Analysis And Measurement Of Prudential Uk Performance.pdf

Table of Contents Executive Summary

1

Products, Services and Financial Instruments Products/Services

2

Financial Instruments – Assets

3

Financial Instrument – Liabilities

4

Financial Ratios Prudential PLC

5

Competitive Comparison

6

Products, Services and Instruments Development Factors Ageing Population

7

Government and Regulation Changes

7

i) ii) iii) iv)

Retail Distribution Review (RDR) Association of British Insurers (ABI) UK Government Solvency II Regime

Low Economic Growth

8 8 9 9 10

Opportunities & Threats Brexit

11

Interest Rate Risk

11

Technology

12

References

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Executive Summary The main purpose of this report is to provide an analysis and measurement of Prudential UK performance. The method of analysis include identify and examine the development of the products, services and the present financial instruments, evaluate company’s financial condition and understand how competitors perform, as well as analyse company’s future opportunities and threats.

Company is relentlessly focusing on with-profits and retirement businesses, enhance customer service level, and invest in technology to improve internal processes are owing to: 

continuing ageing British population and change in customer’s retirement perspective



low economic growth which resulted low interest rate and low investment return



Government and regulations changes such as: o

Retail Distribution Review that require a higher commission transparency and improve professionalism of advisers

o

New code of conducts on retirement choices imposed by Association of British Insurers to help customers understand their options at retirement

o

Pension freedom, which given greater flexibility to use their pot of money

o

European regulatory - Solvency II, required a higher capital requirement, detailed reporting and disclosure, and effective risk assessment system

Based on financial ratio with competitors, company would need to improve its debt to equity as company seems to finance its growth aggressively compare to others and have to improve its operating margin by reviewing and reducing those unnecessary operating and general expenses.

Brexit issues and the low economic growth have rendered as threat to the company as uncertainty might hold back businesses expansion and yield a lower investment returns. Nevertheless, these issues can be an opportunity to the company too. And company need to make use of digital technologies to bridge the interaction gap with customer to gain their loyalty.

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Products, Services and Financial Instruments Products/Services Following are the existing products and services that offered by Prudential UK and are classified into four broad categories as per table below: Categories Pensions & Retirement

Products/Services Pension: - Prudential Retirement Account - Flexible Retirement Plan - Self-Invested Personal Pensions - Additional Voluntary Contributions - Group Personal Pension - Money Purchase Plan Retirement: - Prudential Retirement Account - Guaranteed Pension Annuity - Single Cash Lump Sum - Pension Choices Plan - Flexi-Access Drawdown Option

Investments

-

Prudential ISA Open-ended Investments Company Fund Prudential Investments Plan Prudential Onshore Portfolio Bond Prudential International Investment

Funds

-

With Profits Fund Unit-Linked Funds

Insurance

-

Car Insurance Home Insurance Travel Insurance

(Prudential, 2016a)

The principal activity of the company is managing long term insurance business in the UK. And the company is relentlessly focusing on savings products and retirement income solutions to the ageing population as well as young generation.

2

Financial Instruments - Assets Financial instrument listed in assets are: Financial Investments Loans

-

-

Mortgage loans (collateralised by properties, the types are industrial, multi-family residential, suburban office, retail and hotel) Policy Loans Other loans (commercial loans and comprise mainly syndicated loans)

Equity securities and portfolio holdings in unit trusts

Equities, bonds, cash and cash equivalents and properties

-

Asset-backed securities [which comprise Residential Mortgage-Backed Securities (RMBS), Commercial Mortgage-Backed Securities (CMBS), Collateralised Debt Obligations (CDO) funds and other assetbacked securities(ABS)] Sovereign debt and bank debt securities (in Eurozone, the US, the UK and predominantly Asia)

Debt securities

-

Other investments

-

Derivative assets and partnerships in investment pools and other (i.e.: investments in limited partnerships and in property funds).

Deposits

-

Deposits held at call with banks (offers prompt access to funds and permits unlimited withdrawals and deposits)

Investment properties

-

Investments in leasehold and freehold properties including properties under development for future use as investment properties

(Prudential, 2016b)

Most financial assets are generally held to back policyholder’s liabilities and are in marketable securities which offer higher liquidity and can quickly convert into cash to meet the obligation.

