Prudential is top pick after profits beat

With Prudential shares near a record high, the insurer continues to reap the rewards of targeting Asia's rapidly growing and underinsured middle classes. It also justifies our faith this time last year that Pru shares were likely heading to £17. Today they did, giving a 23% gain.

A seventh consecutive year of double-digit growth in Asian new business profits and capital generation, helped the Pru deliver a record operating profit of £4.26 billion for 2016, up 7% on a year earlier.

The Pru's Asia success has been achieved alongside stellar performances in the UK and United States, where markets are more impacted by regulatory change.

Continued low interest rates, market volatility and political events have also impacted the business, but chief executive Mike Wells said the Pru had demonstrated it was well placed to generate cash for shareholders.

As a result, the company upped its full-year dividend by 12% to 43.5p a share, helping its share price close in on previous highs seen in March 2015.

With earnings and the dividend beating expectations, analysts at Barclays highlighted the group as their top pick in the European insurance industry, slapping a price target of 1,844p on the shares.

"We believe it is one of the (very) few large cap growth stocks in the sector, but trading in line with the sector (both 12x FY17 operating earnings), and we believe today's earnings are further evidence of this (7% growth in operating earnings, 12% growth in the dividend)," it wrote Tuesday.

They pointed to a potential 11% upside for the shares and added that the blue-chip stock was often unfairly benchmarked with UK life insurers, even though the UK now only contributed 17% of full-year earnings.

The Pru's Asia expansion has seen it capture top-three positions in nine of its 12 life markets in the region, as well as become the number one Asian retail asset manager.

Life insurance sales exceeded £1 billion for the first time in the final quarter of 2016, with eight of its markets in the region growing by more than 20%.

It is tapping into a market with low insurance penetration, high out-of-pocket healthcare spend and rapidly growing private wealth. Three-quarters of China's total population is forecast to be defined as middle income by 2030.

Mutual fund penetration rates are currently just 12% in Asia, compared with 75% in Europe and 96% in the US, and there is a significant mortality protection gap. For 2016, new business profit in Asia increased by 22% to £2 billion.

Elsewhere in the business, the Pru grew US operating profits by 8% to £2 billion despite sector-wide disruption caused by the Department of Labor's fiduciary reform plans.

The Pru says that over the next 20 years Americans will be retiring at a rate of 10,000 per day but at the same time, private defined-benefit pension plans are disappearing and government plans underfunded.

US life expectancy at age 65 has increased significantly, but individual investors are struggling to capture returns amid volatile equity markets.

Barclays said the main disappointment in today's results came from the UK after operating profits fell by 32% to £799 million.

This reflected significantly reduced profits from annuity new business following the company's withdrawal from the bulk annuity market and a £175 million provision to cover the cost of undertaking a review of past non-advised annuity sales practices and related potential redress.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.