Prudential’s joint venture gains attention after Q2 report

The Q2 2024 solvency report, though brief, reveals some concerning trends.

Prudential is facing scrutiny as its joint venture, CITIC-Prudential Life (CPL), releases its Q2 2024 solvency report ahead of Prudential’s upcoming H1 2024 results, Jefferies Equity Research said.

Despite CPL contributing only 7% of Prudential’s New Business Profit, the company's recent capital injection and the ongoing macroeconomic challenges have drawn significant attention.

The Q2 2024 solvency report, though brief, reveals some concerning trends. CPL’s premium income for the quarter stood at $114.92m (¥16.9b), slightly down from $115.94m (¥17.05b) last year. 

The company reported a net loss of $23.12m (¥3.4b), a significant decline from the $287.02m (¥42.2b) net profit reported in the same period last year. 

Total assets grew by 8.9% to $1.717b (¥252.5b), but net assets dropped by 4.8% to $86.36m (¥12.7b). Total liabilities increased by 9.8% to $1.630b (¥239.8b).

CPL’s financial indicators also showed a downturn, with a return on total assets of -1.40%, down from 0.02% last year. 

The investment return fell to 1.64% from 2.48%, whilst the comprehensive investment return improved to 3.84% from 2.88%. 

The company’s comprehensive solvency ratio dropped to 86.58%, down from 105.53% last quarter, and the comprehensive solvency adequacy ratio fell to 173.15% from 201.45%.

These figures suggest a complex financial situation, where a rise in the comprehensive investment return contrasts with declining net profits and solvency ratios. 

This could indicate that reserve strengthening is funded by gains on investments recorded in Other Comprehensive Income (OCI) rather than the Profit and Loss (P&L) account. The disappointing decline in solvency comes just months after Prudential and CITIC injected more capital into the venture.

This trend aligns with patterns observed in Prudential’s FY 2023 accounts, where adjusted operating profit from CPL increased, but IFRS losses after tax were significant due to lower equity returns and the impact of falling interest rates. 

The Q2 2024 figures hint at the continued weakness in adjusted operating profit and the likelihood of another IFRS loss after tax for 2024.

CPL’s performance also lags behind that of its peers in the Chinese insurance market. According to local reports, 31 insurers posted a profit in Q2, whilst 29 reported losses. 

Amongst the loss-making companies, CPL’s $23.12m (¥3.4b) net loss was the most significant. Prudential’s upcoming 1H results will be closely watched to see how these trends play out and whether the company can navigate these financial headwinds.

($1.00 = ¥0.0068)