19th Jan 2016 13:11
LONDON (Alliance News) - The unveiling of a better-than-expected capital position under new European Union insurance rules helped to boost shares in Prudential PLC on Tuesday as new Chief Executive Mike Wells declared that middle classes across Asia, Europe and the US remain at the heart of the group's strategy.
The update came ahead of a conference for analysts and investors, which has been seen as an opportunity for Wells to offer reassurance about the sustainability of strong growth in Asia, in what marks the chief executive's first major interaction with the market since succeeding Tidjane Thiam last summer. The stock was up 4.6% at 1,409.00 pence shortly after midday on Tuesday, one of the top gainers in the FTSE 100.
"Prudential has three clear structural long-term growth opportunities across Asia, the US and the UK, driven by the increasing financial self-reliance of the middle classes. This important trend is creating growing demand for savings globally and specifically for health and protection in Asia," Wells said in a statement.
What's more, Wells said, Prudential has made "good progress" towards achieving a range of financial targets for 2017, which were set by his predecessor in December 2013. The targets largely relate to cash generation and profit growth in Asia, building on objectives set three years earlier.
The life insurer was not expected to diverge from a strategy that has seen great success in tapping into Asia's growing middle class, the 'baby boomer' generation in North America, and an ageing population in the UK.
Prudential, which was the first of the London-listed insurers to disclose detailed Solvency II figures, reported a solvency capital ratio - a measure of an insurer's own funds as a percentage of the regulatory requirement - of 190% as of June 30, 2015, versus analyst expectations of about 180%. Under the Solvency II rules, which came into force across the EU at the start of 2016, the group's capital surplus was GBP9.2 billion.
"Our Solvency II outcome confirms the strength of the group's capital position and cash generative nature of our businesses. We remain confident that the group will be able to continue to deliver high-quality products and services to both new and existing customers and strong, sustainable, profitable growth for our shareholders," Wells said.
Analysts at Barclays said Prudential's solvency ratio would dispel any potential concerns about the insurer's capital strength. "We believe the UK insurers in general will likely have lower ratios than their European counterparts, due to having a larger denominator, although this will be somewhat offset by having less sensitive surplus/ratios," Alan Devlin and Angel Kansagra of Barclays said in a note, referring to the higher capital requirement set by the UK.
Barclays reiterated an Overweight rating and 1,726.00p price target on the stock.
Prudential's solvency ratio was lower than the 212% reported by France's AXA SA and the 200% reported by Germany's Allianz SE, though higher than the 160% for Dutch insurer AEGON NV, although regulators have warned against comparing the numbers. In a letter written earlier this month, Sam Woods, executive director, insurance at the UK's Prudential Regulation Authority wrote of the "considerable caution" required when making "comparative judgements" on the basis of Solvency II capital positions.
Significantly, the Solvency II regime will not alter Prudential's dividend plans, Chief Financial Officer Nic Nicandrou told the conference. Prudential's dividend for 2014 was 36.93 pence per share, up from 33.57p for the prior year.
"As the US, Asian and M&G businesses have local capital requirements (Solvency II is not the biting constraint), the cash generation profile for these businesses is unchanged," Societe Generale's Abid Hussain said in a note, reiterating a Buy rating and 1,900p price target on the stock. The analyst also noted Prudential's commentary on changes to the drivers of cash generation in the UK.
"Relative to the existing profile, the expected in-force free surplus generation will increase as a result of the release of the higher capital requirements and risk margin as the business runs-off. Conversely, the expected in-force free surplus generation will decrease due to the run-off of transitionals and the removal of valuation and reserving margins which existed under Solvency I," Prudential said.
In addition, the Solvency II rules will increase capital requirements on writing new bulk annuity business in the UK, meaning Prudential will be "selective" when it comes to allocating its capital, it said.
Setting out its resilience to a market downturn, Prudential said an instantaneous 40% fall in equities would wipe about GBP1.9 billion from its surplus and reduce the solvency ratio to 175%. A 100 basis points increase in credit spreads, with credit defaults of 10 times the expected level in Prudential's Jackson life business in the US, would cut the surplus by GBP1.2 billion and reduce the solvency ratio to 181%.
As well as revealing the sensitivity of its Solvency II surplus to equity markets and credit spreads, Prudential said it stood to benefit in the event of a 100 basis points increase in interest rates, a move which would boost its June 30, 2015 surplus by GBP1.1 billion and increase the solvency ratio to 206%.
Meanwhile, Prudential named John Foley, its group investment director, as the permanent chief executive of its UK & Europe operations, a move which was welcomed by analysts. Foley had been serving in the role on a temporary basis following the departure of Jackie Hunt, who left the group after about two years in the role.
"We view the appointment very much as one made by the relatively new Group CEO Mike Wells. We do not anticipate a major shift in strategy in the UK where the With Profit fund in particular appears to be doing very well," Panmure Gordon's Barrie Cornes said, reiterating a Buy rating and 1,891 pence price target on Prudential shares.
By Samuel Agini; [email protected]; @samuelagini
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