British insurer and asset management firm M&G (MNG) surprised the market with better-than-expected full year results on 8 March. This has made investors look more closely at the investment opportunity and we think you should do the same.M&G’s shares are cheap, trading on 8.3 times 2023 forecast earnings, and the dividend is very attractive with a 9.2% prospective yield based on next year’s expected payment. Berenberg forecasts M&G will pay 19.82p per share in dividends for 2022, 20.65p in 2023 and 21.68p in 2024.

The UK life market benefits from strong macro trends that continue to drive change and growth in the industry.

Over the past decade, and since the global financial crisis, insurers have focused on improving capital buffers, cutting costs and de-risking their balance sheets to improve their solvency and margins.

In the UK, the combination of an ageing population and the ongoing shift of responsibility for retirement income from corporates and the state to the individual should continue to fuel growth in the long-term savings market for years to come. M&G is ideally positioned to benefit from these trends.

The company was spun out of Prudential (PRU) in 2019 and since then it has completed key demerger targets ahead of schedule. It achieved £2.8 billion capital generation over two years, versus an original target of £2.2 billion by the end of 2022. Annual cost savings of £145 million were achieved a year earlier than planned.

This strong performance has enabled the group to announce a £500 million share buyback programme. This amount, together with dividends, will mean the group has returned £1.8 billion of capital to shareholders, equivalent to 32% of its market value at the time of the demerger.

There are some potential areas of risk. For example, the group could face prolonged outflows in retail asset management, with lower growth in institutional asset management.

However, for now, we see plenty of reasons to stay positive. For example, the group should continue to build up excess capital, assuming cash generation of £800 million per year. Given that dividends account for 66% of this cash generation, it is apparent that excess capital will continue to accumulate in the business. Research by Berenberg suggests a figure of £1 billion.

Asset management flows have turned positive for the first time since the demerger from Prudential. Moreover, there are encouraging indications regarding the prospect of a continued turnaround in the retail division.

The launch of M&G’s saving product PruFund in Italy offers a significant competitive advantage and could prove to be a welcome addition to earnings in the medium term.

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