This life assurer is a play on the emerging market boom.
While Fools have recently discussed the merits of investing in insurers such as Aviva (LSE: AV) and Royal & Sun Alliance (LSE: RSA), relatively little attention has been paid to another insurance stalwart, Prudential (LSE: PRU).
The last time a full article was written about the Pru at the Fool was after the failed merger with AIA, the Asian arm of American Insurance Group, way back in 2010. So I thought I would take the opportunity to take a fresh look at the company.
Four business units
Prudential is an international life assurance and financial services company based in London. It has four business units:
- Prudential UK offers pensions, savings and investments in Great Britain and Northern Ireland.
- M&G offers investment services such as fund management, fixed income and property.
- Prudential Asia, based in Hong Kong, is one of the major life assurers in Asia. The company has operations in a wide range of Asian countries, including India, China, South Korea, Malaysia and Indonesia.
- Jackson National Life is the American arm of the company, and is based in Michigan.
While the UK business is progressing steadily, it is the Asian and American businesses which are the real stars of the show.
Asia is booming
The latest results we have are for the third quarter of 2011, where Asia in the year to date showed new business profit up 16% to £719 million, with sales up 8%. That is impressive, but the performance in the four leading markets was even better: sales were up 38% in Singapore, 27% in Indonesia, 17% in Hong Kong and 16% in Malaysia.
There was a hiccup in India, caused by insurers having to re-register products with the regulator, and if this is excluded from the figures then the growth in Asia is even faster.
From 2006 to 2011 the number of life assurance customers in Asia has gone from 7 million to 11 million, but this is just the beginning. There are great opportunities in Asia because the region has strong economic growth, a rapidly expanding middle class, high savings rates, and the current take-up of insurance products is low.
The Asian expansion shows real momentum and it is at the heart of Prudential's strategy for long-term growth. Asia already makes up over a third of the company's sales, and I expect this proportion to increase substantially over time.
The US is doing well too
Not to be outdone, the US business showed year-to-date new business profit up 17% to £622 million. Considering the difficult economic environment in the States, these are remarkable results.
Key to the American market is the growth in sales of annuities to retiring baby boomers. But another factor is that after the credit crunch ravaged many US insurers, there is less competition out there.
Across the whole of Prudential new business profit was up 14% to £1535 million, while total insurance sales were up 10% to £2704 million.
Strong risk management
In these troubled times, if you are looking to invest in any financial company, you need to assess how good its risk management is.
In my view, Prudential has been managing its risks well. The company has a resilient capital position, with a regulatory capital surplus of £3.9 billion.
What's more, the firm has been steadily offloading its holdings of peripheral eurozone sovereign debt, and it now has very little exposure to the troubled debt of Italy and Spain.
Foolish bottom line
So, how does Prudential compare as an investment with, say, Aviva? Well, they are two very different beasts. Prudential is on a forward P/E ratio of 11, with a forecast dividend yield of 3.6%, so it is not nearly as cheap as Aviva, which is on a P/E of around 6.
I see Aviva as a deep value play; it is unlikely to grow as much of its business is in recession-hit continental Europe, but the shares are incredibly cheap and high yielding. In contrast, I see Prudential as a growth play, and a play on booming emerging markets.
Which should you buy? Well, that depends on your philosophy as an investor. I personally hold shares in Aviva, but am keeping Prudential on my watch list and would certainly be interested in buying in if the share price dips.
> Here's your free Essential Investor Kit. Over the next few weeks, you'll get share ideas, a sector report and much, much more. Don't miss out!
> Prabhat owns shares in Aviva.