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Financial Instrument - Liabilities Financial instrument listed in liabilities are: Financial Liabilities Operational borrowings attributable to shareholderfinanced operations

Borrowings attributable with-profits funds

-

Commercial Papers Medium Term Notes (MTN) Bank loans and overdraft Obligations under finance leases Other borrowing (include amounts whose repayment to the lender and senior debt issued)

to -

Non-recourse borrowings of consolidated investment funds Undated subordinated guaranteed bonds Other borrowing (predominantly obligation under finance leases: leases of investment property, investment in leasehold and freehold properties)

-

Other non-insurance liabilities

-

Obligations under funding Securities lending Sale and repurchase agreements Net asset value attributable to unit holders of consolidated unit trusts and similar funds

Derivative liabilities

-

Futures, options, forward currency contracts and swaps such as interest rate swaps, cross-currency swaps, swaptions and credit default swaps

Policyholder liabilities & unallocated surplus of withprofits funds

The excess of assets over policyholder liabilities for the company with-profits funds

(Prudential, 2016b)

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Financial Ratios Prudential PLC Following key ratios were applied to measure Prudential groups’ past five years performance and its financial condition such as its profitability and efficiency.

(GuruFocus, 2004a) 

ROE - The average ROE in the past five years is 19.16%. ROE of 15% to 20% are generally considered decent (Investopedia.com, 2003).



ROA - The group is using lesser investment to make more money which is a good sign.



Operating Margin - Although only 8.04% left to cover the non-operating expenses, but the figures is improving over the past five years and it is expanding. It could be a good sign of more stable during industry slowdown as it has less financial risk. It is a very important indicator of whether the group is facing problems.



Net Margin - Revenue was decline in 2015 due to realised and unrealised losses and gains on securities, derivatives and loans. Investment return was not great as compared to past few years (Prudential, 2016b).



Debt to Equity - The ratio was maintained in between 0.64 to 0.65 in the past two year. There were high ratio in year 2011 and year 2013 which may indicate that the group was borrowing aggressively and can’t make enough cash to satisfy its debt obligations.



Free Cash Flow - The free cash flow is improving over the years, the group can use this cash for further expansion or development, dividends pay-outs, lessening debts or for other purposes.

In short, the group is performing well.

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Competitive Comparison (As of 24 Nov 2016)

(GuruFocus, 2004)

Based on the comparison data, Prudential PLC has the highest Debt to Equity ratio, it can mean that the group has been aggressively in financing its growth with debt, and more financial risk has been taken on as compare with competitors. The group may want to improve its operating margin as it is quite low percentage left to cover the non-operating expenses, and it is earning less per dollar of sales as compared to competitors. Lift up sales revenue and review in operation cost might help to achieve a better operating margin percentage.

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Products, Services and Instruments Development Factors Ageing Population The UK market has an ageing population and it is anticipated to continue ageing.

(Population, 2012) Owing to these ageing population, Prudential UK is primarily focuses on the needs of these “baby boomers” and the younger generation by offering them the annuities, pensions, savings and investments as a retirement income solutions as well as the savings gap (Prudential, 2016d). The company is relentless focus on its core strength, which is on with-profit and retirement businesses.

Government and Regulation Changes

(Prudential UK and Europe, 2016)

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There were a structural market change over the past few years in the UK owing to the regulatory change and customers’ lifestyle change. For instance, in 2011, Prudential UK has relaunched of direct advice service (Prudential Financial Planning - PFP) which was withdrew in 2001, and this PFP is primarily aims to provide financial advice to the existing customers (Prudential, 2012). This implementation is also meant to pad the advice gap and enhance their direct to customer’s distribution business model, as the implementation of Retail Distribution Review in 2012 might lead to fewer financial advisers (Lobo, 2012).

i)

Retail Distribution Review (RDR)

The implementation of RDR has come effect on 31 Dec 2012 with the aims of transparency on the commission aspect and to reinforce the professionalism level in financial advice market. This has led to some short-term disruption in 2013 as distribution landscape has transformed, distributor, adviser, customers and insurers were adapting and adjusting to this new setting (Prudential, 2013).

ii)

Association of British Insurers (ABI)

In Mar 2013, ABI has imposed a new code of conduct on retirement choice on major pension and annuity providers. The aims are to help customers to have their retirement choices, encourage customers to shop around for a more competitive products before committing into one, and help customers to select the suitable products as per their conditions (Prudential, 2014). In order to meet the changes, company has developed innovative products, with more optional and comparative choices as well as enhancing their service level such as providing advice to customers in their home, through telephone and internet in order to grab the opportunity to increase their market shares.

