Description

PRU.LN - Summary

Prudential plc (“Prudential” or “the Group”) is in the midst of a breakup that has the potential to create significant value for shareholders.  Having just separated its M&GPrudential asset management business, Prudential is left with 2 primary businesses, a crown jewel Asian insurance business (“Prudential Corporation Asia” or “PCA”) and a US life insurance business focused on variable annuities (“Jackson National Life” or “JNL”).  PCA and JNL account for similar levels of earnings and balance sheet equity for the Group, but PCA accounts for the preponderance of the value of the Group. Prudential understands that addressing JNL or separating it from PCA can unlock significant value for the Group, so the company is now actively working to figure out the long term strategy and funding solutions for JNL.  

Background

See the company presentation for a good overview of the business. (https://www.prudentialplc.com/~/media/Files/P/Prudential-V3/demerger-transaction-documents/investor-presentation.pdf)

The overall performance of Prudential has been solid.  The Group has generated consistent growth in profits and cash flows.

The performance is generating ROE of ~20% and ROTE of high 20s%.

But this has not helped the stock as it has been flat for the last 5 years.

And Prudential still trades at a relatively undemanding valuation including a 3% dividend yield and 10x EPS.

Crown Jewel - An Impressive Asian Insurance Asset

The PCA business at Prudential is a market leader in a growing market and has delivered solid financial performance.

The insurance market in Asia has been fast growing driven by population growth and increasing wealth.

Despite the growth, penetration is low, implying continued strong growth into the foreseeable future.

Strong performance has helped PCA to generate impressive growth over the last decade.

Comparison with AIA Group 

Prudential’s biggest competitor is AIA Group.  The two are leading players in most major Asian insurance markets.

Prudential has outperformed AIA Group, the industry leader in Asian insurance business.

And while the market has rewarded AIA for solid financial performance and continued growth, Prudential shares have meaningfully lagged - AIA up 80% over 5 years versus a flat performance for PRU.LN.

Market Believes This Is Jackson National 

JNL is the variable annuity business at the Group.  It provides variable annuity products to customers in the U.S.  JNL has consistently remitted capital to the Group over the last decade.  

But the Group has chosen to de-emphasize JNL and any future funding for this business in order to focus capital and investment in PCA.

Unlike PCA, the LNCi nsurance business does not have significant value to the Group (see valuation below), but has driven the shares of Prudential anyway.

Instead of trading with its Asian peer, Prudential shares have traded inline with US life insurance companies (LNC for example below).

This is despite the Group stating that it is seeking a long-term solution for Jackson National.  This could come in the form of a sale, financing deal, or reinsurance. And Prudential has committed to not investing any further in the JNL business, instead focusing capital on growing PCA.

Valuation Opportunity

AIA has historically traded at ~2x embedded value (IFRS definition of embedded life book), and has ranged from 1.8x-2.2x over the last 5 years.

PCA has an embedded value per share of ~11.50 and has grown consistently over the last decade.  Applying the low end of the AIA multiple, yields 20.50/share value to the Group, or >50% more than the full value of shares.

JNL meanwhile generates approximately 0.60/share of IFRS earnings.  Applying 4-5x multiples to this business, inline with peers, yields a value of approximately 2.00-3.00 per share, or ~20% of the current value of Prudential.  There may be upside to this value in a strategic transaction, although that is not considered in this analysis.

There are some Group costs and debt at the Group level that in total are subtract approximately 2.00 to 3.00 per share of value.

Taken together, PCA, JNL, and corporate, yield at least 20.00 per share of value, with the company actively working on solutions to create value by solving the JNL valuation discount on the Group.  This compares to a stock at 13.00.

Catalyst

Strategic decision, capital funding, or other resolution for Jackson National business.

Market recognizes value of Asian asset and discount to peer.