Prudential fires up in Asia

It was a little over a year ago that shareholders vented their anger at life assurer Prudential's bungled and costly attempt to buy AIG's Asian business, AIA. The wounds inflicted at that time were regarded as deep and our sell recommendation on the back of it () was followed by a share price slide.

But wounds heal and Prudential is now a more attractive proposition. In fact, the shares now trade below embedded value when, as recently as April, they were trading at a premium - the only major UK life assurer to do so. Granted, there are still some shareholders who continue to bear a grudge, and chairman Harvey McGrath suffered the embarrassment of having over a fifth of shareholders at May's AGM vote to have him sacked.

However, what should be grabbing shareholders' attention is the solid progress that Prudential has been making this year. The business plan has been simple. The relatively mature UK market continues to generate plenty of cash, which is used to support new business in the fast-growth Asian market. This has been working nicely and, with its first-half figures this month, Prudential reported that new business profits had risen 20 per cent to £1.07bn on an embedded value basis (which includes expected income from future premiums), while investment in new business fell 12 per cent to £297m. Taking a selective approach, but focusing on less capital-intensive new business written, has also worked wonders for the new business margin - up from 54 per cent last year to 59 per cent.

UK growth is slender compared to the Asian outcome, but first-half total UK sales still rose 7 per cent to £409m and new business profits grew 8 per cent to £146m. Nearly all the new business has come from the retail side, with just one £28m bulk annuity contract written in the first half. In contrast, first-half retail sales reached £381m - admittedly, flat on the year. Although, the end of a partnership agreement that had delivered plenty of individual annuity business meant that the UK margin slipped from 35 per cent to 32 per cent.

Asia, however, continues to boom - adding further credibility to the group's growth and cash financial objectives laid out last year. These include a target to double, by 2013, the statutory £465m life and asset management operating profit achieved in 2009, and to double 2009's £713m of new business profits over the same period. Progress looks good and first-half new business profits rose from £396m to £465m - that would have been higher still, but for the Indian market, where sales fell from £119m to £47m. Over time, that decline should be reversed, but the uncertainties caused by a fundamental change in the regulatory regime there covering savings and protection products has affected demand.

US sales through subsidiary Jackson National Life have been performing strongly, too, thanks to management's decision to concentrate on quality rather than quantity. Sales there rose 20 per cent to £672m at the first-half stage and new business profits jumped 27 per cent to £458m - pushing the business margin from an already impressive 64 per cent to 68 per cent.

Prudential also boasts a successful and well-established asset management business - M&G. And, while first-half net inflows there, at £2.9bn, were down from £4.7bn a year earlier, virtually all of the inflow came from retail investors - they tend not to switch their investments around as much as institutional investors. Meanwhile, the Asian asset management side saw broadly neutral net flows compared with a £1.3bn inflow in 2010's first half - which isn't so bad given the outflows experienced following the Japanese earthquake.

Group finances remain in good shape, too, and the surplus over the Insurance Group Directive minimum requirement was solid enough at £4.1bn - although that's before deducting the cost of the half-year dividend of around £200m.