As Covid-19 ripples through the world, it has extracted a toll on populations and economies alike. Most of us wonder how we can protect ourselves and our family—perhaps sanitize regularly, use a face mask and maybe avoid crowded places? At the same time, there is a simple, but often forgotten contract that can protect us financially during times such as these—a life/health insurance contract. If you are a reader in the Western world, there is a high chance that you are covered by several of these since life/health insurance has been around in its current form for decades and is ubiquitous.
However, emerging Asia is a completely different story. The region is underinsured compared to advanced global economies. For example, life insurance penetration measured by premiums as a percentage of GDP is just 2.3% for emerging Asia versus 4.6% for Western Europe.1 On a per capita basis, the difference is stark—the average European spends $1,978 annually on life insurance versus just $115 in emerging Asia.1 Because of the lack of adequate insurance coverage, 43% of the health care spend in Asia is out of pocket compared to 11% in the U.S. and 15% in the U.K.4 This translates to $1.8 trillion of out-of-pocket and unaffordable health care expenses annually in Asia.2
At the same time, Asia is currently at a demographic transition. The continent’s working age population will start stagnating, from around 3.0 billion in 2020 to 3.1 billion by 2050, and the retirement age population will expand from 395 million in 2020 to 901 million by 2050.3 Social safety nets are minimal in most of the region, putting the burden of retirement saving on the individual. The non-bank savings industry is nascent in Asia, to say the least; mutual fund market size as a percentage of GDP is 12% in Asia versus 96% in the U.S.4
As value investors with long-term horizons, we are constantly on the lookout for such exciting opportunities, where the thesis may play out over a couple of years rather than quarters. As my colleague Alex Frey had written in “Process, Checklists and Bargain Hunting,” our research methodology was consistent with Harris Associates’ ingrained research process. We were on the lookout for an insurer that (i) addressed the life, health and savings potential in Asia; (ii) had a strong brand and market share in the region; (iii) possessed a high-quality management team capable of navigating regional idiosyncrasies and (iv) was attractively priced based on our estimate of intrinsic value. We quickly identified Prudential Plc (PRU-LON) as a company that checked all of our boxes.
Prior to 2019, Prudential was a multinational life insurer with operations spanning the U.K., U.S. and Asia. Its crown jewel is its pan-Asian insurance footprint;5 it occupies a top-three position in most of the countries it operates in, with a double-digit through cycle earnings growth. In addition, it has a solid balance sheet and sells capital-light products, both crucial in a low interest rate environment.
Owing to its conglomerate structure, the market was historically ascribing a lower valuation multiple to Prudential’s Asian operations versus its closest Asian insurance peer AIA. Similar to many of our holdings, we met with Prudential’s management several times over the past seven years before we initiated a position—we were waiting for the right combination of price and quality to materialize.
This changed in October 2019, when the U.K. operation was spun off as M&G Plc, with the management committing to IPO/inject external capital into the U.S. operations as well.6 This was a key catalyst. We initiated a position at the start of 2020. As Prudential was primarily an Asian insurance company listed in London, it bore the brunt of the Covid-related sell-off in March and April. However, we were in regular communication with management and combining their views with our research gave us comfort that the long-run fundamentals of the company were undiminished. The market’s pessimism and short-term view provided us with an attractive opportunity to add on to our stake.
While it is still early days to judge the success of this investment, we feel confident that our time-tested process has uncovered an investment with a high return potential.
1Swiss Re Sigma, No 3/2019
2Swiss Re. “Closing Asia’s USD 1.8 trillion health protection gap”, 30th October 2018.
3United Nations, World Population Prospects, 2019 Revised
4Prudential Plc, Asia Strategic Overview, 2018 Investor Conference
5Prudential Plc also owns Jackson National, a US based insurance company (we assign less than 10% of Pru’s fair value to Jackson National)
6Jackson National IPO/ third party stake sale announcement in March 2020.
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