Travelers’ Personal Insurance Business In Focus
The Travelers Companies, Inc. (NYSE:TRV) is the fifth largest property and casualty insurer in the U.S., with a market share of 4.04% in terms of net premiums earned. [1] In our model we have divided Travelers into three main divisions: Business and Financial Insurance, Personal Insurance and Investment Income. In the note below we discuss the personal insurance division, which is mostly comprised of automobile and homeowners’ insurance. The division accounts for about 25% of the company’s total revenues, with almost an equal contribution from the homeowners’ and automobile insurance lines.
We have a price estimate of $112 for Travelers’ stock, which is about in line with the current market price.
See Full Analysis for Travelers Here
Automobile Insurance
The personal automobile line of insurance is among the best known product types in the U.S., as vehicle insurance is mandatory in most states in the U.S. Pricing of insurance products is contingent upon the insurance company’s underwriting policies. Travelers, being a disciplined underwriter, focuses more on profitability as opposed to increasing its market share. Income from the investment of premiums earned also plays a vital role in helping the company concentrate on improving its margins. As the returns on investments have not seen much growth in the past few years, the company resorted to price increases so as to improve its operating margins.
The total personal automobile insurance premiums earned in the U.S. stood at about $186 billion in 2014, which is nearly 35% of the total property and casualty insurance premiums in the country. This has grown at a steady pace of over 3.5% over the last three years. The U.S. auto industry has picked up since the financial crisis, bouncing back to 16.5 million units sold in 2014 from a low of just 10.4 million units in 2009. It is expected to rise to about 17 million units in 2015. [2] We expect the increase in automobile sales to fuel demand for insurance. Additionally, price hikes implemented by U.S. insurers will drive growth in the automobile insurance market in the coming years.
Travelers’ share is about 1.8% of the total U.S. personal automobile insurance market, making it the tenth largest player in the segment. The company has been consistently losing market share as it laid a greater emphasis on improving underwriting profitability. Typically, Travelers’ underwriting profits from the personal division have been lower than those from the business and financial insurance division. We expect Travelers’s market share to remain relatively stagnant, as the company continues to pursue disciplined underwriting at the expense of market share gains. The company uses a distribution network of more than 11,000 independent agents across the U.S., with sales personnel in 9 regions and 5 contact centers.
In recent years, Travelers has also subscribed to the trend of closely monitoring and evaluating individual customers (drivers) in order to minimize risk while writing a policy. [3]((Lower Your Car Insurance Bill, at the Price of Some Privacy, New York Times)) The company employs a data analytics approach to reduce risk and improving underwriting performance. We believe that this will aid it in achieving better underwriting profits.
Homeowners’ Insurance
The U.S. homeowners’ insurance market is smaller than the automobile market, accounting for about 15% of the total property and casualty premiums earned in the U.S. Homeowners’ 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. State Farm is the market leader in this category with a share in excess of 20%. No other insurer has more than 10% market share.
The U.S. housing market has shown mixed signs of recovery over the past few years. Housing starts, a key metric to gauge the housing industry’s performance, fell to 897,000 in February 2015 compared to 928,000 in February 2014, primarily because of severe weather conditions. This comes after the industry witnessed a resurgence in housing starts to nearly 1.1 million in January 2015. Going forward, housing starts (seasonally adjusted annual rates) are likely to grow to about 1.16 million by the end of 2015 and 1.32 million in 2016. [4] This should lead to steady growth in the homeowners’ insurance market in the U.S.
Travelers’ share in the U.S. homeowner’s insurance market is about 4.5%, down from 5.3% in 2011. This is a result of the company’s concerted efforts to improve underwriting profitability in the segment. We expect this trend to continue going forward as the company concentrates on increasing underwriting margins. Travelers will also face competition from other players in the market who will resort to more competitive pricing in order to gain market share.
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