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iii)

UK Government

The UK government announced “pension freedom” in 2014 budget to kick start in April 2015 has given the opportunity to all pension and annuities providers, as customers who reached age 55 can choose to cash out all his money. This has become an indication to the say providers that customers can choose to invest or save in a greater amount than before (Prudential, 2015). The need for retirement fund and savings still remains unchanged and with the “pension freedom”, it has eventually provide a new significant opportunity to the say providers by introducing more competitive and innovative products (introducing income drawdown business, manipulate withprofits products which is making PruFund available through ISA wrapper and through drawdown products) to meet the rising demand from “pension freedom” world customers (Prudential, 2016b).

iv)

Solvency II Regime

The new European regulatory framework, Solvency II has come into effect on 1 Jan 2016 with the aims of enhancing consumer protection level, modernised the present framework, improve companies risk management towards financial shocks, and increase the international competitiveness (Swain and Swallow, 2015). Under this new regime, all insurance company is require to reserve a higher capital requirement and further disclosures of risk such as assess company assets and liabilities in more depth than before. This create a substantial impact on the company’s annuity business as increase in capital intensity as well as longevity risk. Owing to these reason, company tends to minimize their craving for the annuity business post Solvency II and going forward the primary earnings generated are from the core annuities inforce and with-profit business (Prudential, 2016c). And to meet the new regime requirements, the company is paying a great attention on regulatory developments and will continue to repositioning the fixed income asset portfolio. Based on year 2015 financial report, the company does has a strong Solvency II capital position owing to their nature of operating capital generation approach. And the company does believes that “The best firms are looking at using it to improve their returns. If you only look at it from the compliance angle, you won’t get the benefits.” (Ralph, 2016)

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Low Economic Growth The company is constantly searching for alternative sources of income owing to the low yield and low interest rate environment as it has make company struggle to gain a healthy and stable return on investment. And the recent regulatory changes has also make it a significant challenge to the business to be able to staying on top of the portfolio while managing cost effectively. Company has announced to invest in technology - Black Rock’s Aladdin platform which can help to streamline the reporting process, enhance innovation, to meet various regulatory regimes requirements, as well as helping assets managers to manage their investment portfolios more effectively (Prudential, 2016d).

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Opportunities & Threats Brexit The share price of the company was experiencing volatility due to the uncertainty arise from the post Brexit referendum. Whole industry do not know how exactly it will take to exit from the EU, questions arise are, will UK insurers still able to access to the single market and their capacity to trade in the EU. If the company lose its single market access, the company basically need to shift their operational platform to Europe, because under the existing rule the UK base asset manager cannot sell the funds to European investor (Insurance Business, 2016). If this is going to happen, a significant amount of time, resource and cost are inescapable. Uncertainty just making everyone in the market don’t know what to do next, plans might hold back, causing both investment and economic growth slow down.

Despite the fact that Brexit may causes chaos, but this as well can be an opportunity to the company too. For example, a flourishing and financial stable country like Switzerland, which is not part of the EU member but still able to access to the single market and yet the Switzerland’s insurers need not to comply with any EU regulations especially the new regime, Solvency II (Oliver James Associates, n.d.). This will allow Prudential UK to escaping from the demanding capital requirements, and can lessen those unnecessary costs provided the Brexit terms has been negotiated properly and UK still can access to the single market.

Interest Rate Risk 2008 financial crisis has resulted a long term impact on the global economy, the whole economy especially developed economies country seems like still trying hard to recover fully from this waves (Ralph, 2016b). And low interest rates is one of the consequences of the low economic growth. Owing to the low interest rate environment, this could impact company’s profit and company may not be able to make a good yield return which is mainly from its fixed income securities portfolio. Company also has to continuous evaluate the obligations values and keep on adjusting the balance sheet and their investment strategy to cope with the bigger

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liabilities size and especially now under Solvency II regime which required even more capital to be reserved.

Although low interest rate environment might adversely affect the company especially with the with-profits products, but this does not make the company’s sales falls. Instead of sales falling, variable annuities and fixed index annuities (pegged to market index) sales have gone up (Prudential, 2016b). In order to minimize the interest rate risk exposure, company has the risk management and mitigation action in place which is apply derivative programs and at the same time to manage the asset and liability matching.

