Prudential's Asian opportunity at a discount

Structural drivers such as a growing middle class, lack of retirement provision and desire for savings products are pushing more UK-listed life assurers into the Asian market. However, Prudential is the furthest along in developing a presence. This strategy began almost seven years ago with the appointment of former chief executive Tidjane Thiam and the failed attempt to buy insurer AIG's Asian unit. However, Prudential has had more success since using cash generated by the more mature UK and US businesses to grow in Asia. For example, Mr Thiam planned to double Asian operating profit between 2009 and 2013. This was achieved a year ahead of schedule.

New business profit for life assurance during 2016 increased 11 per cent at constant currency rates on a group level. Asia was crucial to this, primarily because of growing demand for health and protection coverage products. These products accounted for 62 per cent of new business profit in the region. That helped push new business profit for the Asia life business 22 per cent higher to £2.03bn. What's more, regular premiums on longer-term contracts now account for around 93 per cent of annual premium equivalent (APE) sales. This means a greater proportion of recurring income, which is less impacted by market fluctuations.

However, it is not just life assurance that is a growing market for Prudential in Asia. Asset manager Eastspring Investments gained £1.84bn in net inflows last year. Overall assets under management reached a new high of £118bn by the year-end. This meant a 10 per cent increase in operating profit to £141m.

Another plus point of the life assurer's skew towards Asia is that it insulates it from the negative impact of reforms to the annuity markets in the US and the UK. US life business Jackson suffered a decline in new business profit due to government reforms around the sale of variable annuity products. However, management efforts to improve the business mix, as well as rising average account balances improved fees and operating profit. The latter increased 8 per cent last year to £2.1bn.

In the UK annuity sales have continued to decline due to management's decision to gradually withdraw from the market, following pensions freedom changes in 2015 as well as new Solvency II requirements. The latter has made it more expensive for insurers to write annuities, since they need to hold a greater level of capital against these long-term liabilities. As a result, UK operating profit declined by 32 per cent last year. Management has decided to withdraw entirely from the UK annuity market, and will stop writing new annuities to existing customers before the end of this year. Instead, customers will be offered a panel of external annuity providers.

At UK asset manager M&G outflows of higher-margin retail assets brought down operating profit by 4 per cent. However, assets managed by external clients increased by 8 per cent to £137bn, which together with internal cash brought assets under management up to £265bn.

The good news is that the Asian business remitted the most cash back to the group last year, offsetting a decline in cash generation by other businesses. Asia remitted £516m last year, up 21 per cent on 2015. This helped push up overall cash generated by 6 per cent to £1.7bn. This was crucial to management's ability to increase the annual dividend by 12 per cent on the previous year. It also meant the Solvency II ratio increased to 201 per cent - the highest in the sector.