Will Annuity Scrap Damage Prudential?

The UK's 1.2 million pensioners no longer have to purchase annuities. As a result, Prudential’s annuity sales fell 35% year over year to £36 million

Vincent Lui, CFA 14 May, 2014 | 9:54AM
Facebook Twitter LinkedIn

Prudential (PRU) is off to a good start in 2014, with 13% growth in new business. However, we think the U.K. insurer is facing increasing headwinds in the rest of the year due to intensified competition in Asia and budgetary changes in the U.K. While our long-term view for the company remains positive, we think top-line growth for this year is constrained to 3%-4%, given our forecast for more sluggish sales in Asia and Europe. We will maintain our fair value estimate and no-moat rating for the company.

Asia’s new sales grew 2% from last year’s levels to £507 million. Almost all Asian markets experienced a slowdown in sales in the January quarter, except for Hong Kong and Singapore, thanks to a new 15-year agreement with Standard Chartered that allows Prudential to distribute its products through 1,700 branches in the region. However, as margins tend to be lower for bank channel products (as they are more plain vanilla) than for products sold through an agent, we expect new sales profit to grow only modestly this year.

Separately, inclement weather did play a role in poor agent sales, with new business sales falling 33% from last year’s levels.

As we expected, the U.K. budgetary changes also had a negative effect on annuity sales. The new bill now doesn’t require the country’s 1.2 million pensioners to purchase annuities from insurance companies if their lump sum benefits are worth less than £30,000.

As a result, Prudential’s annuity sales fell 35% year over year to £36 million. That said, it’s too early to predict how the bill will affect sales in subsequent quarters, as pensioners’ purchase behavior is slow to change and bank savings yields are still a tad lower than yields offered by annuities. Also, given that U.K. is a small market for Prudential, we don’t expect the lower annuity sales to have a meaningful impact on the firm’s overall growth and profitability.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Prudential PLC662.20 GBX0.88Rating

About Author

Vincent Lui, CFA  Vincent Lui, CFA is an equity analyst for Morningstar, covering life insurance companies.

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures