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Prudential pushes higher as rapid Asia growth boosts results

By Oliver Haill

Date: Tuesday 14 Mar 2017

Prudential pushes higher as rapid Asia growth boosts results

(ShareCast News) - As double-digit growth in Asia and the weak pound offset, full year results from Prudential beat City forecasts for operating profits and its dividend.
IFRS operating profit for the year grew 7% to £4.26bn, beating the consensus forecast of £4.1bn, though at constant exchange rates profits would have fallen 2%.

The insurance and savings group generated an underlying free surplus of £3.59bn, up 18% at reported exchange rates or 10% at CER.

Life new business profits of £3.09bn, surged 24% or 11% at CER, with Asia saving the day, as new business profits declined in the US and UK, by 13% and 16% respectively.

With cash remittances growing 6% tho £1.7bn, the board hiked the full year ordinary dividend 12% to 43.5p per share.

City analysts were expecting a dividend of 41.6p.

Asia, in delivering a seventh consecutive year of double-digit growth in new business profit, IFRS operating profit and capital generation, was the engine of growth.

In the fourth quarter, eight of Prudential's markets grew by more than 20% and for the full year, new business profit across the region increased by 22% to £2.03bn, operating profit by 15% to £1.64bn and free surplus generation grew 15% to £859m.

In the US and in the UK, chief executive Mike Wells said business remained "well positioned to navigate a period of significant regulatory change".

Summing up 2016, he said: "Prudential has delivered a strong financial performance in 2016. In a year that has seen continued low interest rates, market volatility and dramatic political change, our results continue to benefit from the scale and diversity of the group's global platform, the disciplined execution of our strategy and the strength of the opportunities in our target markets."

Clouds among the silver linings included a 4% fall in the M&G investment business's operating profit due to net fund outflows.

Profit from new annuity business reduced to £41m from £123m as it withdrew from the annuity market and in response to the findings of the FCA's thematic review of non-advised annuity sales practices, the UK life business made a provision of £175m for the cost of this review and related potential redress, which does not include potential insurance recoveries of up to £175m.

Shares in Prudential climbed 3% to 1,712.5p, their highest level since 2015's all-time highs around 1,750p.

Analyst Richard Hunter at Wilson King said Prudential continued to live up to its name, with the diverse nature of the group reaping dividends, with growth in Asia, US and UK, while its complex currency position has benefited from the weakness of sterling.

Overall he said Prudential's main attraction was its exposure to a rapidly expanding middle class in Asia and its increasing need for insurance, while in the US and UK savings and pension requirements remain solid.

"Inevitably within such a large entity there will be pockets of mild disappointment, such as the negative retail outflows in the M&G business and the effect of both the withdrawal from the annuities business and sale of its Korean unit weighing on the numbers," King said.

"The immediate future will also pose issues, with the ramifications of Brexit likely to unfold, a rise in US interest rates not necessarily working to Prudential's advantage and the cost of regulation rising as challenges.

And while there was strong Hong Kong sales in 2016, analysts at RBC Capital Markets expressed concerns looking forward, expecting lower sales in 2017 and beyond due to new regulation introduced at the beginning of this year as the Chinese regulator has introduced another rule to stem the outflow of monies to Hong Kong, "and in contrast to previous regulations we expect this one to reduce offshore sales".

"Prudential has been the most successful insurer at attracting monies from mainland China and therefore is particularly at risk,
at a time when its other large Asian geographies are showing slower sales growth."

Elsewhere in Asia there were encouraging signs on 'diversity', with Indonesia returning to sales growth in December and Singapore sales in the 2nd half were 12% higher year on year.

Reflecting the US Department of Labor's fiduciary rule changes, RBC noted that while variable annuity sales declined 25% versus 22% for the market as a whole, net inflows remained positive for PRU at $4.4bn.

"Uncertainty now remains: the rule may be delayed, watered down, replaced or cancelled altogether. Whatever the outcome,
we do not expect the market to fully recover to previous highs."

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