Editor’s Note: The initial article incorrectly identifies Prudential Financial with Prudential Public Limited Company (ADR) (NYSE:PUK). This version has been corrected and Motley Fool apologizes for the error.
According to Munich RE, the primary insurance market is finally recovering from 2008 despite the slow economic recovery throughout the world.
Within the insurance giants’ short term insurance market outlook published this month, it was noted that the volume of primary insurance premiums written is expected to grow 2.8% in real terms during 2013, and 3.6% in real terms during 2014, after growth of only 1% during 2012. Unsurprisingly, the majority of this growth is coming from emerging markets and North America, while growth in the European market continues to be held back by economic contraction.
Munich RE expects primary life insurance premiums written to grow by 2.5% during 2013 and 3.6% during 2014 after a contraction of -0.4% during 2012. The company also expects primary property and casualty insurance premiums written to grow 3.4% in 2013 and 3.6% in 2014.
The majority of this growth in primary insurance is expected to come from emerging markets, as I have already stated. Within primary property and casualty insurance, premiums in Eastern Europe and Latin America are expected to grow around 6%, and premiums in emerging economies such as China and India could expand by as much as 10% or more.
However, the life insurance market is expected to grow even faster during the next two years. Premiums written are expected to grow between 10-15% in some Asian and Latin American countries. Although, this rate of growth is slower than 2012 when the volume of premiums written grew 18%. Premiums from Africa and the Middle East are also expected to grow faster than average, but these markets continue to represent a very small portion of the global market (approximately 2.5%).
On a longer term, compounded-annual-growth-rate basis, property and casualty insurance premiums are expected to rise about 10.2% annually from now until 2020 in emerging Asian economies and about 6% in Eastern Europe and African economies. Meanwhile, life insurance premiums are expected to rise 14% on average annually in emerging Asian economies and 12% annually in Latin American economies from now until 2020.
Which company will benefit the most from these trends?
The best play for this trend, in my opinion is Prudential Public Limited Company (ADR) (NYSE:PUK). The company has the most exposure to fast growing Asian economies as well as exposure to the US and UK markets, which are also set grow, although not as fast as Asia
Prudential’s income split:
| Region | Net Income | Percentage of Total |
|---|---|---|
| Asia | $989 | 27.20% |
| Rest of the World | $599 | 16.50% |
| United Kingdom | $1,158 | 31.80% |
| United States | $894 | 24.60% |
Figures in millions of $US
After the UK, Asia is Prudential Public Limited Company (ADR) (NYSE:PUK)’s biggest market and, as shown above, the company generates slightly more than 27% of its income from the region.
As well as the fast growing insurance markets in Asia, Prudential Public Limited Company (ADR) (NYSE:PUK) also generates more than 30% of its income in the UK. While the UK is technically in Europe, where the insurance market is stagnating, Prudential Public Limited Company (ADR) (NYSE:PUK) is set to benefit for government policy shifts and an aging population in the UK.
In particular, in addition to insurance, Prudential Public Limited Company (ADR) (NYSE:PUK) also provides pension products, and like most eurozone governments, the UK is cutting hard to return to fiscal stability; part of this is a structural shift away from state pensions into privately controlled pension schemes. This shift in policy is driving funds toward Prudential Public Limited Company (ADR) (NYSE:PUK) and should lead to even wider profit margins for the company.
On the other hand…
Two companies that are not set to benefit from the insurance market growth in Asia are Travelers Companies Inc (NYSE:TRV) and American International Group Inc (NYSE:AIG).
American International Group Inc (NYSE:AIG) and Travelers Companies Inc (NYSE:TRV) both make the majority of their income in North America, or more specifically the US.
Revenue split:
| Region | Travelers | AIG |
|---|---|---|
| US | 96.5% | 70.3% |
| Asia Pacific | 0% | 11.7% |
| Rest of world | 3.5% | 18% |
Travelers has almost no exposure to the global insurance market outside of the US. AIG does have some exposure to the Asian insurance market, but once again the company makes more than 70% of its income in the US.
Even though AIG and Travelers have limited international exposure, there is still potential for them to grow as the primary insurance market in the US gains traction and starts to grow in-line with the rest of the economy.
Meanwhile, for investors who are seeking more risk
Genworth Financial Inc (NYSE:GNW)’s main business is mortgage insurance, but the rest of the company’s revenue comes from wealth management services such as life and health insurance. Q1 of this year was the first quarter since 2007 that Genworth Financial Inc (NYSE:GNW)‘s U.S. mortgage insurance division actually turned a profit since 2007. In addition, the number of delinquent US mortgages on Genworth Financial Inc (NYSE:GNW)’s book fell 21% from April 2012 to April this year.
Having said that, mortgage reinsurance for US properties only accounts for 12.5% of Genworth Financial Inc (NYSE:GNW)’s total revenues; 46% of the company’s revenue comes from the insurance of international mortgages, a division that has remained relatively profitable during the past five years.
Genworth Financial Inc (NYSE:GNW) revenue split:
| Division | Revenue | Percentage of total |
|---|---|---|
| International Mortgage Insurance | $737 | 46.10% |
| International Protection | $58 | 3.60% |
| Runoff | $81 | 5.10% |
| U.S. Life Insurance | $417 | 26.10% |
| U.S.Mortgage Insurance | $200 | 12.50% |
| Wealth Management | $107 | 6.70% |
Figures in million of $US
Life insurance accounts for 26% of Genworth Financial Inc (NYSE:GNW)’s revenues as of 2012, so the company is well placed to take advantage of growth in the life insurance market and housing market recovery over the next few years.
Conclusion
The primary insurance market is set to boom in emerging economies over the next few years, and the company that will benefit the most will be Prudential plc. Travelers and AIG will benefit from growth in the general market for insurance, but I do not expect their growth to be as rapid as that of Prudential.
Genworth on the other hand, offers a mix of exposure to the growing insurance market and the housing recovery, albeit with more risk. But more risk = more reward, and Genworth is my personal choice.
The article The Outlook for the Global Insurance Market Is Starting to Pick Up originally appeared on Fool.com.
Fool contributor Rupert Hargreaves owns shares of Genworth Financial. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group. Rupert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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