quarter that we think were solid to good. To call out some key themes in the release, 10 of Prudential's 13 markets achieved double-digit new-business profit growth. As restrictions ease, the business delivered $1,559 million in annual premium equivalent sales, a 35% rise from the same period last year at constant foreign exchange. New-business profit climbed from $571 million to $743 million over the same period, again at constant currency rates. It is important to note the change in Hong Kong numbers within this overall growth. In that region, new-business profit rose 106% to $293 million as visits from mainland customers, as well as domestic sales, continued to grow. Visitation to Hong Kong has bounced.

Prudential is now a fully focused Asia and Africa business accessing the high growth of these markets. This has come about after the divestment of M&G was completed in October 2019 and the almost full separation of Jackson in September 2021. Prudential still holds a small Jackson stake. We think the focus of the market is currently on lower growth and that is what is being extrapolated. However, we do not think the restricted movement conditions in China and Hong Kong will last forever and we see a trend of an easing of these restrictions. With that we also believe there will be a normalisation of new business contributions and the rates of growth within the in-force business will start to approach something more normal.

Prudential is now a fully focused Asia and Africa business accessing the high growth of these markets. This has come about with the divestment of M&G completed in October 2019 and the completed separation of Jackson in September 2021. Though Prudential still holds a small Jackson stake. We think the focus of the market is currently on lower growth and that is what is being extrapolated. However, we do not think the restricted movement conditions in China and Hong Kong will last forever and we see a trend of an easing of these restrictions. With that we also believe there will be a normalisation of new business contributions and the rates of growth within the in-force business will start to approach something more normal.

When looking at the exposure of insurers to the unfolding banking crisis, we believe this is limited. The main impact of the crisis currently seems to be contagion, so investors are selling shares cheaply. However, exposure to United States bonds is either in government bond securities, or exposure to Credit Suisse, Silicon Valley Bank, and other U.S. regional banks is immaterial, which is 50 basis points or less of their investment portfolio. Some do hold larger bank debt holdings of up to 5.5% of shareholder investments, but nearly all that debt ranks as senior. AT1 debt tends to be very minimal or there is no exposure as a policy with board-level approval. The vast majority of corporate debt held is investment-grade. We maintain our fair value estimates and moat ratings across our European insurance coverage. Allianz remains our Best Idea. Admiral is one of our top picks.

Prudential is now a fully focused Asia and Africa business accessing the high growth of these markets. This has come about with the divestment of M&G completed in October 2019 and the completed separation of Jackson in September 2021. Though Prudential still holds a small Jackson stake. We think the focus of the market is currently on lower growth and that is what is being extrapolated. However, we do not think the restricted movement conditions in China and Hong Kong will last forever and we see a trend of an easing of these restrictions. With that we also believe there will be a normalisation of new business contributions and the rates of growth within the in-force business will start to approach something more normal.

Prudential clearly missed market expectations in its results on March 15. For example, consensus' estimate for EPS, as collected by FactSet, was $0.65 and Prudential delivered $0.37. It’s quite obvious that the March 15 results are messy with shares trading down over 10% at the time of writing. However, we still believe there are an unfortunate confluence of factors that are hitting Prudential. First, under IFRS reporting standards investors only really have three years of data to work with. Second, those three years give no indication about the true earnings power of the business. For example, in 2019 Prudential earned $2.12 billion and then after it divested Jackson that swung to negative $2.04 billion the next year. The results for 2022 have clearly taken investors by surprise as earnings have shrunk to $1.01 billion. Yet, digging deeper there are also a number of positives.

We think Prudential looks set to return to more normal levels of growth as China and Hong Kong emerge from lockdown. The business has experienced a substantial contraction in new business contributions as China and Hong Kong have been in severely restricted conditions due to the policy of zero-COVID. We think the market is estimating those lower levels of growth into the future because if we use those growth levels, we get to a share price equal to the current market value. However, we think these lower levels of growth will not last forever and that traffic from China to Hong Kong is starting to return albeit at muted levels. Prior to the pandemic these numbers of visitors to Hong Kong from mainland China were around 350,000 a month and during the pandemic that fell to around 4,000. That is now creeping back above 50,000 and the recent relaxing of restrictions point to a continued emergence from this situation. That gets us most of the way to our estimate of fair value.

Prudential is now a fully focussed Asia and Africa business accessing the high growth of these markets. This has come about with the divestment of M&G plc completed in October 2019 and the completed separation of Jackson in September 2021. Though Prudential still holds a small Jackson stake. We think the focus of the market is currently on lower growth and that is what is being extrapolated. However, we do not think the restricted movement conditions in China and Hong Kong will last forever and we see a trend of an easing of these restrictions. With that we also believe there will be a normalisation of new business contributions and the rates of growth within the in-force business will start to approach something more normal.

A little over four years ago, Prudential announced the merger of its life insurance and asset management business in Europe and United Kingdom. Following this Prudential announced the demerger of M&G within a little under a year and the spinoff listed on the London Stock Exchange. M&G operates an old-fashioned with-profit funds on its back book and sells its new take on this, PruFund. Historically, M&G has been successful here.

We like Prudential plc's first-half results, now as a business fully focused on protection in Asia and Africa. Some of Prudential’s success is shown in its 3.8% growth in customers, now standing at 19.3 million, and this may grow in the second half as Prudential launched in April its stand-alone Syariah life insurance entity in Indonesia, making it the first global insurer to do so. In Malaysia, management suggests that Prudential has maintained its market-leading position in the takaful segment. Prudential continues to demonstrate good customer retention at 90% for the first half of 2022 versus 89% in the full year of 2021. Prudential achieves this through its distribution network of 530,000 licensed tied agents and 170 bancassurance partners, 32 of which are exclusive bancassurance arrangements. This gives Prudential access to 27,600 bank branches and agents now have the advantage of Prudential’s Pulse mobile application. This digital offering recorded 4.8 million leads in the first half of 2022, around a quarter of agency annual premium equivalent sales.

A little over four years ago, Prudential announced the merger of its life insurance and asset management business in Europe and United Kingdom. Following this Prudential announced the demerger of M&G within a little under a year and the spin-off listed on the London Stock Exchange. M&G operates an old-fashioned with-profit funds on its back book and sells its new take on this, PruFund. Historically, M&G has been successful here.