Having sold off its life insurance and retirement solutions businesses in 2012, The Hartford Financial Services Group (NYSE:HIG) will be focusing on property and casualty insurance in the coming years. The company finished 2012 outside the list of top 10 P&C insurance companies in the U.S. in terms of direct premiums earned, according to the National Association of Insurance Commissioners (NAIC). With over 2,000 property and casualty insurance companies vying for market share in the country, Hartford will have to work hard to grow its business.
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Hartford is the 11th largest property and casualty insurer in the U.S. with a market share of 2.05%. The company provides insurance to businesses in the country through its property and casualty commercial division and to individuals through the consumer division. In the following two articles, we will focus on the consumer division, which accounts for more than 35% of the net premiums earned by the P&C business.
Our $24 price estimate for Hartford’s stock is in line with the current market price.
The property and casualty consumer division primarily provides automobile insurance and homeowners’ insurance to individuals in the U.S. Automobile insurance generates about $2.5 billion in earned premiums, whereas homeowners’ insurance generates around $1.1 billion. Hartford has an agreement with the American Association of Retired Persons (AARP) to market automobile and homeowners’ insurance directly to 37 million members enrolled in AARP through January 1, 2020. More than three-quarters of the consumer division’s earned premiums are generated through the AARP agreement. However, apart from this agreement, Hartford has been losing ground in the U.S. market and must act quickly to protect its market share.
Automobile Insurance – Historical Trends
Hartford has lost market share in the automobile insurance market, accounting for 1.71% of the total automobile premiums earned by U.S. insurers in 2010.  This share dropped to 1.57% in 2011 and further to 1.46% in 2012. Total policies in force dropped from 2.23 million in 2010 to 2.02 million in 2012.
Pricing and distribution are two key elements determining the market share an insurer is able to attain. Apart from a direct distribution channel to AARP members, Hartford also has an established network of brokers and independent agents for distribution and is working on affinity agreements with the American Kennel Club, Sierra Club, the National Wildlife Federation and Direct Selling Association.
Hartford has been able to keep premiums down in a time when most property and casualty insurers have been forced by a low interest rate environment to increase prices to generate float for reinvestment. New business premium or premium earned from new contracts written in a given year went down from $311 in 2010 to $298 in 2011. It should be noted, however, that this doesn’t necessarily mean the company has been cutting prices as premiums are also determined by the value of the property being insured as well as the level of coverage.
The combined expenses ratio – or the ratio between expenses and premiums – actually improved from 98% in 2010 to 95% in 2011, as the automobile insurance division was not as badly affected as the homeowners’ division, which saw an increase in the combined ratio from 104% to 115%. This increase was due to increased claims and expenses from Hurricane Irene, Tropical Storm Lee and other catastrophes in the calendar year. The consumer division reported an underwriting loss of $48 million in 2011, which forced the company to increase new business premiums for automobile insurance to $332 in 2012 (it was also impacted by property value and coverage though).
According to our analysis, the monthly average premiums per policy for automobile insurance are around $105, a figure that has remained fairly consistent through the last four years. In contrast, The Travelers Companies, Inc. (NYSE:TRV), which has a market share of 2.1% in the automobile insurance market with 2.3 million policies in force, has monthly average premiums per policy of around $129.
The AARP affinity agreement is the biggest source of income for Hartford’s consumer division and has to be considered while making a forecast. Around 77% of the premiums earned by the consumer insurance division are through Hartford’s agreement with the AARP. Assuming equal distribution of premiums amongst policies, Hartford has approximately 1.5 million AARP member automobile insurance policies in force. This would mean that around 4% of the 37 million AARP members are opting for Hartford for automobile insurance.
There were about 35 million American citizens in the age group 55 to 64 in 2010, according to the 2010 U.S. census. The mortality rate for senior citizens in the age group 65 to 74 is around 2% and around 5% for citizens in the age group 75 to 84.  Using these statistics, we can approximately assume close to 50 million AARP members by 2020. Hartford’s current affinity agreement with the AARP is in place until January 1, 2020 which allows the company to directly market automobile insurance to 50 million people by the end of our forecast period. As the P&C business is now the main source of income for Hartford, we expect increased marketing and sales focus on the company’s part, allowing it to attain 5% penetration. This would lead to around 2.5 million AARP member policies in force.
Outside of the AARP, Hartford is also working on affinity agreements with associations like American Kennel Club, Sierra Club, the National Wildlife Federation and Direct Selling Association. With effective pricing and distribution, we expect that Hartford can increase the number of policies in force from the current number of 450,000 to at least 1 million. This means that Hartford would have a total of around 3.5 million automobile insurance policies in force by 2020.
Hartford’s monthly average premiums per policy have historically been around $105. We expect this trend to continue, allowing the total premiums earned from personal automobile insurance policies to reach $4.4 billion by the end of our forecast period. Considering 2% annual growth in total personal automobile insurance premiums in the U.S., this means that Hartford could attain a market share of 2.14% by 2020.
We currently do not provide a forecast for the consumer insurance division, but you can modify the interactive chart below to gauge the effect a change in our forecast for Hartford’s share of the property and casualty market in the U.S. will have on our price estimate for the company.Notes:
- NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩]
- National Vital Statistics Reports, Centers for Disease Control And Prevention [↩]