Prudential, the UK’s biggest insurer by market value, is a financial services powerhouse. It incorporates life insurance businesses in Asia and North America, as well as its own-branded operations in the UK and its funds business M&G. Prudential UK has seven million life and pensions customers, while M&G has over £200bn in assets under management. But I have grave reservations about the business’s vulnerability to any setback in the UK gilt or US Treasury markets, which are now offering very skimpy yields.
Many of Prudential’s assets will be held in the form of expensive instruments such as gilts whilst as a pensions provider it is exposed to huge liabilities. I predict trouble ahead. That’s without considering the impact of eurozone troubles. Ratings agency Fitch recently suggested that a messy exit on the part of Greece, for example, would hit insurers’ credit ratings, asset values, credit quality and their capital base.
The firm has, however, been on something of an acquisition spree. Its recent purchase of Reassure American Life Insurance from Swiss Re for $621m was generally regarded as well timed and opportunistic. But brokerage Nomura voiced concern that the purchase had been “a closed book transaction that will run off over time (probably over half the book will run off within the next ten years)” – implying that while the acquisition would boost Prudential’s earnings in the short term, it would represent something of an earnings drag over the longer haul.
There was some eyebrow-twitching in the City earlier this year when it emerged that fund-management veteran Paul Manduca was to become Prudential’s chairman, having previously led the search to find a replacement for Pru’s outgoing chairman, Harvey McGrath. But there was even more eyebrow-twitching under McGrath after the Pru’s abortive $35bn bid for the Asian businesses of US insurer AIG.
Prudential (LSE: PRU), rated SELL by Nomura
Prudential is widely described using adjectives like “solid” and “pedestrian”. However, under CEO Tidjane Thiam, the company has expanded into Asia at pace and now gets nearly half of its operating profits from the region. That should work out well longer term, but it leaves the company vulnerable to a Chinese hard landing.
Other risks include the guarantees associated with many of the Pru’s products. In the US, for example, many of its pension products include expensive guaranteed minimum death and withdrawal benefits. The company also acknowledges the risks arising from its investments in long-term debt and fixed-income assets. In the US, “there is interest-rate risk across the portfolio”.
There are also asset/liability mismatch risks in the company’s UK business, and it acknowledges the potential for foreign exchange risk, credit risk, counterparty, insurance and liquidity risk. And good luck to any investor seeking transparency in the company’s operations: its annual report runs to some 484 pages. Some 21 analysts rate the stock a ‘Buy’. I disagree.
Rating: SELL
• Tim Price edits The Price Report newsletter. For more, call 020-7633 3637 or see
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