Prudential

The British insurer with its sights on Asia

Since the financial crisis at the end of 2007, banks, and insurers too, have been having an increasingly hard time. For shareholders these industries have been rather unsexy ever since - which, in part, I can totally understand. Too many financial service providers simply acted in a shady and almost criminal way. A little movie tip on the side: The Big Short - a film with an all-star cast that covers the financial crisis really well and shows how it could happen. But that's not what today is supposed to be about ...

In the following I'll introduce the British insurance group Prudential plc. By the way, prudentia comes from Latin and stands for wisdom. So it's no wonder that an American insurer (Prudential Financial) wanted to have exactly that in its name too.

The history and business model of Prudential Public Limited Company

1848 was a year of political unrest and rebellion all over Europe. On top of that, Great Britain had been stuck in a difficult economic crisis for a few years. But exactly at that time a group of investors in London got together and founded an insurance company. They were aware that crises create a desire for security. The Prudential Mutual Assurance, Investment, and Loan Association was born. It didn't take long before the name became too long even for the founders, and it was renamed Prudential Assurance Company Limited.

However, Prudential was entering a very competitive industry, and its start was anything but easy. In the first 18 months alone the company generated a mere £1,500 in premiums. Like many other insurers, Prudential was always on the brink of bankruptcy. At the time, insurance was only offered to the upper class - workers got sick too often and needed so many financial benefits that it simply wasn't worth it for the insurers. But with the Industrial Revolution that changed, and from 1854 on the first insurance policies were also sold to the working class.

Prudential quickly became the leading company for industrial policies - while many other insurance companies went bust. By 1905 it was already insuring almost 60% of the entire British population. With smart management and sound business thinking, the insurance group stayed successful and was able to expand into various segments. Later it focused predominantly on life/annuity insurance as well as long-term savings products. These bring in a regular cash flow that the insurer can work with.

Today Prudential is divided into 6 divisions. Prudential UK takes care of the domestic population, Prudential Corporation Asia serves the broad population in Asia. And Prudential Africa wants to let the African population share in the benefits of insurance too. In addition, the subsidiary Jackson National Life manages the life insurance business, M&G Investments is the in-house fund company offering investment and savings plans, and last but not least there's the asset manager Eastspring, which looks after the assets of mostly Asian institutional and private clients.

What's planned at Prudential for the future?

The insurer's board is currently planning to spin off its European business under the name M&G Prudential and wants to focus more on the faster-growing and less regulated Asian, African and US business. In 2018 the life insurer earned an impressive £3 billion - here too, new business in Asia was clearly the big driver. Of course this spin-off won't happen overnight, but it's supposed to be finalized in 2019 or early 2020.

How's the dividend looking?

Shareholders have been receiving a share of the profits since 1988. Since 2005 it has also been raised every year - and by an impressive 10% on average. The current dividend yield of 2.9% and the payout ratio of around 50% are also definitely respectable.

Conclusion:
Prudential is perfectly positioned for the future. In Asia and also in Africa it has positioned itself superbly to benefit from the growth potential of emerging markets - even if the "old businesses" in Europe and the US should keep running solidly. For me, Prudential is a great stock to diversify my dividend portfolio a bit further - I don't own an insurer yet (apart from Berkshire Hathaway). However, I'm going to wait for the spin-off of the European business first.