Prudential

For half-year 2026, Prudential has delivered a mixed set of numbers. They look a little light in some areas versus the company's 2027 objectives and our forecasts. Yet, we believe that in the most important areas, the business is ahead where it matters, particularly gross OFSG and the dividend.

Why it matters: The business has delivered only a mid-single-digit rise in annual premium equivalent. This has occurred as the business has focused on retaining customers and on improving margin. Yet this continues a slower first three-month sales trajectory with recent regulatory developments. The new business profit across the group has come in at $1.384 billion. This is slightly shy of the business' 15% to 20% compound annual growth strategic target. The growth has predominantly come from the buildout of the health business that has been part of the investment targeted. Yet, further down, the all-important gross operating free surplus generation is ahead of the 10% growth target, up 15% at $1.791 billion. And it looks to be ahead of our full-year forecast of $3.428 billion. This is probably the most important metric because it largely determines the capacity to pay dividends.

The bottom line: We maintain our GBX 1,270 per-share fair value estimate, no moat rating, and Exemplary Morningstar Capital Allocation Rating. At the time of writing, shares screen as undervalued. The $941 million free cash flow produced over the first half is unfortunately down on the first half of the prior year, as well as looking a little behind our full-year forecast of $1.2 billion. This hasn't stopped the business announcing a 15% rise to $8.88 cents per share in the interim dividend. On Aug. 26, 2026, the business announced a further up to 2-percentage-point sale of its stake in ICICI Prudential Asset Management. We estimate that this will fetch in the region of up to $300 million. It looks to us like this has been allocated to a new set of share repurchases.

Our fair value estimate for Prudential is $34 per share.

Prudential has a history of improving its operational performance. Between 2009 and 2013, the value of policies surrendered averaged 8.0% of total policyholder liabilities, and through actions the business took, such as training, tied agents, and bancassurance partners, or improving digital sales through Pulse, surrenders fell to close to half of this. Prudential made similar progress in the persistency of in-force contributions, and we think this centered on technology, distribution depth, and breadth. In its most recent results, Prudential has delivered a 1-percentage-point improvement in its retention rate, though it still has some way to go to hit its 90%-95% 2027 retention objective.

Prudential has close to 200 bancassurance relationships, of which 10 are strategic. Strategic relationships generate three-quarters of the annual premium equivalent generated by bancassurance agreements. They include Standard Chartered Bank and United Overseas Bank in Singapore, and we believe these two are among Prudential's best. The agreement with SCB focuses exclusively on face-to-face sales, and we think that caters to a higher-end market. TMBThanachart Bank is Prudential’s strategic partner in Thailand. Citic-Prudential and ICICI Prudential are joint ventures in Mainland China and India, and there are several partnerships in Africa, including with Fidelity Bank, Zanaco, and Zenith. Bancassurance accounts for around 50% of Prudential’s annual premium equivalent.

Prudential has also made progress in the productivity of its distribution force. Prudential’s Futuready program trains agents in analytics and behavioral sciences, PruDNA is used in the assessment process for profiling, and PruVerge is used to identify and train the next generation of agency leaders. These leaders in turn nurture high-potential agents who progress to the Million Dollar Round Table. Prudential has over 9,000 MDRTs.

Prudential's digital offering, Pulse, is a mobile application used for analytics and sales. First launched in Malaysia in 2019, this tool develops Prudential prospects through a five-point process. With the application downloaded, the user is connected with features covering health, fitness, and curated content. Hopefully, users become bite-size product customers, and through the application's features and content, Prudential nurtures them into higher-value prospects. They are then passed to an agent for development. At the end of 2022, Pulse generated 10% of annual premium equivalent sales.

We think investments in customer experience, technology, and health are likely to improve sales, retention, expenses, margins, and dividends.

We assign Prudential a Morningstar Economic Moat Rating of none. We believe Prudential has not and will not earn its cost of capital over the long term.

Prudential divested its UK and European operations in October 2019. It then divested its North American operations in September 2021. While this means there is not much clean return data for us to assess, Prudential generated an average return on equity of around 12% over the past 16 years. That is slightly below the cost of equity we apply.

Prudential operates in some interesting markets where there is often strong growth and high demand for insurance. While insurance penetration tends to be higher in some of Prudential's more developed markets, such as Hong Kong and Singapore, and economic growth tends to be lower in these regions, in the more emerging Southeast Asian markets, insurance penetration is low and economic growth is in the mid- to high-single digits. Thus, Prudential has a long runway for growth in many of its markets. For example, in China, where insurance penetration is only 2.4%, there is an $800 billion health insurance protection gap. Prudential has had the potential to increase market share for decades. Other very interesting markets for Prudential include Malaysia, Thailand, Vietnam, India, and the Philippines. We think Prudential’s mobile application, Pulse, can have a real impact in these emerging markets, helping it acquire customers and reach and service them.

For individuals, life and health insurance isn’t really a commoditized product. For example, suppose a consumer wanted to buy a health insurance policy to protect against a potential critical illness or an upcoming treatment. In that case, it is unlikely a consumer would just buy the cheapest coverage. The product is purchased to provide access to better healthcare and services, and these features are very important. Pricing in health and protection insurance can therefore be relatively inelastic. A reduction in price is unlikely to materially increase sales volume. We think this means health and protection insurance companies compete on three main features: Which offers access to the best healthcare, which offers access to the best benefits and services, and which has the fastest and best customer service.

This also seems to play out in the way insurers run their business. Prudential and other quality insurers tend to take a very rational and disciplined approach to pricing, and they keep sales origination and hurdle rates within their risk appetite. Underwriting discipline has long been a Prudential strength.

Once an individual consumer or enterprise customer has chosen a health or protection provider and the relevant insurance policy, they are unlikely to switch. This is borne out in high retention rates. As an insurance portfolio grows, so does its pool of risks, and this increases the diversification benefit and lowers regulator-driven capital requirements. All else equal, with the same leverage and investment portfolio risk, this results in higher returns delivered to shareholders. We think this means that in a relatively inelastic pricing environment with stable demand for health and protection policies and high retention rates, a business is likely to reach an inflection point where it may need to replace the policies it has lost annually with new business. As acquisition costs fall and economies of scale improve, a health and protection insurer can reach a point where maintainable economic returns are achievable if it has developed strong switching dynamics.

With Prudential's mobile application Pulse, the business is working toward these competitive advantages. For example, the more Pulse downloads, the more bite-sized product conversions. While those individual small products may not generate much revenue or even profit, the power of Pulse lies in nurturing those users and their bite-sized products into larger full-size insurance policy sales.

Prudential is not the number one provider of health and protection insurance in Asia. However, we think the business tends to take market share from many of its peers. For example, we think Prudential has consistently increased its market share in Hong Kong to around 15%. In India, ICICI Prudential has around 7% market share, and in the Philippines, it holds around 15%. In Singapore and Vietnam, this share is between 15% and 20%. In mainland China, while Prudential increased its market share among foreign joint-venture operators by over 10 percentage points in less than a decade, across the whole of China it still holds a market share of around 1%. This presents a substantial growth opportunity, particularly as many local operators tend to focus on investment products. This has been the driver behind Prudential’s design of city clusters through which it can tackle this market.

In many of its key markets, Prudential has a long runway for growth.

Prudential has a track record of improving both product and expense margins.

Prudential is utilizing policyholder growth and switching costs to build a competitive position.

Prudential's intangible assets haven’t yet led to the generation of long term defendable economic profits.

Prudential's proprietary agent distribution force is smaller than that of its main peer.

A slowdown of growth could lead to its dividend not meeting forecast levels.