Prudential (PRU) has provided a definitive statement of intent on its US interests at the half-year mark, while confirming that it will adopt a new dividend policy aligned to the Asia and Africa growth strategy and to the intended separation of the businesses Stateside. Prudential will now split-off Jackson from the group, commencing with a minority IPO planned for first half of 2021 and a “full divestment over time”.
The strategic switch is probably understandable when you consider that adjusted profits for Asia increased by 14 per cent in the first half, whereas they pulled back 19 per cent in the US. Geopolitics have not helped matters. The ongoing trade ructions between the world’s two largest economies take on an extra dimension when you have a foot in both camps, though it is a moot point whether politics played a part in the decision.
The interim dividend of 5.37 cents per share (ex-date 20 August), represents one third of the current expectation for the 2020 full-year pay-out, with the focus remaining on capital discipline. The balance sheet remains in good trim, with surplus capital well in excess of regulatory constraints at $12.4bn (£9.54bn), while the LCSM ratio (Hong Kong’s Local Capital Summation Method) strengthened by 25 percentage points to 334 per cent.
The insurer recently announced the completion of a $500m equity investment by Athene Life Re Ltd in Prudential’s US business in return for an 11.1 per cent stake. The US interests includes Jackson National Life Insurance Company, a leading annuity provider, and Illinois-based institutional asset manager PPM America Inc.
The decision on the IPO marks the end of a long period of uncertainty over plans for the US business, but attention may simply just switch to Asia. Earlier this year, Prudential came under pressure from US hedge fund Third Point, which suggested that the group could generate additional value for shareholders by separating its US and Asian businesses, while closing its head office in London. Analysts at RBC Capital concur, pointing to implied upside based on a sum-of-the-parts valuation using peer group multiples, though this was at the point when markets troughed in March.
It may seem unthinkable that the insurer would up pegs from Holborn Bars after 172 years, but it has long since started looking eastwards for growth opportunities. As the group has previously pointed out, insurance penetration in Asia is only 2.7 per cent of gross domestic product, compared with 7.5 per cent in the UK, while mutual fund penetration is just 12 per cent in Asia, compared with 96 per cent in the US.
It is a gap that needs to be filled, a reality brought home by the rapid growth in the number of open-ended equity and balanced funds in China. Their aggregate value has more than doubled over the past 12-months, providing support to the mainland SSE index, up by a fifth over the same period, despite the US spat and the virus outbreak originating in Hubei Province.
The space may be getting a little more crowded, but it still represents a huge opportunity, even though the market still values the group as a mature, low-growth affair, rather than one likely to benefit from its Asian exposure. The correlation between market value and projected earnings growth suggests that the stock could be fundamentally undervalued, arguably a point borne out by an average five-year price/book ratio of 2.7. Return on equity has averaged 15.6 per cent over the same period, much of which is derived from its Asian operations.
Prudential’s Asian businesses are expanding on the back of two main structural drivers: a rapid increase in median incomes and demographic transition towards an ageing populace. It is a heady brew and it underpins a business which Daniel Loeb, the founder of Third Point, reckons “would be worth well in excess of Prudential’s current market capitalisation” if it was spun-off as a standalone entity.
On the income front, pay-outs are now expected to “grow broadly in line with the growth in Asia operating free surplus generation net of right-sized central costs” – admittedly, a little vague, but the intervention of an activist investor would seem to have resulted in further onus being placed on reinvestment in Asia at the expense of share-based returns. Hardly surprising given the prize on offer, but, like HSBC Holdings (HSBA), the group has gradually morphed into a primarily Asian business.