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Prudential to spin-off M&G Prudential and sell £12bn of UK annuity portfolio

The company hiked its dividend by 8% as it reported an increase in full year operating profit, led by double-digit growth in Asia
Prudential
Prudential wants to focus on its Asia and US divisions

Prudential PLC (LON:PRU) said it plans to demerge its M&G Prudential business and sell £12bn of its UK annuity portfolio as it revealed Asia continued to drive profit growth in 2017.

Prudential M&G, a UK and European savings, investment and retirement business, will be separated from the group and operate as a standalone entity.

Shares in Prudential jumped 5% to 1,916p in morning trade. 

The business will be led by its current chief executive John Foley, who will continue to carry out his transformation plan to make it more “capital-efficient and customer-focused”.

Shareholders will hold interests in both Prudential and Prudential M&G.

Prudential M&G was formed after the parent company rolled its UK asset management business, M&G, with its Prudential UK and Europe life insurance unit last year.

Prudential to focus on 'attractive returns' in Asia and the US

"The decision to demerge M&G Prudential follows a rigorous review by the board which considered all options, including the status quo, and concluded that it is in the best interest of the group to operate as two separately-listed companies, able to focus on their distinct strategic priorities in their chosen geographies,” said chairman Paul Manduca.

Chief executive Mike Wells said after the separation, M&G Prudential will have more control over its business strategy and capital allocation, allowing it to play a “greater role in developing the savings and retirement markets in the UK and Europe”.

Prudential will be able to focus on the "attractive returns and growth potential of its market-leading businesses in Asia and the US", he said.

“Looking forward, we believe we will be better able to focus on meeting our customers' rapidly evolving needs and to deliver long-term value to investors as two separate businesses,” he said.

Ahead of the demerger, Prudential will transfer the legal ownership of its Hong Kong insurance subsidiaries from its UK regulated insurance entity, The Prudential Assurance Company Limited, to Prudential Corporation Asia Limited. The transfer is expected to be completed by the end of 2019.

The group will also sell £12bn of its shareholder annuity portfolio to Rothesay Life as part of its strategy to de-risk the business.  Proceeds will be used to support the group’s demerger.

Prudential reports rise in 2017 profits

Alongside the announcement, Prudential reported an operating profit of £4.7bn for 2017, up 6% at constant exchange rates.  New business profit increased by 12% to £3.6bn.

Growth was again driven by Asia, which delivered a 15% rise in operating profit and a 12% increase in new business profit.

The UK and Europe region posted a 10% increase in operating profit and a 28% rise in net business profit.

M&G Prudential achieved record levels of external asset management net inflows of £17.3bn, contributing to total assets under management of £351bn, up from £311bn the previous year.

The US division saw operating profit edge up 3% and net business profit rise 9% as the life business Jackson delivered net inflows of £3.5bn with separate account assets rising 19% to £130.5bn.

Donald Trump’s US tax reform resulted in a £445mln charge for re-measuring deferred tax balances last year. However, the company said the tax changes will be “positive in the long term” with the effective tax rate expected to fall to 18% from 28%.

Prudential hikes dividend, CEO 'confident' on future profit growth 

Prudential raised its full year dividend by 8% to 47p per share even as underlying free surplus capital generation fell by 1% to £3.6bn due to an increase in restructuring costs and a lower contribution from our US business.

The company improved its capital strength with Solvency II surplus rising by 6% to £13.3bn and the ratio increasing by 1 percentage point to 202%.

“I am confident that, given the extent of our opportunities and our proven ability to execute and innovate, we are well positioned to continue to grow profitably,” said Wells. 

Demerger makes sense, says analyst

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said in an organisation as complex and diverse as Prudential, a split makes sense.

"It allows investors to get a firmer handle on what’s going on at each of the component businesses, and should help M&G focus on its own progress rather than having to compete with the rapidly growing Asian business for management attention," Hyett said.

He said the sale of UK annuity assets suggests M&G Prudential is ultimately eyeing up a business model similar to that of Standard Life Aberdeen.

Standard Life and Aberdeen Asset Management completed its £11bn merger in August of last year as asset managers come under pressure from increased regulatory scrutiny and competition from passive funds.  

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