View from City Road: For value, be with the Prudential

THE rehabilitation of the Pru continues apace. Eighteen months after the insurer was the City's favourite whipping post, Prudential Corporation yesterday declared a 46 per cent rise in half-year profits, a 7.9 per cent increase in its interim dividend and the prospect of more recovery and growth to come. Who would now tell Mick Newmarch, the chief executive, that he badly mistimed getting rid of Prudential's estate agencies?

Prudential's interim pre-tax profit of pounds 249m was a record. The biggest improvement came from general insurance, where Prudential reaped the benefit from its decision six months ago to stop accepting business from insurance brokers. The company reduced its general insurance losses from pounds 54m to pounds 14m, and would have made a profit but for Mercantile and General, the reinsurance arm. The household and motor business sold through the Pru's field force swung back to a profit of pounds 3m after a pounds 23m loss last year, and the overseas operations also made strong progress.

Prudential also received a pounds 30m fillip from its non-insurance activities, mainly due to some smart footwork in the management of its shareholders' funds. The group made pounds 52m of investment gains after its well-timed switch in May of pounds 120m from equities into German mark bonds.

At first glance, the pounds 199m profit from the core life insurance business looks less impressive. However, this pounds 9m advance was achieved after a provision of unspecified size that recognises the Pru's expectation that it will once again have to cut the bonuses paid to its with-profits policyholders at the end of this year.

The big question remains M&G Re. The life insurance side of this business is very strong, increasing its profits for the half from pounds 24m to pounds 32m. But the general side is dogged by the problems of the reinsurance spiral. The need to set aside additional reserves for hurricanes, storms, IRA bombs and other disasters left it pounds 25m in the red. Mr Newmarch has set new management to work, but he also has the option of jettisoning M&G's general side in his continuing strategic review.

The 4.1p interim dividend seems to point to a total dividend for the year of at least 11.9p to maintain the 8 per cent increase. Prudential has substantially outperformed the market since immediately before the election. With profits of pounds 450m or more on the way this year, its shares still look good value.

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