Prudential’s Eastern Promise

Published in Company Comment on 18 July 2012

The insurer's Asian strategy is paying off.

One is a composite insurer struggling with a turnaround plan and at risk of having its dividend cut. The other is a pure life assurer with a prestigious name and history. But perhaps nothing symbolises the difference between Aviva (LSE: AV) and Prudential (LSE: PRU) more than their geographic focus.

Aviva is mired in the sluggish growth and financial instability of the eurozone, which accounts for 60% of its business outside the UK. Prudential has been building a large Asian operation, which produced 30% of its total operating profit last year, and is the single biggest contributor to its bottom line.

The difference in the fortunes of the two FTSE 100 (UKX) members is a microcosm of those two regions. In the past 12 months, Prudential's shares have risen 14% against a drop in the index of 2% and a 26% decline in Aviva's stock.

Bidding

It is significant that Prudential is now one of four insurers bidding to acquire Aviva's joint-venture interest in Malaysia as it shrinks back from non-core operations. Aviva has struggled to make a success of its collaboration with Malaysia's second-largest bank, CIMB. In contrast Prudential has a number of successful 'bancassurance' ventures in the region, in which it sells its insurance products through the distribution network of a retail bank.

Bancassurance is an important factor in the rapid growth of insurance in Asia, where sales are mainly made through agents. Augmenting the region's fast economic development, the penetration of insurance is growing from a low base and margins are high. Total life assurance premiums in Asia are growing at twice the global average rate.

Prudential has a long history in Asia where some of its activities date back to the 1920s. But it has quietly set about building up its activities since its abortive £23bn bid for AIA in 2010. That deal costs the chairman his job and undermined investor confidence in CEO Tidjane Thiam, as shareholders baulked at the price and sheer scale of the transaction.

Instead, Prudential has been using the cash flow of its mature UK operations to finance growth internationally. Does that strategy sound familiar? It was, of course, what Tesco (LSE: TSCO) was doing highly successfully until its management was caught napping by neglecting the UK market. There may be a cautionary tale there for Prudential, but on the other hand many investors see Tesco's stumble as a temporary setback.

Sole play

Asia's 30% contribution to Prudential's 2011 profit was slightly ahead of the UK and US at 28% each. The asset management arm M&G made up the remainder. It is the only play on the Asian life assurance sector on the FTSE 100.

The most international of the FTSE 100 insurers is Old Mutual (LSE: OML) but it's history gives it an distinctive geographic mix with over 90% of insurance profits deriving from emerging markets in Africa and Latin America. About 1% of Standard Life's (LSE: SL) revenues are from Asia. Legal and General (LSE: LGEN) makes less than 10% of its profit from an international division that includes the US, Europe and emerging markets.

Prudential has stolen a march on its peers, and has been rewarded for it. I confess it slipped under my radar, and I wish I had bought in before last year's rise.

It has taken the low hanging fruit, and will face increasing competition both from existing incumbents, such as the newly floated AIA, and new capital drawn into the burgeoning sector from, for example, Chinese insurers. But there should be plenty of growth yet to come.

At 755p the shares are marginally below embedded value and yield 3.3%. They're now definitely on my watch list.

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> Tony has shares in Aviva and Tesco but no other shares mentioned in this article. The Motley Fool owns shares in Tesco.

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