Prudential's first half profits gain on Asia growth

The insurance giant posted a 6% increase in operating profit to £2.06bn, beating analysts’ estimates of around £1.88bn.

Group APE new business sales also exceeded forecasts, rising 11% to £3.03bn compared to consensus expectations of £2.85bn, as stronger UK retail sales offset the company's withdrawal from the bulk annuity market.

The FTSE 100 company achieved a 10% rise in free surplus generation to £1.6bn and a 8% gain in new business profit to £1.26bn, despite the challenges of low interest rates, higher investment market volatility, reforms in the US labour market, a decline in annuity sales in the UK and the continuation of net outflows at the M&G asset management business.

Chief executive Mike Wells said the group’s performance was led by growth in Asia where operating profit grew 15% to £743m, ahead of the £725m forecast. Asia operating free surplus generation rose 15% to £419m and new business profit increased 20% to £824m.

In the US business, however, total operating profit fell 3% to £876m, reflecting the costs of winding down the Curian capital asset-management operation. Traditional variable annuity sales, excluding the Elite Access investment platform, dropped 22% due to elevated market volatility and significant uncertainty on the Department of Labor reforms.

A 4% increase in separate account assets to $138.9bn supported a 9% rise in fee business operating profit to £642m.

In the UK, operating profit rose 9% to £492m as life retail APE sales jumped 51% to £593m and PruFund sales grew 80% to £438m. Underlying free surplus generation surged 66% to £514m with Solvency II surplus of £2.9bn, equivalent to a ratio of 138%, supporting a £215m remittance to the group.

During the period, Prudential withdrew from bulk annuities, writing no business in the first half given the onerous capital impact under the Solvency II regime.

Profits from new annuity sales fell to £27m from £66m following the group's change in stance on annuities. Management actions to support solvency contributed profits of £140m, compared to £61m last year.

The group Solvency II surplus was estimated at £9.1bn on 30 June, equivalent to a ratio of 175%, down from a ratio of 193% on 31 December.

“In the US and the UK, we continue to successfully manage the effects of market turbulence,” Wells said.

“The quality of our earnings, geographic diversity and strong balance sheet position us well to grow over the long term. We remain on track to achieve our 2017 financial objectives.”

The first interim dividend for 2016 was raised 5% to 12.93p per share.

"Several one-offs boosted what are nevertheless solid underlying results with a reassuringly broad based growth in Asia despite market turbulences and product withdrawals," said Whitman Howard analyst Craig Bourke.

"Shares have recovered strongly since the sector de-rating but still leaving 11% upside to our estimated 2017 price target with growth remaining intact in Asia, flattered by favourable currency movements."

RBC Capital Markets reiterated a 'sector perform' rating and target price of 1,392p. The broker said Prudential is an inexpensive stock but headwinds remain

"The current 11.0 times 2017E earnings for Prudential is attractive relative to recent history (this represents a 33% premium to the European insurance sector compared to a five-year average premium of 42%), however we continue to see short- term headwinds over the remainder of 2016," RBC analysts said.

"As well as pressures in the US and loss of diversity in Asia (see above) Prudential has ceased writing individual annuities in the UK and will not be active in the bulk annuities market. We also expect outflows at its UK asset manager M&G to continue."

Shares rose 2.30% to 1,424p at 0950 BST.