In our last article, we analyzed the recent trends affecting the personal automobile market in the U.S. We discussed how strong vehicle sales in the country and price hikes by insurers offset low yields, influencing premium volume growth in the last few years. To recap, premium volume increased from $164 billion in 2010 to $172 billion in 2012,  as the vehicle sales growth rate hit double digits during the period.  Average auto insurance costs for sedans also increased 3.4% in 2011, followed by 2.8% growth in 2012. 
We currently cover two companies involved in personal automobile insurance in the U.S. : The Travelers Companies, Inc. (NYSE:TRV) and The Hartford Financial Services Group (NYSE:HIG). Hartford has a market share of 1.3% and earns a quarter of its P&C premiums from its personal automobile insurance operations, while Travelers has a market share of nearly 2% and earns 16% of its premiums from the division. In this article, we focus on Hartford Financial.
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- Hartford’s Q1 Core Earnings Drop On Investment Income Decline, Lower Underwriting Gains
Renewed Focus From Hartford
Last year, Hartford sold its individual life insurance business to Prudential Financial (NYSE:PRU), its retirement plans business to Massachusetts Mutual Life Insurance Company (MassMutual) and its broker-dealer business, Woodbury Financial Services to AIG (NYSE:AIG). Last week, it completed the sale of its U.K. subsidiary, Hartford Life Limited (HLL), to Columbia Insurance Company for $285 million.  Following the divestiture of non-core operations, Hartford has three main businesses: property and casualty insurance, group life insurance and mutual funds.
The P&C division is the most important business for Hartford, accounting for more than 80% of the company’s operational core earnings. (Excluding earnings from divested and corporate streams) More than a quarter of the division’s premiums are earned through personal automobile insurance. Hartford has an agreement with the American Association of Retired Persons (AARP) to market automobile and homeowners’ insurance directly to 37 million AARP members. This agreement accounts for 80% of the consumer insurance premiums earned by Hartford.
AARP And Strong Underwriting Will Help On The Road To Recovery
Hartford’s personal automobile insurance premiums fell from $2.8 billion in 2010 to $2.5 billion in 2012 as the number of policies in force fell from 2.2 million to 2 million. The company maintained average monthly premiums of around $105 through this period. This year, it has managed to check the slide. Through the first nine months of 2013, Hartford’s written premiums for the automobile line have increased 2%. The total number of policies in force has remained around 2 million, with a strong policy count retention rate of over 85%, despite a renewal written pricing increase of 5%. The new business written premium is up 10%.
With increased focus on property and casualty insurance, Hartford is spending more on marketing, leading to higher underwriting expenses. The combined ratio (expenses to premiums) for automobile insurance increased from 93.7% in the first nine months of 2012 to 95.6% in the same period this year. Below 100%, the combined ratio indicates that the company is earning an underwriting profit from its automobile insurance operations. This is much better than the rest of the industry, which observed a combined ratio 108% in 2011 and 103% in 2012. 
The AARP agreement, which has been extended till 2023, will be crucial for Hartford from a marketing perspective in the coming years. So far, the company has achieved a penetration of 4% in the organization. As other insurance companies try to offset low returns from investments, Hartford can effectively leverage its agreement with the AARP, along with its strong underwriting practices, to expand further in the automobile insurance domain. Our current forecast is based on Hartford achieving a market share of 2% through the end of the decade.Notes:
- NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩]
- GENERAL MOTORS COMPANY AND SUBSIDIARIES, Form 10-K [↩]
- Auto Insurance, Insurance Information Institute [↩]
- Hartford Financial Services Group Inc : The Hartford Completes Sale Of U.K. Variable Annuity Business To Berkshire Hathaway, December 12, 2013 [↩]
- P/C Insurers’ Profits Rose in 2012, but Profitability Lagged Long-Term Norm as Sandy Losses and Drop in Investment Gains Hit Results [↩]