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.

On the last day of campaigning before the polling booths open, the SNP leader has written to voters in a final attempt to convince them to vote for independence
scotland decidesIs a huge gamble on oil keeping First Minister up at night?
Arts and Entertainment
Rosalind Buckland, the inspiration for Cider with Rosie died this week
booksBut what is it like to be the person who inspires a classic work of art?
Life and Style
techApple has just launched its latest mobile operating software – so what should you do first?
A male driver reverses his Vauxhall Astra from a tow truck
newsThe 'extremely dangerous' attempt to avoid being impounded has been heavily criticised
Arts and Entertainment
Lionel Messi in action for Barcelona
filmSo what makes the little man tick?
Arts and Entertainment
tvReview: An undercooked end (spoiler alert)
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Pharrell dismissed the controversy surrounding
musicThe singer said 'the last thing I want to do is degrade'
Cesc Fabregas celebrates his first Chelsea goal
footballChelsea vs Schalke match report
Arts and Entertainment
Toby Jones (left) and Mackenzie Crook in BBC4’s new comedy The Detectorists
tvMackenzie Crook's 'Detectorists' makes the hobby look 'dysfunctional', they say
Life and Style

Olympic diver has made his modelling debut for Adidas

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Recruitment Consultant - Soho - IT, Pharma, Public Sector

£20000 - £25000 per annum + OTE £35,000 first year: SThree: The SThree group i...

Sales Executive

£20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week