Prudential boosted by China reopening but lacks clear strategy

There was a palpable sense of relief in Prudential’s (PRU) results as the Hong Kong-based and Asia-focused life insurer seeks to benefit from the general opening of economic activity after China lifted most Covid measures. Face-to-face meetings are still an important selling strategy in Asia and the company retains at least 5,000 agents across its distribution channels. Despite this headwind last year, the company reported adjusted operating profit of $3.37bn (£2.80bn), up 8 per cent at constant currency.

The hedging complexity that characterises life insurance companies made itself felt on new business lines. Profits here at constant currency were 11 per cent lower at $2.18bn because of the impact of rising interest rates on hedging positions – Prudential’s primary goal being to defend the stability of its Hong Kong-regulated group minimum capital requirement. However, outside of Hong Kong, new business performed better, growing by 5 per cent to $1.8bn.  

Drilling down into Prudential’s growth markets showed why the company was so keen to shift its strategic operations to Asia. In countries such as Vietnam – which is benefiting rapidly from a maturing economy – Myanmar, the Philippines and Thailand, profit growth reached double figures, with the 20 per cent growth in new-line business easily the company’s strongest performance. In IFRS terms, profits within the segment more than doubled to $881mn.

When it came to asset management, the performance was more mixed. Prudential’s Eastspring, like every other asset manager out there, was hit by volatility in asset prices and assets-under-management declined by 12 per cent in constant currency terms to $221bn, as negative exchange rate movements and market declines combined to hit profits. The fee margin stayed broadly flat at 29 basis points, while the overall cost ratio rose marginally to 55 per cent. In flow terms, the picture was more positive, with in-flows from Prudential’s other businesses of $7.8bn, partially offset by withdrawals of $3.2bn from third-parties.

Prudential’s performance was satisfactory, but there had been an expectation prior to the results that management would offer a clear direction on strategy. The loss of momentum after a quarter of gains explains the sudden fall in the share price and reflects the market’s initial disappointment. Consensus puts the company on an adjusted forward price/earnings ratio of 13 for 2023, a premium to its peers but also reflective of its greater potential for growth. Buy.

Last IC view: Buy, 986p, 10 Aug 2022