Prudential still focused on Asia
It’s clear that Asia is still the focus of attention for the Prudential and despite the AIA fiasco, CEO Tidjane Thiam still seems to think it was a good idea. Better than expected profits and a lower cost of the failed takeover of AIA allowed Prudential to raise half-year dividends by 5 per cent.
Cost of the AIA deal was lower at £377 million than the £450 million expected. This was due to tax deductions, cheaper currency hedge and lower cost of advisers fees. Thiam is adamant that the acquisition attempt was the right course of action and losing AIA is a disappointment. He said “the Board was unanimous in believing – and still believes – that AIA was absolutely a unique opportunity for Prudential in an absolutely core market for us to significantly amplify our presence, our position, and increase margins.” He believes it would have generated “huge value for our shareholders”.
Despite the loss of AIA, the company continues to regard Asia as it’s main target for growth, with 36 per cent growth in sales here in the first half. Southeast Asia, specifically Malaysia, Philippines, Indonesia, Vietnam, Thailand, Singapore and Hong Kong have seen growth of 46 per cent with margins of 72 per cent. These remain a “priority destination” for their marginal capital investment. Prudential’s future Asia strategy will continue to focus on expanding distribution through tied agency partnerships.
The Pru has also been active in expanding distribution via the banking channel through a bancassurance partnership with United Overseas Bank Limited (UOB). With over 400 branches in Indonesia, Thailand and Singapore, UOB will distribute Prudential’s life, accident and health insurance products through their bank branches for an initial term of 12 years. As part of the deal Prudential bought UOB Life Assurance Limited for £192 million.
Prudential recently announced listing on the Hong Kong and Singapore Stock Exchanges which “underline the Group’s long-term commitment to Asia” and raise their profile in the region. CFO, Nic Nicandrou, is clear that capital allocation will target geographic markets with the best returns and shortest payback periods – “It means that we will continue to focus on Asia because of the high savings rate, the increasing disposable income and the high population sizes which are fuelling growth at very profitable rates.”
Although the spotlight is on Pru’s Asian activities, US sales were up 43 per cent with higher margins than Asia. However this is due to Prudential benefiting from many of the large providers leaving the market causing distributors to sell more Prudential products. Tidjane Thiam explained that “this is not sustainable, because it is not designed to be sustainable. It’s opportunistic.”
In the UK Prudential are focused on sustainable cash generation rather than growth and on investment performance from their asset management business. The Inherited Estate was valued at at £5.9 billion at 30 June 2010. Contributions from UK with-profits were lower due to bonus reductions from 2009. When describing the UK market, the pull of Asia is obvious. Their UK activity aims to maximize profits rather than volume as there are “great investment opportunities elsewhere” and Thiam believes that capital can be invested with returns of 20 per cent over 2 or 3 years in the US and Asia. “Cash we can get out of the UK is very precious for us. It allows us to grow very aggressively elsewhere in the world.”
Although cautious on the Global economic outlook, especially western economies, Asia is seen as more resilient. Prudential feels markets consider growth in Asia less dependent on the US than it previously was. It believes China’s growth rate will moderate rather than stall and will therefore not destabilise the region.
