Professional Documents
Culture Documents
Executive Summary 1
Products/Services 2
Financial Instruments – Assets 3
Financial Instrument – Liabilities 4
Financial Ratios
Prudential PLC 5
Competitive Comparison 6
Ageing Population 7
Government and Regulation Changes 7
i) Retail Distribution Review (RDR) 8
ii) Association of British Insurers (ABI) 8
iii) UK Government 9
iv) Solvency II Regime 9
Brexit 11
Interest Rate Risk 11
Technology 12
References 13
Executive Summary
The main purpose of this report is to provide an analysis and measurement of Prudential UK
performance. The method of analysis include identify and examine the development of the
products, services and the present financial instruments, evaluate company’s financial
condition and understand how competitors perform, as well as analyse company’s future
customer service level, and invest in technology to improve internal processes are owing to:
low economic growth which resulted low interest rate and low investment return
Based on financial ratio with competitors, company would need to improve its debt to equity
as company seems to finance its growth aggressively compare to others and have to improve
its operating margin by reviewing and reducing those unnecessary operating and general
expenses.
Brexit issues and the low economic growth have rendered as threat to the company as
uncertainty might hold back businesses expansion and yield a lower investment returns.
Nevertheless, these issues can be an opportunity to the company too. And company need to
make use of digital technologies to bridge the interaction gap with customer to gain their loyalty.
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Products, Services and Financial Instruments
Products/Services
Following are the existing products and services that offered by Prudential UK and are
Categories Products/Services
Pensions & Retirement Pension:
- Prudential Retirement Account
- Flexible Retirement Plan
- Self-Invested Personal Pensions
- Additional Voluntary Contributions
- Group Personal Pension
- Money Purchase Plan
Retirement:
- Prudential Retirement Account
- Guaranteed Pension Annuity
- Single Cash Lump Sum
- Pension Choices Plan
- Flexi-Access Drawdown Option
The principal activity of the company is managing long term insurance business in the UK.
And the company is relentlessly focusing on savings products and retirement income solutions
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Financial Instruments - Assets
Financial Investments
Loans - Mortgage loans (collateralised by properties, the
types are industrial, multi-family residential,
suburban office, retail and hotel)
- Policy
- Loans
- Other loans (commercial loans and comprise mainly
syndicated loans)
Equity securities and portfolio - Equities, bonds, cash and cash equivalents and
holdings in unit trusts properties
Most financial assets are generally held to back policyholder’s liabilities and are in marketable
securities which offer higher liquidity and can quickly convert into cash to meet the obligation.
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Financial Instrument - Liabilities
Financial Liabilities
Operational borrowings - Commercial Papers
attributable to shareholder- - Medium Term Notes (MTN)
financed operations - Bank loans and overdraft
- Obligations under finance leases
- Other borrowing (include amounts whose repayment
to the lender and senior debt issued)
Policyholder liabilities & - The excess of assets over policyholder liabilities for
unallocated surplus of with- the company with-profits funds
profits funds
(Prudential, 2016b)
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Financial Ratios
Prudential PLC
Following key ratios were applied to measure Prudential groups’ past five years performance
(GuruFocus, 2004a)
ROE - The average ROE in the past five years is 19.16%. ROE of 15% to 20% are
ROA - The group is using lesser investment to make more money which is a good sign.
Operating Margin - Although only 8.04% left to cover the non-operating expenses, but
the figures is improving over the past five years and it is expanding. It could be a good
sign of more stable during industry slowdown as it has less financial risk. It is a very
Net Margin - Revenue was decline in 2015 due to realised and unrealised losses and
gains on securities, derivatives and loans. Investment return was not great as
Debt to Equity - The ratio was maintained in between 0.64 to 0.65 in the past two year.
There were high ratio in year 2011 and year 2013 which may indicate that the group
was borrowing aggressively and can’t make enough cash to satisfy its debt obligations.
Free Cash Flow - The free cash flow is improving over the years, the group can use
this cash for further expansion or development, dividends pay-outs, lessening debts or
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Competitive Comparison
(GuruFocus, 2004)
Based on the comparison data, Prudential PLC has the highest Debt to Equity ratio, it can
mean that the group has been aggressively in financing its growth with debt, and more
financial risk has been taken on as compare with competitors. The group may want to improve
its operating margin as it is quite low percentage left to cover the non-operating expenses,
and it is earning less per dollar of sales as compared to competitors. Lift up sales revenue and
review in operation cost might help to achieve a better operating margin percentage.
