Investment View: Steer clear of the Pru, but if you do invest, be careful
Getting on the wrong side of your regulator is a bad idea. Particularly in financial services
Standard Life and Aviva got the Investment View treatment last week. Today I’m going to focus on a company some would consider to be the life-insurance sector’s star: Prudential.
This is a company that received some good reviews from the City following its results in March. While its great rival Aviva dashed expectations and unexpectedly cut its dividend, Prudential hiked its payout by nearly 16 per cent.
Pre-tax profits surged 54 per cent to a shade below £3bn and the chief executive Tidjane Thiam announced that the company had attracted 1m new customers in Asia.
What’s not to like? Pru is in the right place, at the right time. The shares have come off a bit since its results – quite a bit in fact – but they’re still up by about a half since the botched bid to dramatically increase its presence in the region by buying Asian insurer AIA, now an independently listed company run by Pru’s former boss, Mark Tucker.
Ah, that bid. Part of the reason for the shares’ recent weakness is that the Financial Services Authority fined the company some £30m for failing to keep it informed about its plans, and the massive rights issue that would have accompanied a successful deal. It also publicly censured Mr Thiam.
On the day after the fine was announced, the shares were the biggest fallers on the FTSE 100. Note to Pru: Getting on the wrong side of your regulator is a bad idea. Particularly if you operate in financial services.
The chairman Paul Manduca said the company wanted to “move on” after the fine. You often hear people saying that when problems have emerged, but the underlying issues haven’t been addressed and they’d like to sweep them under the carpet. Is it worth noting that Mr Thiam’s pay package was nearly £8m last year despite that huge fine?
Look, Prudential has some great businesses in Asia, even after the failed bid. They make lots of money. That dividend increase was a very good sign; it shows confidence, and rewards shareholders for the money they have put into those businesses.
That said, my one tiny concern is whether regulators in that part of the world will at some point decide that insurers are making rather too much out of consumers who don’t generally have access to anything resembling a welfare state. Just a thought.
I asked Pru about this – margins in Asia are close to twice what the company makes in the UK, for example.
Here’s the response: “In Asia, insurance penetration is much lower and populations much younger so the focus there is on health and protection products to meet the demand from the rapidly growing middle class. These are typically core life-insurance products to which customers pay for additional features such as health insurance or critical illness. So customers typically have a number of products with us to meet their requirements. These are regular premium products which also tend to offer better returns than single premium. Regular premium makes up about 90 per cent of new sales.”
So there you have it. The test I apply to stocks covered in this column is this: “Would I put my own money in this company?”
When it comes to the Pru, I would not. In terms of performance, I think the shares will do OK. While Pru trades at a chunky premium to the “book” value of in-force business, you’d expect that from a fast-growing operation. The prospective yield, at 3 per cent, is respectable given the company’s a growth business.
If you invest in the Pru you should be rewarded, certainly in the medium term. Asia’s a good place to be. But this is a company that needs to be watched like a hawk. It has been involved in unnecessary foul-ups one too many times for my liking, and yet doesn’t really appear to see where it has a problem. So if you do invest, have a care.
Another life insurer which comes with a warning light is Resolution. An agglomeration of various life companies, including Friends Provident and AXA’s UK business, created by the insurance entrepreneur Clive Cowdery, it offers an astonishing yield of nearly 8 per cent, fully covered by earnings too.
It has shaken up its governance and moved the HQ from Guernsey so it looks a little more like a normal company than when it was set up, although one that needs to do a lot of work to integrate its businesses. I worry that its name keeps popping up in deal rumours despite management saying they’re not after more acquisitions. And strategically it’s all a bit opaque. But at the price it’s worth a speculative buy.
As far as life insurance goes, if you’re looking for a secure and sensible company that does what it says on the tin, stick with Legal & General. It does the right things on pay, offers a very healthy dividend (5 per cent) and has the potential to expand its fund-management business overseas. The shares are probably high enough right now, so it’s just a hold, but buy with confidence on any weakness.
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