Half-year results for Prudential (PRU) were very strong, and we plan to maintain our fair value estimate of £13 per share and no-moat rating for the United Kingdom insurer. The company continued to focus intently on growing its underwriting profits and fee income. In the first half of this year, fee income grew 24% from last year’s levels to £764 million, thanks to the success of its U.S. subsidiary – Jackson National Life, which has become one of the largest annuity writers in the country.
Additionally, half-year underwriting profits of £680 million were 23% higher than the year-ago period, reflecting the success of Prudential’s life and health products in Asia. These two sources of gains contributed to a 17% increase in operating income of £1.5 billion for the first half of this year. But more importantly, the balanced and diverse earnings mix allows the company to grow steadily with the Asian economies while gaining positive exposure to rising equity markets.
While Prudential’s U.S. strategy was relatively successful, it is not without risk. Prudential has taken market share in the annuity market from MetLife and Prudential Financial, as the two large-cap U.S. insurers are cutting back on sales to limit their exposure to market risk. In the first six months, Prudential saw a 21% year-over-year increase in annuity sales, compared to an approximately 45% sales reduction for the two U.S. firms.
However, with every new sale, Prudential was also using up a bit more of its free surplus. At the six-month mark, free surplus for the whole firm was essentially unchanged from last year’s levels at £4.2 billion. This compares sharply to a 20% growth in free surplus in a 12-month period between June of 2012 and 2013, when Prudential was focusing on growing lower-risk life and health insurance business in Asia.
