A Look At Hartford’s Homeowners’ Insurance Business

-1.30%
Downside
103
Market
102
Trefis
HIG: Hartford Financial Services Group logo
HIG
Hartford Financial Services Group

The Hartford Financial Services Group’s (NYSE:HIG) property and casualty (P&C) insurance business consists of a commercial business, which caters to businesses in the U.S., and a consumer business, which primarily provides personal automobile and homeowners’ insurance to individuals. The consumer division accounted for about 30%, or $3.8 billion, of the net premiums earned by the P&C business in 2014. Further breaking up the consumer segment, the homeowners’ product line contributed roughly $1.2 billion, while the personal automobile insurance line earned over $2.6 billion in premiums.

Hartford has a market share of 1.4% in terms of premiums earned in the U.S. personal auto insurance market. Hartford is the twelfth largest property and casualty insurer in the U.S., with a market share of 1.92%. [1] Having completed the divestiture of its life insurance and retirement solutions businesses, the company has focused its resources on the P&C business, along with Group insurance and mutual funds.

In this note we take a look at the homeowners’ insurance market for Hartford, as well as our forecasts and outlook. We have a price estimate of $42 for Hartford’s stock, which almost is in line with the current market price.

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See our full analysis of Hartford Financial here

Decreasing Market Share, Better Underwriting Profitability

Hartford has been losing market share in the homeowners’ line of insurance, with its share declining from 1.61% in 2010 to 1.41% in 2013 to 1.35% in 2014. Major catastrophes in 2011 and 2012 hit underwriting margins for the division, with the combined ratio (the ratio of claims to premiums earned) rising to over 110% in the segment.

As a result of these factors, Hartford undertook price increase initiatives. However, the total policies in force in the segment also declined. As Hartford increased its focus on the P&C business, the company also sought to improve underwriting profitability as opposed to trying to increase its market share. The combined ratio in the consumer segment has since fallen to 95%, compared to 105% in 2011. At the same time, Travelers (NYSE:TRV), which is a major competitor in the homeowners’ insurance market, also lost share from about 4.39% in 2013 to 3.81% in 2014. Travelers, which is known for strict underwriting discipline, has a combined ratio of 89% in the consumer insurance division.

Outlook

Hartford has an exclusive agreement with the American Association of Retired Persons (AARP), to market automobile and homeowners insurance directly to the 37 million members enrolled in AARP. The agreement was recently renewed and is valid through 2023. Roughly 80% of the consumer division’s premiums are generated through this agreement, and we believe this will help Hartford expand in the coming years. We forecast Hartford’s market share in the homeowners’ space to increase at a steady but gradual pace to over 1.5% by the end of the Trefis forecast period.

In addition to Hartford’s increased focus on the P&C segment, this expected growth in market share is based on two additional factors:

  1. AARP Association – Hartford’s association with the AARP will be the main source of new business growth. In addition to increasing penetration in the AARP membership base, the aging population in the U.S. indicates a likely rise in AARP membership, which will bode well for Hartford. According to National Population Projections, the number of people aged 65 and above is expected to exceed 65 million by 2025 from around 48 million in 2015. [2] This will provide a significant opportunity for growth for Hartford.
  2. Economic Growth – The U.S. housing sector has seen a significant recovery since the crash during the financial crisis of 2008. Housing starts at the end of May 2015 were over 1 million at a seasonally adjusted annual rate. [3] There has been decent growth in the sector in the last couple of quarters, concurrent with the pickup in economic activity in the U.S. There has been a remarkable improvement when compared to the low of about 500,000 starts in 2009. [4] Going forward, we believe that as economic growth in the U.S. picks up in the coming years, the housing sector should also see some continued growth. This will have a positive impact on homeowners’ insurance market in the U.S. as a whole and will provide Hartford with a greater opportunity to return its focus back to increasing market share. This is because, as interest rates eventually rise, the company’s investment income should bounce back considerably, which will allow the company to maintain healthy margins and look to recapture some of its lost market share.

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Notes:
  1. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2014 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM []
  2. Projections of the Population by Sex and Selected Age Groups for the United States: 2015 to 2060, United States Census Bureau []
  3. Residential Construction, May 2015, U.S. Department of Housing and Urban Development []
  4. Housing Starts: Total: New Privately Owned Housing Units Started, Federal Reserve Bank of St. Louis []