The Travelers Companies, Inc. (NYSE:TRV) is the sixth largest property and casualty insurer in the U.S. with a market share of 4.5% in terms of premiums earned.  We have revised our price estimate for Travelers to $94, implying a premium of 10% to the market price.
In our valuation model, we have divided the company into three business divisions: Business and financial insurance (see overview article), investment income (see overview article) and personal insurance. In this article, we discuss the personal insurance division, which primarily provides automobile and homeowners’ insurance to individuals in the U.S. The division accounts for 30% of the company’s revenues with both the homeowners’ and automobile insurance lines accounting for 15% each.
Higher Claims Than Business Insurance
Unlike the business insurance division, the personal insurance division has not generated an underwriting profit for Travelers in the past few years, partially due to claims from disasters like Hurricane Irene. Superstorm Sandy was particularly devastating in 2012. New York was the state most affected by the storm and since 15% of Travelers’ personal insurance premiums come from New York, the storm had a particularly adverse impact on Travelers.
Catastrophe related losses incurred by the personal insurance division were $1.49 billion in 2011 and $1.02 billion in 2012. As a result, the combined ratio in the last two years was above 100%, leading to an underwriting loss. Historically, the combined ratio for the personal insurance division has been around 97%. Given the company’s record in maintaining underwriting discipline, we expect it to achieve similar underwriting results in the coming years. The operating margin shown in the chart below includes the effects of net investment income but is calculated by assuming a combined ratio of around 97%.
The personal automobile line of insurance is probably the best known product type in the U.S. Vehicle insurance is mandatory in most states in the U.S. Most vehicle insurance companies charge monthly (or annual) premiums from insured parties with rates depending on the profile of the individual, the vehicle being insured and the level of coverage being requested. Rates also depend on the underwriting practices of the insurance companies. While it is easy to cut rates in order to gain market share, most companies tend to maximize underwriting profit (or minimize underwriting loss) and also consider the income they can generate from investments.
Personal automobile insurance premiums account for nearly 35% of P&C premiums in the country. The premium volume has gone up from $164 billion in 2010 to $172 billion in 2012, primarily due to rate increases imposed by insurance companies to compensate for low yields from their investments. The automobile industry has recovered well from the collapse during the financial crisis. Sales plunged from 16.1 million units in 2008 to 10.4 million units in 2009.  However the industry had a stellar year in 2012, with the market size growing by 13.4% to 14.5 million units.  U.S. automobile manufacturers like General Motors (NYSE:GM) expect a growth rate of 6% in 2013.
Increasing automobile sales and demand for insurance along with price hikes implemented by U.S. insurers should drive growth in the automobile insurance market in the coming years.
Travelers is the ninth biggest insurer in the automobile insurance domain.  The company uses a distribution network of more than 12,000 independent agents across the U.S., with sales personnel in 13 regions and 7 service centers. Travelers’ market share declined from 2.3% in 2010 to 2.1% in 2012, mainly because of its underwriting practices. The total policies in force went down from 2.6 million in 2011 to 2.4 million in 2012. An increase in premium rates is one of the main reasons for this decline as the average monthly premiums per policy increased from $63 in 2011 to $67 in 2012 (though this figure is also dependent upon the product mix, not just pricing). Going forward, we expect the company to continue to lose market share, albeit at a very slow rate, as it maintains underwriting discipline to ensure that it can maintain underwriting profitability (or minimize its underwriting loss).
The homeowners’ insurance market is smaller than the automobile market. Premiums from this line of insurance account for 15% of the total P&C premiums in the U.S. The insurance covers losses occurring to the insured party’s home, its contents, personal possessions of the homeowner and also covers liabilities for accidents that might happen at the insured premises. Like automobile insurance, premium rates have increased as insurers have been trying to minimize underwriting loss in response to low interest rates cutting into their investment income. Premium volume in this line of insurance increased from $71 billion in 2010 to $76 billion in 2012.  State Farm is the market leader in this category with a market share in excess of 20%. No other insurer has more than 10% market share.
The housing industry was one of the worst affected by the 2009 financial crisis. The number of housing starts is one of the metrics used to gauge the industry’s performance. While the figure remains well below the average 1.5 million recorded during 1960-2010, the housing market is now on the road to recovery.  In February 2013, housing starts were recorded at 917,000, representing a y-o-y increase of 28%.  Industry experts have estimated that housing starts will reach normalized levels of about 1.6 million by 2015.  We expect the recovering housing industry to drive growth in the homeowners’ insurance market in the coming years.
Travelers is the sixth biggest P&C insurer in the homeowners’ line of insurance with a market share of 5.2%.  The distribution network is the same as for automobile insurance, but the company also has a marketing agreement with GEICO to underwrite homeowners business for its automobile insurance customers. As with automobile insurance, we expect the company to concentrate on maintaining underwriting margins in the coming years. This strategy might lead to a loss of market share as other companies might offer lower premium rates to gain share.
- NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩] [↩] [↩] [↩]
- U.S. Car Sales Keep Up Their Firm Growth, April 3, 2012, nytimes.com [↩]
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- CSX’s Management Presents at JPMorgan Aviation, Transportation and Defense Conference (Transcript), Seeking Alpha, March 6, 2013 [↩]
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