Prudential starting to fire on all cylinders

Prudential (LSE:PRU) has a new strategy and fresh purpose, and the early signs of this renewed focus are extremely encouraging.

Now focused on Asia and Africa, the group is fully aware that such major continents bring significant opportunities. The combined populations of the two continents is around four billion, with an estimated $1 trillion of additional annual gross written premiums by 2033 being the addressable market.

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The group had previously noted that in Asia, for example, household wealth was over $150 trillion in 2021, broadly similar to North America and well in excess of Europe, while it is expected that by 2030 Asia and Africa will house three-quarters of the global working age population.

In addition, the group has noted that insurance penetration remains low in Asia, where growing demand for savings and protection products come alongside the need for wealth management and retirement planning amid a higher income market.

The group’s stated aims by 2027 are punchy, including new business profit growth of between 15% and 20% annually, but even at this early stage Prudential is confident in achieving these goals. Indeed, the outlook comments mention that the momentum continues, with new business and adjusted operating profit expected to rise by more than 10% in the coming year. 

The new business profit figure for 2024 came in at $3.08 billion, an increase of 11% from the previous year. There was also 5.6% growth in Insurance new business profit to $3.42 billion and 8.6% within Asset Management to $304 million. At a headline level, adjusted operating profit of $3.13 billion was up from $2.89 billion the previous year and exceeded the $3.05 billion estimate. Pre-tax profit, meanwhile, grew by 41% to $2.95 billion, leading to the picture of a group which is beginning to fire on all cylinders.

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The free surplus ratio of 234%, as compared to 242% at the end of last year, is comfortably ahead of the group’s target range of between 175% and 200%, which potentially augurs well for further shareholder distributions. While Prudential is not traditionally known as a group where the dividend payment is a shining light – the increase announced takes the projected yield to a pedestrian 2.3% - the $2 billion share buyback programme is ongoing with the strong possibility of more to come. Prudential is currently weighing up a partial sale of its stake in ICICI, which could not only net the group an estimated $2.5 billion, but could also be returned to shareholders.

Elsewhere, the focus on digital distribution and the move towards more technology-based solutions continues apace, such as the increasing use of advanced analytics and AI for higher value purposes, which is being selectively trialled.

Less positively, and from a broader perspective, heightened geopolitical tensions between the West and China cannot be overlooked, with Hong Kong the group’s biggest single country of profit generation during 2024 at $1.1 billion. Competition across its markets persists, while costs for businesses are remaining generally elevated.

Another driver of growth which the group sees as an integrated offering is the Eastspring investment arm, which reported strong net inflows, taking the total of Funds Under Management to $258 billion. This was attributed to improved market conditions, better investment performance and strong retail momentum, with the structure enabling the virtuous circle of new funds being managed separately to benefit the group as a whole, with an improving trend towards equity funds being another area of promise.

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The improving fortunes of the Chinese economy and indeed the Hong Kong market have propelled the shares higher by 21% so far this year. Over the last year, progress has been more pedestrian, with a gain of 4% comparing to a spike of 12.5% for the wider FTSE100.

For investors, however, it seems that there is still much to go for. A share price decline of 28% over the last three years leaves the stock on a modest valuation by historic standards, let alone the potential and significant promise of both Asia and Africa. As such, the market consensus of Prudential not only as a buy, but also as a core portfolio constituent, is likely to continue.