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The Economist
September 22nd 2018
Business 63
T
OYOTA, Unilever, Barclays, Amazon, Tata. There are 71,000
listed firms in the world, but only a few hundred that many
people knowat least a little about. Schumpeterwould like to pro-
pose two Asia-centric candidates:
AIA
and Prudential
PLC
. They
pass the key tests of relevance. They are big, with a combined
market value of $160bn. They are special, having grown profits
faster than two-thirds of listed companies over the past decade.
They have prospered against the odds, surviving wars, revolu-
tionary Shanghai, decolonisation and the 2008Wall Street crash.
And they illustrate a global trend: the rise of Asia as a mighty
force—perhaps eventually the dominant force—in global finance.
AIA
and Pru are specialists in getting Asians to save through
long-term insurance, typically life or health policies. They span
20 Asian countries, have over 60m customers and employ al-
most a million agents to sell their services. They are big investors
in local financial markets. And they are beneficiaries of powerful
trends. Asia’smiddle class is growingbut tends tohave its savings
stashed in cash. Welfare states do not yet offer an adequate safety
net if family members get ill or die. An obvious answer to this is
insurance, yet annual premiums are just 2.5% of
GDP
in emerging
Asia, comparedwith 5% inwestern Europe.
What is logical is not necessarily easy to achieve. Both firms
have had to go on odysseys.
AIA
was founded in Shanghai in1919
by an adventurer called Cornelius Vander Starr, and went on to
be folded into
AIG
, a huge, rogue American financial conglomer-
ate that got bailed out in 2008.
AIA
was spun out in 2010. Pruwas
founded in 1848 to serve the insurance needs of Britain’s middle
class. Its annual report from three decades ago mentions Asia
once. But in the 1990s it remembered that it had some operations
in the region that were remnants of colonial times and sent out
Mark Tucker, a young executive, to investigate. He ignited the
business, later became boss of Pru and then
AIA
, and is now
chairmanof
HSBC
—one of several star executives tohave been in-
volved. Tidjane Thiam, boss ofCredit Suisse, ran Pru in 2009-15.
Expanding life-insurance businesses is hard. You have to
spend cash up front onmarketing, agents and laying aside capital
reserves. The profits are spread over decades: 67% of the undis-
counted earnings from
AIA
’s book of policies will be realised
after 2038. In Asia each national market grows over time but in
volatile fashion, shrinking on average one year in every three.
Currencies gyrate. The industry is fragmented—there are at least
100 life firms across Asia. Someone is always starting a pricewar.
Both firms have found ways to cope. They are geographically
diversified. Each of India, Indonesia and Thailand have boomed
since 2008, only to slowdown. Between 2015 and 2017HongKong
tookoffasmainlandChinese flocked to sign up to policies in a lo-
cation with rule of law, but it has since hit saturation point. Now
parts of South-East Asia and mainland China are growing nicely
again. The firms’ armies ofagents are abarrier to entry that ishard
to replicate, and both companies avoid writing policies that re-
quiremarkets to soar in order to be profitable.
The result is that
AIA
and Pru’sAsian armhave increased their
operating profits at a compound rate of 13% and 18% respectively,
in dollar terms, since 2007. Two decades ago Asia represented 5%
of Pru’s market value; now it is about 50%.
AIA
is worth twice as
much as its former parent,
AIG
. The crumbs have become the big-
gest slice of the cake. For the global life industry Asian firms now
represent 49% of total market value, up from4% two decades ago.
China is a big part of the story. It has had fiascos, includingAn-
bang, a deal machine and patronage vehiclemasquerading as an
insurance firm, that failed in February. But there are serious com-
panies, too. PingAn is themost valuable life firm in theworld and
is admired for its use of data. China Life ranks third.
AIA
owns
100% of a mainland operation and Prudential has 50% of a joint
venture with
CITIC
, a state-run conglomerate. These bets have
achieved critical mass, delivering 18% of the new business writ-
ten so far this year for
AIA
and 11% for Pru Asia. The two firms are
set to join a tiny elite ofmultinational financial firms that derive a
significant share of their global profits frommainland China.
One risk to them is technology. For now, customers still like
dealing with a human (armed with an iPad) when signing com-
plex policies. But startups accessing customers through their
phones could make agents obsolete. Colm Kelly, an analyst at
UBS
, has surveyed 800 agents inAsia, and halfof them think that
digital distribution is a “big threat”. The management of
AIA
and
Pru need to take this more seriously. Another danger is an eco-
nomic crisis in Asia, spurred by trade wars or a sell-off in emerg-
ing markets. Insurers are inherently opaque. Still, in the 2008-09
downturn
AIA
and Pru Asia avoided big underwriting-and-in-
vesting banana skins, while newsales dipped only a little.
Deal or no deal
Instead the big testmay be consolidation. China is easing its rules
on foreign ownership, which will prompt a reshuffle among the
long tail of 26 other foreign life firms that have a presence there.
Ping An and China Life may seek to buy a presence abroad. Con-
tinental Europe’s two giants,
AXA
and Allianz, both say that they
eschewbig deals, but have spare cash, half an eye onAsia and 20-
year records of empire-building through acquisitions.
For
AIA
, the danger is that it overpays for small deals or faces a
big new competitor. For Prudential the risk is it faces an opportu-
nistic takeover bid. It is the smaller of the two, with a less mature
book of business that throws off less cash. In 2019 it will spin off
its British arm. The idea is to lose this baggage so that Pru gets a
racier valuation, but the unintended effectmay be tomake it a sit-
ting duck. Ping An has reportedly been sniffing around its Asian
business. Pru’s board should resist any bid and stiffen its share-
holders’ resolve. Both it and
AIA
belong at the forefront of a new
generation ofAsian financial multinationals.
7
Metamorphosis
TwoAsian financial giants deserve to be betterknown
Schumpeter