Technology Social media, mobile apps, digital marketing and other digital related facility have become part of peoples’ life nowadays. Many peoples’ behaviour has changed due to the use of technology. And many companies out there are following this new trend to interact with their customers, to advertise, to reach out to the public and to create brand awareness. Therefore, Prudential may also need to look into this trend such as to improve their existing apps with the function of prompting customer when the premium is due, able to check on their policy values, to prompt customers when there is a new products or service available, etc. The apps can be functioning similar to mobile banking too, such as allowing customers to transfer or withdraw their excess profits at one click with certain products. Be innovative and follow the trend will help the company to form a better relationship with the customers and perhaps loyalty can be gain a little by this too.

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References GuruFocus (2004) Prudential PLC (LSE: PRU) P/E ratio (ttm). [Online]. Available at: http://www.gurufocus.com/term/pettm/LSE:PRU/P%252FE%2BRatio%2528ttm%2529/ (Accessed: 25 November 2016). Insurance Business (2016) Prudential may move parts of business post-brexit. [Online]. Available at: http://www.insurancebusinessmag.com/uk/news/breaking-news/prudential-maymove-parts-of-business-postbrexit-36378.aspx (Accessed: 29 November 2016). Investopedia.com (2003) ‘Return on equity - ROE’. [Online]. Available at: http://www.investopedia.com/terms/r/returnonequity.asp (Accessed: 25 November 2016). Lobo, D. (2012) ‘Man from the Pru’ relaunches and targets 200, 000 clients. [Online]. Available at: http://citywire.co.uk/new-model-adviser/news/man-from-the-pru-relaunchesand-targets-200000-clients/a564100?section=wealth-manager (Accessed: 26 November 2016). Oliver James Associates (no date) Brexit and its impact on the UK insurance industry. [Online]. Available at: https://www.ojassociates.com/blog/2016/03/brexit-referendum-and-its-impacton-the-uk-insurance-industry (Accessed: 27 November 2016). Population (2012) Population Ageing in the United Kingdom, its Constituent Countries and the European Union. [Online]. Available at: http://webarchive.nationalarchives.gov.uk/20160105160709/http://www.ons.gov.uk/ons/dcp1 71776_258607.pdf (Accessed: 26 November 2016). Prudential (2012). Annual Report 2011. [Online]. http://2011ar.prudentialreports.com/index91ba.html#ref_AR11_HP3 November 2016).

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Prudential (2013). Prudential plc - annual report 2012 - report - business review - business unit review - insurance operations - United Kingdom. [Online]. Available at: http://2012ar.prudentialreports.com/index33eb.html?pageid=26 (Accessed: 24 November 2016). Prudential (2014). Annual Report 2013. [Online]. Available at: http://2013ar.prudentialreports.com/indexea8e.html?pageid=15&slideid=1#slide1 (Accessed: 24 November 2016). Prudential (2015). Prudential plc - 2014 annual report - report - strategic report - our businesses and their performance - United Kingdom: Focus. [Online]. Available at: http://2014ar.prudentialreports.com/index7434.html?pageid=30 (Accessed: 24 November 2016). Prudential (2016a). Pensions and retirement planning, investments and savings - prudential. [Online]. Available at: https://www.pru.co.uk/ (Accessed: 23 November 2016).

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Prudential (2016b). Annual Report 2015. [Online]. Available at: http://2015ar.prudentialreports.com/index.asp?pageid=60 (Accessed: 23 November 2016). Prudential (2016c). Prudential plc - 2016 Half year financial report - report - group overview group chief executive’s report. [Online]. Available at: http://2016hy.prudentialreports.com/index.asp?pageid=21 (Accessed: 27 November 2016). Prudential (2016d). Prudential plc to implement global risk and portfolio management platform. [Online]. Available at: http://www.prudential.co.uk/media/group-news-releases/2016/15-112016 (Accessed: 27 November 2016). Prudential UK and Europe (2016). [Online]. http://www.prudential.co.uk/~/media/Files/P/Prudential-Corp/businesspresentations/2016/Prudential-UK.pdf (Accessed: 27 November 2016). Ralph, O. (2016) Risk Management. [Online]. https://www.ft.com/content/fabddcfc-ce5d-11e5-831d-09f7778e7377 November 2016).

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at:

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Ralph, O. (2016b) Insurance industry faces daunting list of challenges. Online]. Available at: https://www.ft.com/content/86aab6c6-21d9-11e6-9d4d-c11776a5124d (Accessed: 30 November 2016). Swain, R. and Swallow, D. (2015). The prudential regulation of insurers under Solvency II. [Online]. Available at: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2015/q2prerelease _2.pdf (Accessed: 27 November 2016).

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