Retirement and savings firm M&G Prudential is set to benefit from growth in its with-profits PruFund business following the demerger from the Asian business later this year, according to research.
In March 2018, M&G Prudential announced plans to demerge its UK and European businesses from its Asian business, which is expected to complete in the fourth quarter of this year.
The demerger will create two London listed businesses with M&G Prudential listing its shares under the name M&G but retaining the Prudential brand for its savings business.
Research from Moody’s Investors Service, published yesterday (September 9), suggested new business reaching the PruFund product in the next five to 10 years would outweigh a decline in earnings from the closed life insurance book.
Helena Kingsley-Tomkins, AVP-analyst at Moody’s, said: “The key competitive advantage of PruFund policies, which smooth out returns, insulating policyholders from market fluctuations, is that they are backed by M&G’s strongly capitalised UK life fund.
“Rapid growth at PruFund will help counterbalance a decline in assets under management as M&G’s closed life insurance businesses run off.”
But Moody’s said it would take time for PruFund’s growth to filter through to operating profit, as these policies only generate earnings when the funds mature.
This compares to traditional with profits policies which pay annual bonuses and deliver some return to shareholders.
The rating agency said M&G Prudential could expect to see stable cashflows from its traditional life business, which includes its traditional with-profits business and annuities book, both of which are closed to new business.
In its report Moody’s added: “M&G’s traditional with-profits and annuities book, known internally as the Heritage business, will run off gradually, providing material stable earnings for at least the next 10 years.
“These earnings, coupled with an efficiency programme designed to cut annual costs by £145m, will partly offset a reduction in operating profits as recent substantial longevity releases decline, and as other one-off items are not repeated.”
M&G Prudential will also see an increase in central costs and interest payments following the demerger as it will take on an estimated £3.2bn share of group debt.
Prudential declined to comment at this stage in the demerger process.
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