Since last year’s spin-off of UK asset management arm M&G, Prudential (PRU) describes itself as an “Asia-led portfolio of businesses focused on structural growth markets”. But does that portfolio continue to obscure the life insurer’s inherent value?
Third Point, the activist hedge fund led by Dan Loeb, thinks so. After building a shareholding of just under 5 per cent, the New York-based group this week wrote to Prudential’s board to call for a separation of the life insurer’s US and Asian businesses, and to axe its London headquarters. Shares in the FTSE 100 company responded by rising 2 per cent.
The activist’s argument centres on the idea that the combination of pan-Asian insurance franchise PruAsia and US-focused annuity writer Jackson provides “no discernible benefit” under the same corporate umbrella. Prudential’s trading multiple of nine times consensus earnings of £1.57 for 2020 reflects this, reckons Third Point.
Such a cheap rating helps to explain why Prudential parted company with its slower-growing M&G business last year. For the past decade, PruAsia’s return on equity has consistently surpassed 25 per cent, thanks to well-developed distribution channels and strong demand from an increasingly wealthy Asian middle class. Prudential’s management has long-heralded the greater opportunities in its Asian business, and the chance to free up surplus capital.
Both Third Capital and other institutional shareholders see Jackson as a stodgier business with a greater strain on capital. But while there is a simple logic in a split, its execution is likely to be a complex affair.
“We suspect that US cash flows are more critical than they may at first appear, providing cash flow to reinvest in Asia via bancassurance transactions,” argues Jefferies. “If Prudential really intends to break up, then it will be easier to accomplish if Jackson were more diversified, a process that will take many years of organic growth.”
Though he views a split of the US and Asian units as “a logical step”, JP Morgan analyst Ashik Musaddi has arrived at a similar conclusion, pointing to considerable uncertainties around the separation process, and Jackson’s eventual capital structure, ownership and valuation.
Third Point says it is confident it can convince most shareholders to back its proposals, although top-five shareholders Vanguard and Norges Bank declined to comment on the letter. Prudential said it “looks forward to commencing a dialogue with Third Point”.