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Products, Services and Instruments Development Factors
Ageing Population
(Population, 2012)
Owing to these ageing population, Prudential UK is primarily focuses on the needs of these
“baby boomers” and the younger generation by offering them the annuities, pensions, savings
and investments as a retirement income solutions as well as the savings gap (Prudential,
2016d). The company is relentless focus on its core strength, which is on with-profit and
retirement businesses.
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There were a structural market change over the past few years in the UK owing to the
regulatory change and customers’ lifestyle change. For instance, in 2011, Prudential UK has
relaunched of direct advice service (Prudential Financial Planning - PFP) which was withdrew
in 2001, and this PFP is primarily aims to provide financial advice to the existing customers
(Prudential, 2012). This implementation is also meant to pad the advice gap and enhance their
The implementation of RDR has come effect on 31 Dec 2012 with the aims of transparency
on the commission aspect and to reinforce the professionalism level in financial advice market.
This has led to some short-term disruption in 2013 as distribution landscape has transformed,
distributor, adviser, customers and insurers were adapting and adjusting to this new setting
(Prudential, 2013).
In Mar 2013, ABI has imposed a new code of conduct on retirement choice on major pension
and annuity providers. The aims are to help customers to have their retirement choices,
encourage customers to shop around for a more competitive products before committing into
one, and help customers to select the suitable products as per their conditions (Prudential,
2014). In order to meet the changes, company has developed innovative products, with more
optional and comparative choices as well as enhancing their service level such as providing
advice to customers in their home, through telephone and internet in order to grab the
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iii) UK Government
The UK government announced “pension freedom” in 2014 budget to kick start in April 2015 has
given the opportunity to all pension and annuities providers, as customers who reached age 55 can
choose to cash out all his money. This has become an indication to the say providers that
customers can choose to invest or save in a greater amount than before (Prudential, 2015). The
need for retirement fund and savings still remains unchanged and with the “pension freedom”, it
has eventually provide a new significant opportunity to the say providers by introducing more
competitive and innovative products (introducing income drawdown business, manipulate with-
profits products which is making PruFund available through ISA wrapper and through drawdown
products) to meet the rising demand from “pension freedom” world customers (Prudential, 2016b).
The new European regulatory framework, Solvency II has come into effect on 1 Jan 2016 with
the aims of enhancing consumer protection level, modernised the present framework, improve
companies risk management towards financial shocks, and increase the international
competitiveness (Swain and Swallow, 2015). Under this new regime, all insurance company
is require to reserve a higher capital requirement and further disclosures of risk such as assess
company assets and liabilities in more depth than before. This create a substantial impact on
the company’s annuity business as increase in capital intensity as well as longevity risk. Owing
to these reason, company tends to minimize their craving for the annuity business post
Solvency II and going forward the primary earnings generated are from the core annuities in-
force and with-profit business (Prudential, 2016c). And to meet the new regime requirements,
the company is paying a great attention on regulatory developments and will continue to
repositioning the fixed income asset portfolio. Based on year 2015 financial report, the
company does has a strong Solvency II capital position owing to their nature of operating
capital generation approach. And the company does believes that “The best firms are looking
at using it to improve their returns. If you only look at it from the compliance angle, you won’t
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Low Economic Growth
The company is constantly searching for alternative sources of income owing to the low yield
and low interest rate environment as it has make company struggle to gain a healthy and
stable return on investment. And the recent regulatory changes has also make it a significant
challenge to the business to be able to staying on top of the portfolio while managing cost
effectively. Company has announced to invest in technology - Black Rock’s Aladdin platform
which can help to streamline the reporting process, enhance innovation, to meet various
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Opportunities & Threats
Brexit
The share price of the company was experiencing volatility due to the uncertainty arise from
the post Brexit referendum. Whole industry do not know how exactly it will take to exit from
the EU, questions arise are, will UK insurers still able to access to the single market and their
capacity to trade in the EU. If the company lose its single market access, the company
basically need to shift their operational platform to Europe, because under the existing rule
the UK base asset manager cannot sell the funds to European investor (Insurance Business,
2016). If this is going to happen, a significant amount of time, resource and cost are
inescapable. Uncertainty just making everyone in the market don’t know what to do next, plans
might hold back, causing both investment and economic growth slow down.
Despite the fact that Brexit may causes chaos, but this as well can be an opportunity to the
company too. For example, a flourishing and financial stable country like Switzerland, which
is not part of the EU member but still able to access to the single market and yet the
Switzerland’s insurers need not to comply with any EU regulations especially the new regime,
Solvency II (Oliver James Associates, n.d.). This will allow Prudential UK to escaping from the
demanding capital requirements, and can lessen those unnecessary costs provided the Brexit
terms has been negotiated properly and UK still can access to the single market.
