Profits at Prudential up 8%, but Covid challenge remains

The FTSE 100 insurance giant is going through the mill at the moment, but the question for investors is whether the bad news has been priced in and the longer-term prospects remain intact, says Richard Hunter.

Prudential is in a difficult place at present, trying to balance its short-term challenges against its longer-term objectives.

Indeed, the longer-term strategy is very much intact, and the group is one which is on an extremely stable financial footing, boosted by a fundraising of $2.4 billion (£1.9 billion) in the last financial year, which went towards reducing debt.

The insurance and health protection markets within Prudential (LSE:PRU)’s target geographies provide a rich seam of opportunities alongside increasingly wealthy populations with evolving financial needs. The company has pointed to an expected middle-class population of 1.5 billion across Asia by 2030, with an estimated health protection gap of $1.8 trillion. Given the group’s current customer base of 19 million, the potential spoils are enormous and Prudential has a strong reputation in these regions.

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For the moment, however, it is those very regions which have tended to suffer the full force of the latest Covid-19 variants, with particularly acute financial pain being felt still in Hong Kong. Customer retention remains solid, but the ability to grow the business was severely impacted by the latest wave of the pandemic, which severely impacted agent activity in the region.

More positively, Prudential is spinning the plates to maximise the business it has, and the 32% reduction in central costs was a strong contributor to an increase in adjusted operating profit, which rose by 8% to $1.6 billion, largely in line with forecasts. The group expects a $70 million reduction in costs by the beginning of next year, adding to the $180 million of saving arising from the demerger of the UK business.

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The increasing focus on digital distribution adds to the group’s multi-channel offering, and despite the Covid-19 related disruption, Annual Premium Equivalent (APE) sales rose by 9% to $2.2 billion, ahead of the expected $2 billion. Prudential’s Pulse platform is driving the new digital approach, where customers are in theory less expensive to recruit and then serve, which should boost margins.

The issues nonetheless remain, and the current market volatility, increase in bond yields and wider corporate bond spreads all conspired to decimate profit after tax, which fell by 90% to $106 million. In terms of outlook, Prudential notes that there are some signs of stabilisation across its markets following the latest pandemic wave, although the second half of the year is likely to be one of challenging operating conditions.

The increase to the dividend is a welcome sign of management prospects, although the projected yield of 1.5% is scant solace to investors who have seen sharp declines in the total return on these beleaguered shares.

Prudential is going through the mill at the moment, as reflected by a share price decline of 30% over the last year, as compared to a gain of 4.6% for the wider FTSE 100. The main question for investors is now whether the bad news has been priced in and the longer-term prospects remain intact as Prudential attempts to navigate these choppy waters. The market consensus of the shares as a strong buy is evidence that most believe that the strategy will eventually prosper.