A Company Riding The Asian Explosion Straight Up

by Tony Daltorio, Investment U Research
Tuesday, March 9, 2010

The American press didn’t really cover the recent, major deal in the global insurance industry.

But just because they didn’t pay it any attention, doesn’t mean that you should ignore it too… It indicates one very profitable opportunity you won’t want to miss out on.

British insurance firm Prudential Insurance ADR (NYSE: PUK) offered $35.5 billion to purchase the Asian arm of American International Group (NYSE: AIG). That branch, called AIA, is the leading pan-Asian foreign insurer. It carries 33 million policyholders across 13 countries, employs about 250,000 sales agents and makes annual operating profits of around $2 billion.

The current deal calls for Prudential to pay AIG $25 billion in cash, $5.5 billion in stock, $3 billion in mandatory convertible notes and another $2 billion in preferred stock. And if all goes well, the two companies should sign off on it by May.

That should mean that U.S. taxpayers get back some of the money they forked over to keep AIG afloat.

As for Prudential? The $22 billion company wants to fund the purchase by offering shareholders $20 billion in share offerings in return for their financial support. If the shareholders refuse, the company’s Plan B involves falling back on sovereign wealth funds from China and Singapore, which have offered their own money if necessary.

If those funds do get involved, Asian sovereign wealth funds could end up with a substantial stake in the region’s biggest insurer.

The Asian Insurance Market

Asia is the fastest growing market for life insurance.

According to a McKinsey study last year, Asia should account for up to 40% of the global life insurance market’s growth over the next five years. And of that growth, China and India will represent about 70%.

Currently, penetration rates in these countries only amount to 4% and 2% respectively. But McKinsey forecasts compound annual growth of over 15% for the next five years.

Currently the second largest foreign insurance company in the region, Prudential already takes a third of its sales and half of its profits from Asia. But those figures will skyrocket to 80% – 90% after it doubles business by acquiring AIA.

That will put Prudential light years ahead of its foreign rivals in terms of business volume and geographic spread. With about 700,000 agents throughout Asia, the combined company will have a dominant position in most of its Asian markets. And it will be the leading life insurance firm in at least eight Asian countries, including the Philippines, Vietnam, Thailand, Malaysia and Indonesia.

Prudential obviously values the high-growth, high-margin markets there. And rightfully so, considering how they represent little-touched areas with all the right characteristics for financial success. That includes rapid economic growth, low government debt and young, growing populations. Better yet, citizens there hold little or no debt themselves, and keep their savings mostly in low-interest bearing bank accounts.

That’s the kind of potential that makes insurance companies drool.

Meanwhile, Prudential plans to move away from the more mature markets of Japan, South Korea and Taiwan, while still keeping Hong Kong and Singapore in its sights.

China and India

Of course, no discussion of the Asian insurance market would be complete without considering China and India. Already the world’s seventh largest market for life insurance, China will still provide more than two-thirds of the region’s growth in that market. And India’s growth makes it an ideal location as well.

Both economic giants tightly restrict foreign insurance input. In order to get any amount of business in either country, outside players have to work through local partners. Somehow though, AIA became the only non-Chinese company to own the necessary licenses… probably because of its presence in the country since 1919.

As for India, Prudential is already the biggest player in that insurance market through its joint venture with ICICI Bank Limited ADR (NYSE: IBN). So the AIA deal will only make it more powerful.

A Win-Win Situation

Some analysts don’t believe Prudential can pull off the deal. Short-term focused hedge funds have even pushed the stock down 20% since the two companies went public with the details.

No matter though, because investors can win no matter the outcome.

If the deal falls through, the stock should quickly regain what it lost. If it does goes through though, the stock should go up just the same, especially if the sovereign wealth funds join in. Their help will open even more doors in Asia, insuring that Prudential will be the one to beat in the Asian insurance market.

Good investing,

Tony Daltorio