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This Financial Institution Pleased Investors

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What's going on?

Prudential, the massive insurance and investment management company, saw its shares gain almost 3% in London as it reported profits that beat investors’ expectations.

What does this mean?

Insurance companies are complicated businesses. And Prudential isn’t an insurance company that insures your car or house, but rather it offers insurance that is designed to help you protect/manage your personal finances. For example, you can buy a product that guarantees a minimum income every month after a certain age (e.g. for when you retire). It can also manage your money: it owns the well-known fund management company M&G.

The simple, good news from Wednesday: Prudential made more profit than expected (and investors like that). The more complicated news: it paid investors a big one-off payment (called a “special dividend”) – that’s supposedly good but it’s unlikely to be recurring, so there’s no real future benefit for shareholders.

Why should I care?

For the stock: Insurance companies have to keep extra money in reserve – and changes to those rules could make Prudential’s life more difficult. If I promise to pay you money when you retire, you would hope that I keep at least that much money available for when it’s needed. In reality, the government makes insurance companies keep a large cushion above what is required. Due to changes concerning how much extra money has to be kept in reserve, Prudential’s future cash payments to shareholders (a.k.a. its dividend) might not keep growing at the same rate it has in the past – and that’s likely a negative for the stock.

The bigger picture: Prudential is another company betting on China’s emerging middle class. Remember how China is trying to grow the “services” part of its economy? Well, such “services” include insurance. A key growth strategy for Prudential is to sell insurance to the middle class in China (which is projected to keep growing significantly in size). For Prudential and others, that could be a lucrative, long-term growth strategy.

Originally posted as part of the Finimize daily email.

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