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Why Legal & General Group plc’s Results May Make Prudential plc A Buy

These have been tough times for investors in FTSE 100 insurers such as Legal & General (LSE: LGEN) and Prudential (LSE: PRU) (NYSE: PUK.US). They suffered a massive blow when Chancellor George Osborne liberated individual pension savers from the obligation to buy an annuity at retirement. 

This was followed by a low blow, when the Financial Conduct Authority over-egged its investigation into zombie funds. I felt this was a good buying opportunity for a sector that has demonstrated robust adaptability in the past. Now the positive reaction to first L&G’s latest results, then Prudential’s, suggest I’m not the only one who feels this way.

The Incredible Bulk

Yes, I am worried by predictions that the individual annuity sector is likely to shrink by 75%, but these are highly resourceful businesses. L&G showed this by boosting group cash generation by 21% in the first quarter, with assets under management up 5% to nearly £463 billion.

A 40% drop in individual annuity sales to £244 million, as buyers took advantage of L&G’s cooling-off period, will definitely hurt. But this was more than offset by the quadrupling in new business premiums to £3.3 billion, after it signed a bulk annuity contract with the final salary pension scheme of defunct chemicals giant ICI. 

More companies are likely to sell off their exposure to final salary uncertainties such as longevity and interest rate hikes, and as the ICI figures show, this could dwarf lost individual annuity income. L&G boasts a strong quote pipeline in bulk annuities, giving hope for the future, and for Prudential.

prudentialAsian Angst

I was never as worried about Prudential as L&G. Its Asian adventures limit its exposure to the individual UK annuity market, protecting the share price against Osborne’s annuity shocker. 

The Pru already generates half its sales from Asia, and has ambitious plans to ramp that up between now and 2017. Its share price has had a storming five years, rising 210% in that time, and 20% in the last year. This stock isn’t cheap.

This week’s storming Q1 results pushed the share price even higher. Prudential reported a 29% increase in new business profits to £529 million, up from £410 million a year earlier. The US and UK led the way, but profits also rose in Asia. Prudential’s fund management arm, M&G, saw more than £1.4 billion in net inflows, with external funds under management up 8% to £129 billion. Pru’s balance sheet is strong.

My Aim Is Pru

If L&G is set to survive the annuity shake-up, Prudential has even less to worry about, provided we avoid a full-blown emerging markets meltdown. But the long-term story for Asia remains strong, as its highly educated emerging middle class grows richer, then older, and starts planning for retirement. 

A whopping 82% growth in forecast earnings per share for this calendar year, followed by double digit teens for the next three years, makes Prudential a buy. If L&G can thrive amid recent uncertainties, Prudential can do even better.

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Harvey owns shares in Prudential. He doesn't own any other company mentioned in this article.