Travelers’ Personal Insurance Division and Key Trends
The Travelers Companies Inc. (NYSE:TRV) is the fifth largest property and casualty insurer in the U.S., with a market share of 4.22% in terms of net premiums earned. Total property and casualty insurance premiums in the U.S. were over $530 billion in 2013. ((NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2013 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM))
In our model, we have divided Travelers into three main divisions: Business and Financial Insurance; Personal Insurance; and Investment Income, which contribute around 60%, 30% and 10% to our valuation respectively. The Personal Insurance business includes personal automobile and homeowners’ insurance products. The division generates about 20% of the company’s total operating income and 30% of the total revenues. In a previous article, we discussed key trends for the Business and Financial Insurance division. In this note, we discuss the Personal Insurance division, its key underlying trends and our future outlook for the business.
Our price estimate for Travelers is $105, about 10% ahead of the current market price.
See our full analysis of Travelers here
Homeowners’ Insurance
Homeowners’ insurance covers losses related to the insured party’s home and its contents – this includes the personal possessions of the homeowner, and also covers liabilities for accidents that might happen on the insured premises. The homeowners’ product line accounts for about 15% of Travelers’ value according to Trefis estimates, earning just over $4 billion in revenues in 2013.
In a market worth $80 billion in 2013 in terms of net premiums earned, Travelers is the sixth largest company in home insurance in the U.S. The U.S. market has grown consistently at 3-4% for the last three years. For this product line, State Farm Group leads the market with over 20% market share and more than a 10% gap in terms of premiums from its closest rival, Allstate. [1]
Personal Automobile
Automobile insurance is mandatory in most states throughout the U.S., which makes it one of the most common forms of insurance products in the country. With the U.S. economy gradually recovering, automobile sales have shown signs of improvement. This improvement, along with regular increases in premium rates, led to a 3.75% expansion of total U.S. personal auto insurance premiums to $180 billion in 2013.
Travelers is the tenth largest insurer in this product line, holding a share of 1.75% in 2013 compared to market leader State Farm’s near 20% share. The company’s personal automobile insurance division earned $3.2 billion (12.6% of the total company revenues) in revenues in 2013, with its market share declining by around 0.2% as premiums slipped by nearly 6% from 2012.
Combined Ratio and Operating Margin
The combined ratio is defined as the ratio of losses and expenses incurred as a result of insurance claims to premiums. It shows whether the company is registering underwriting losses or profits. A 100% combined ratio indicates claims at par to premiums earned; below 100% means the company is operating at an underwriting profit, while above 100% implies underwriting losses. Travelers’ combined ratio with all divisions taken together was around 85% for Q1 2014. [2] Historically Travelers has been very disciplined in its underwriting, avoiding significant underwriting losses. In 2011 and 2012, however, the division was adversely hit due to the catastrophic losses caused by Superstorm Sandy and Hurricane Irene. Travelers incurred related losses in the proximity of $1.5 billion for the personal insurance division. A great deal of that was a result of the damage caused in the New York region, which generates almost 15% of premiums in this division for Travelers.
Future Outlook
In the past few years, Travelers has recorded stagnant or declining market share in the personal insurance business. The company has been focused on underwriting discipline, looking to improve its combined ratio as opposed to expanding its market share, and we expect that to continue going forward. However, in the current environment wherein the returns on investments have fallen due to low interest rates has propelled the company to compensate by increasing insurance premium and fee charges. We expect Travelers to improve the combined ratio for the division to the mid-90s and also increase its premium rates through the end of our forecast period.
As the U.S. economy recovers to the pre-recession levels of 2008 at a snails pace, GDP which had grown by 2.6% for Q4 2013, contracted by 1% for Q1 2014 [3], we remain cautiously optimistic for Travelers business to grow in both personal automobile and homeowners’ insurance product lines.
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Notes:- ref:1) Travelers’ U.S. market share is just under 4.5% in terms of premiums earned. It earned $3.4 billion in premiums for 2013, showing no extraordinary change from the previous year.
The homeowners’ insurance market is significantly impacted by the housing market, as a greater number of homeowners will generally result in an increase in the number of policies (though premium rates also have an impact on the market size). The housing sector was one of the worst hit following the financial crisis, but has started to bounce back, with housing starts for May 2014 up 6% year-over-year. The housing market recovery contributed to the growth in homeowners’ insurance premiums from $71 billion in 2010 to $80 billion in 2013. ((ref:1 [↩]
- 8-K SEC Filing [↩]
- Bureau of Economic Analysis, Release May 29 2014 [↩]