Life Insurance  

Thiam’s legacy

Thiam’s legacy

With a distinctive name and a brain reputedly keener than that of Stephen Hawking, the current chief executive of Prudential, Tidjane Thiam cannot help but be in the limelight. We now hear that he is moving to pastures new.

He has certainly been newsworthy in his five-year tenure at the Pru. Initially it was for a failed merger with AIA. Much worse was a very public censure by the then-FSA for keeping them out of the loop when merger negotiations were taking place. Most people would have paid the price. Not so Mr Thiam. He obtained resounding backing from his board, who almost stuck two fingers up at the FSA.

Since then he has concentrated on business issues and the results to date have been impressive. A united board, a focused strategy, unwaveringly attended to has been the approach adopted, to great success.

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The three key metrics they use are International Financial Reporting Standards operating profit, new business profit and cash. These are three of the four most important metrics, so they have selected wisely. So the key questions are:

(1) whether the strategy is the correct one;

(2) whether the figures for the metrics have been appropriately calculated; and

(3) what does it have to say regarding the fourth most important metric: customer satisfaction

When Prudential embarked on its current strategy I asked in Financial Adviser whether it made sense for the Pru to focus its attention on the Far East. It changes the nature of the firm as there is no synergy between the UK and the Far East. If indeed the future lies there, then it is a matter for the shareholders to decide so management can return capital to its shareholders. It is surprising the board gave unanimous backing to the strategy.

Is that still the case? The chairman who appointed Mr Thiam is no longer there.

So what are the facts? The figures for operating and new business profit are good:

IFRSNew Business
Operating ProfitProfit
2012£2,520m£2,452m
2013£2,954m (+17%)£2,843m (+16%)
2014£3,186m ( +8%)£2,126m (+10%)

There is an inconsistency in the reporting of new business profit when comparing 2013 to 2014. Pru claims a 10 per cent increase when the reported figure compared to last year’s reported figure should be down. The net cash remittances from business units is a whopping £1.48bn.

Increasingly, Asian business is of importance to the Prudential. One third of its IFRS operating profit (2014) came from that continent. Indonesia, Hong Kong and Singapore are of great importance. Judging by its rapid growth and rapid recycling of capital I assume that it is selling old-fashioned front end-loaded policies paying initial commission, many of which are whole life or protection plans. The Pru also claims to have a major share of the Sharia-compliant business. There are warning bells in both here.

I remember looking at the figures of a major local Indonesian company. Three things stood out: a high level of lapses and bad debts and material related-party transactions, with some of the directors, who are also shareholders, having major financial interests in connected companies. It is not uncommon in many Asian countries – not that the West is immune to this – for companies that started out with private capital and then sought external capital to expand, for the original shareholders to treat the company as their own fiefdom – think of Satyam in India.