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This article originally featured in Baillie Gifford’s Autumn 2019 issue of Trust magazine.
Some parts of human nature are hard-wired and difficult to disrupt. One is the instinct to protect ourselves and our families, when we can, against ill-health, sudden death, enforced unemployment and fear of a cash-strapped old age.
For Asia’s newly prosperous middle classes, that instinct is running rampant, much to the benefit of the region’s life insurers.
“There isn’t an NHS in China. There’s no universal unemployment benefit in Thailand. There isn’t a state pension in many of these countries,” Monks manager Charles Plowden says. “The life insurance industry in Asia provides a useful social function promoting private savings and security in markets that don’t have social security systems or the tradition of a welfare state.”
Asia, he says, is enjoying a “seemingly unstoppable” improvement in levels of health, education and wealth. This has already taken hundreds of millions out of poverty or bare subsistence, towards levels of income where they can begin to save for longer lives in retirement. With a middle class income comes discretionary spending.
Around 1.2 billion more people across Asia are expected to join the middle class before 2025, six times more than in the rest of the world. Plowden’s confidence that these relatively prosperous Asians will continue to buy increasingly sophisticated life insurance products is based on the human instinct to secure what we have. Insurance, he says, is an essential rung on the “ladder of needs” from subsistence to luxury.
Convinced that these numbers mean that the pull of high-quality demand for policies of increasing sophistication, and therefore profitability, will continue for decades, Plowden is almost as confident about who will be supplying that demand. Some of these companies now feature amongst Monks’ highest-conviction holdings.
There are two dominant players in the region. One is the deep-rooted and fast-growing Prudential Corporation Asia (soon to be listed separately from the Pru’s venerable UK and European operation). The other is AIA, founded in Shanghai in 1919, the largest pan-regional insurer in Asia. Both are top 10 holdings in the Monks portfolio. Between them the two Hong Kong-headquartered companies have 60 million customers in 20 countries and armies of highly-trained agents to sell their products.
A more recent addition to Monks’ portfolio is Ping An (meaning ‘safe and well’). Founded as recently as 1988, the China-only life insurer had achieved a $225 billion market capitalisation by the time of its 30th anniversary. Monks also has a smaller holding in ICICI-Pru, a joint venture between one of India’s largest private banks and Prudential. Although the numbers of new entrants to India’s middle class surpass even China’s, Plowden sees Indian life insurance as “further behind the growth curve”, making it a longer-term opportunity.
“Is the current growth of life insurance sustainable? Undoubtedly so. Asia encompasses markets with a population nine times the size of the US, though life insurance penetration in Asia is only one-ninth of what it is in America. Over time, there is scope for significant catch-up. To avoid taking on such liabilities, governments are generally very supportive of private savings – and of suppliers.”
Plowden highlights the importance of the distribution and sales force: legions of agents, thoroughly-trained and equipped with tablets and laptops, fanning out across the cities, towns, farmsteads and islands of Asia. “The whole thing about life insurance is that it is never bought, it is always sold. The customer has to be persuaded that they need it, then they must have all the features explained to them. You can’t do that in 20 minutes looking at a website.”
His emphasis on the quality of the leading companies, plus the size of the growth opportunity they can address, invites the question of where Asian life insurance companies stand in the spectrum of ‘best ideas’ in his career as an investor.
“It is very unusual to have this level of predictability and forward visibility. If you believe the big statistics, that Asians are going to carry on getting richer, the need is going to keep going up,” he says.
“But what is really unusual is how few competitors there are in these markets. The barriers to entry, and the element of consumer and regulatory trust required are high. It’s very difficult to get a new licence as a start-up and you won’t have the brand.” While tech-led innovation or industry consolidation could disrupt the landscape, the chances of the established companies extending their leading position are boosted by life insurance’s need for massive marketing and sales force development costs.
The dominant players, Plowden says, “will I hope feature in the portfolio for a long long time. We just don’t see why the opportunity should get any less appealing.”
Granted it’s a different kind of comfort, but Asia’s new life insurance consumers and Monks’ investment managers share a common belief: that a long-term investment in Asian life insurance is good for their financial health.
Portfolio data to 31 August 2019. Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates. Investing in emerging markets is only suitable for those investors prepared to accept a higher level of risk. This is because difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment.
The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research.
Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions.
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Colin is deputy editor of Trust, having joined Baillie Gifford in 2018. He is a former business editor of the Sunday Herald and has worked as a lecturer and journalist in Japan.