The Hartford Financial Services Group’s (NYSE:HIG) P&C business can be subdivided into commercial markets which focuses on providing insurance to businesses in the U.S., and the consumer markets which provides personal automobile and homeowners insurance to individuals in the country. The consumer division accounts for 35% or $3.6 billion of the net premiums earned by the property and casualty business. Of these, around $2.5 billion are generated through automobile insurance and $1.1 billion through homeowners insurance.
In our previous article, we discussed the company’s consumer insurance division focusing on the personal automobile insurance business. To recap, Hartford is the eleventh largest property and casualty insurer in the U.S., with a market share of 2.05%. Having completed the divestiture of its life insurance and retirement solutions businesses, the company will now be depending on the P&C business for income. In this article we look at the homeowners insurance.
Our $24 price estimate for Hartford’s stock is in line with the current market price.
Hartford has been losing market share in the automobile insurance market. It accounted for 1.71% of the total automobile premiums earned by U.S. insurers in 2010.  This share dropped to 1.57% in 2011 and further to 1.46% in 2012. The total policies in force dropped from 2.23 million in 2010 to 2.02 million in 2012. However, the company has an affinity agreement with the American Association of Retired Persons (AARP) to market automobile and homeowners insurance directly to 37 million members enrolled in AARP through January 1, 2020. Around 77% of the consumer division’s premiums are generated through this agreement, and we believe this will help Hartford expand in the coming years.
Homeowners’ Insurance – Historical Trends
Like automobile insurance, Hartford has also been losing market share in the homeowners’ line of insurance. Its market share has declined from 1.61% in 2010 to 1.46% in 2012. We earlier touched on the effect that Hurricane Irene and other catastrophes had on the underwriting margin for the homeowners division in 2011. The combined expense ratio for this line of insurance expanded from 104% to 115%.
As a result of this, Hartford has undertaken pricing initiatives with new business premiums increasing from $106 in 2010 to $117 in 2012. The monthly average premiums per policy have gone up from $67 in 2010 to $70 in 2012. However, total policies in force have declined from 1.43 million in 2010 to 1.32 million in 2012. In comparison, The Travelers Companies, Inc. (NYSE:TRV), which is a big player in the homeowners insurance market with a market share of over 5% and close to 5 million policies in force, has monthly average premiums per policy of around $67. This doesn’t actually mean that Travelers is actually cheaper than Hartford as premiums are also determined by the value of the property being insured as well as the level of coverage, but it gives us a fair idea of the proximity in pricing.
The AARP affinity agreement is a major source of income for Hartford, accounting for 77% of the consumer division’s premiums. Any forecast regarding this division would have to take this agreement into account. AARP currently has around 37 million members. Assuming equal distribution of premiums amongst policies, we can assume that there are approximately 1 million AARP member homeowner insurance policies in force. This would mean that around 2.75% of AARP members prefer Hartford for homeowners insurance.
There were about 35 million American citizens in the 55 to 64 year age group in 2010, according to the 2010 U.S. census. The mortality rate for senior citizens in the 65 to 74 year age group is around 2% and around 5% for citizens in the 75 to 84 years age group.  Using these statistics, we can approximately assume close to 50 million AARP members by 2020.
Hartford’s current affinity agreement with AARP is in place until January 1, 2020, allowing the company to directly market automobile insurance to 50 million people by the end of our forecast period. We can also expect increased focus on marketing and sales on the company’s part, leading to a penetration of 3.25%. This would lead to around 1.6 million AARP member policies in force by the end of our forecast period.
Outside the AARP, Hartford is also working on affinity agreements with associations like the American Kennel Club, Sierra Club, the National Wildlife Federation and Direct Selling Association. With effective pricing and distribution, we expect that Hartford can increase the number of policies in force from the current number of 300,000 to at least 500,000. This would mean that Hartford would have a total of around 2.1 million homeowners’ insurance policies in force by 2020.
We expect a slight decline in homeowners’ monthly average premiums per policy to around $67. This would allow Hartford to earn $1.7 billion from homeowners’ insurance policies by 2020. Considering a 2% average annual growth in the market, Hartford will have a market share of 1.9% in the homeowners’ market.
The Final Takeaway
Hartford is a relatively small player in the P&C insurance market. But having sold off its life insurance and retirement solutions business, the company will have to focus on property and casualty in the coming years. We believe that the best way to go forward will be to further capitalize on its agreement with AARP. Other affinity deals will also help the company. We currently do not provide a forecast for the consumer insurance division, but you can modify the interactive chart below to gauge the effect that change in our forecast for Hartford’s share of the property and casualty market in the U.S. will have on our price estimate for the company.
Disclosure: No positions.