2008 financial crisis has resulted a long term impact on the global economy, the whole
economy especially developed economies country seems like still trying hard to recover fully
from this waves (Ralph, 2016b). And low interest rates is one of the consequences of the low
economic growth. Owing to the low interest rate environment, this could impact company’s
profit and company may not be able to make a good yield return which is mainly from its fixed
income securities portfolio. Company also has to continuous evaluate the obligations values
and keep on adjusting the balance sheet and their investment strategy to cope with the bigger
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liabilities size and especially now under Solvency II regime which required even more capital
to be reserved.
Although low interest rate environment might adversely affect the company especially with the
with-profits products, but this does not make the company’s sales falls. Instead of sales falling,
variable annuities and fixed index annuities (pegged to market index) sales have gone up
(Prudential, 2016b). In order to minimize the interest rate risk exposure, company has the risk
management and mitigation action in place which is apply derivative programs and at the
Technology
Social media, mobile apps, digital marketing and other digital related facility have become part
of peoples’ life nowadays. Many peoples’ behaviour has changed due to the use of technology.
And many companies out there are following this new trend to interact with their customers,
to advertise, to reach out to the public and to create brand awareness. Therefore, Prudential
may also need to look into this trend such as to improve their existing apps with the function
of prompting customer when the premium is due, able to check on their policy values, to
prompt customers when there is a new products or service available, etc. The apps can be
functioning similar to mobile banking too, such as allowing customers to transfer or withdraw
their excess profits at one click with certain products. Be innovative and follow the trend will
help the company to form a better relationship with the customers and perhaps loyalty can be
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References
GuruFocus (2004) Prudential PLC (LSE: PRU) P/E ratio (ttm). [Online]. Available at:
http://www.gurufocus.com/term/pettm/LSE:PRU/P%252FE%2BRatio%2528ttm%2529/
(Accessed: 25 November 2016).
Insurance Business (2016) Prudential may move parts of business post-brexit. [Online].
Available at: http://www.insurancebusinessmag.com/uk/news/breaking-news/prudential-may-
move-parts-of-business-postbrexit-36378.aspx (Accessed: 29 November 2016).
Lobo, D. (2012) ‘Man from the Pru’ relaunches and targets 200, 000 clients. [Online].
Available at: http://citywire.co.uk/new-model-adviser/news/man-from-the-pru-relaunches-
and-targets-200000-clients/a564100?section=wealth-manager (Accessed: 26 November
2016).
Oliver James Associates (no date) Brexit and its impact on the UK insurance industry. [Online].
Available at: https://www.ojassociates.com/blog/2016/03/brexit-referendum-and-its-impact-
on-the-uk-insurance-industry (Accessed: 27 November 2016).
Population (2012) Population Ageing in the United Kingdom, its Constituent Countries and the
European Union. [Online]. Available at:
http://webarchive.nationalarchives.gov.uk/20160105160709/http://www.ons.gov.uk/ons/dcp1
71776_258607.pdf (Accessed: 26 November 2016).
Prudential (2013). Prudential plc - annual report 2012 - report - business review - business
unit review - insurance operations - United Kingdom. [Online]. Available at:
http://2012ar.prudentialreports.com/index33eb.html?pageid=26 (Accessed: 24 November
2016).
Prudential (2015). Prudential plc - 2014 annual report - report - strategic report - our
businesses and their performance - United Kingdom: Focus. [Online]. Available at:
http://2014ar.prudentialreports.com/index7434.html?pageid=30 (Accessed: 24 November
2016).
Prudential (2016a). Pensions and retirement planning, investments and savings - prudential.
[Online]. Available at: https://www.pru.co.uk/ (Accessed: 23 November 2016).
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Prudential (2016b). Annual Report 2015. [Online]. Available at:
http://2015ar.prudentialreports.com/index.asp?pageid=60 (Accessed: 23 November 2016).
Prudential (2016c). Prudential plc - 2016 Half year financial report - report - group overview -
group chief executive’s report. [Online]. Available at:
http://2016hy.prudentialreports.com/index.asp?pageid=21 (Accessed: 27 November 2016).
Prudential (2016d). Prudential plc to implement global risk and portfolio management platform.
[Online]. Available at: http://www.prudential.co.uk/media/group-news-releases/2016/15-11-
2016 (Accessed: 27 November 2016).
Ralph, O. (2016b) Insurance industry faces daunting list of challenges. Online]. Available at:
https://www.ft.com/content/86aab6c6-21d9-11e6-9d4d-c11776a5124d (Accessed: 30
November 2016).
Swain, R. and Swallow, D. (2015). The prudential regulation of insurers under Solvency II.
[Online]. Available at:
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2015/q2prerelease
_2.pdf (Accessed: 27 November 2016).
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