company posts positive results thanks to cost-cutting strategy however is likely to be hurt by changes to assurance business regulations
Despite positive first quarter results, the stock market is pushing Prudential's share price down on anticipation of a change in regulation for assurance businesses.
The company struggled to get through the 2000 and 2001 bear markets as its reserves, which were held in stock and shares, dropped in value. Significantly, it held as much as 2.7 million Marconi shares at the end of August last year.
However, due to cutting costs through redundancies in its sales force, the company posted positive results and is looking to expand in the UK by re-engineering its retirement and savings products. It announced a 13% first quarter gain in the UK and declared that insurance sales climbed to £460m from £448m, in the first quarter of last year.
Its share price stood at 755p on the 24 April when the results were announced but fell to 715p on the 30 April, a week after. 'The new business figures are broadly in line with expectations,' said Kevin Fenelon, investment manager at Britannic Asset Management. 'However the sector has recently been under some tension because equity markets have been squeezed and some investors are concerned over pending regulatory changes.'
UK life companies are expected to come under scrutiny from the upcoming release of the Sandler and FSA reviews. The Sandler review is expected to address the issue of with-profits policies while the FSA will look at the way life companies spend policyholder money. 'Both the Sandler review and the FSA review will impact on the sector by tightening regulation,' said Fenelon.
As the industry braces itself for changes in regulation, the Prudential is aiming to form alliances to strengthen its position in the market. With the advent of depolarisation, the product distribution might feel some pressure, hence the company is seeking to make alliances with banks. 'There have been talks about alliances,' said Chris Murphy, fund manager at Framlington. 'If Prudential does not form any alliances, it risks being taken over by European banks. Also if the company forms an alliance with a bank, it would have a better distribution network.'
While regulation is a limitation in the UK market, the overseas' market is one with many opportunities. In the first quarter, Prudential gained record sales in Singapore due to a relaxation of regulations in that region. The company is aiming to double its profits from that area within four years time.
'The key to improving its profit stream is the rapid expansion of business in Asia owing to the rapid increase of wealth in the region,' said Fenelon. He added: 'It would not be surprising if the company makes some acquisitions in the US. Last year it bid for American General but were ultimately outbid. The present share price is reasonable and the balance sheet should allow the company to achieve its growth targets.'
However, Murphy argued that in order to support this expansion, Prudential will need more capital: 'One issue for Prudential is that in the longer term it would need to raise more equity in order to have enough capital to grow the business. This is likely to come from a rights issue.'
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