The Hartford Financial Services Group (NYSE:HIG) is scheduled to report earnings for the third quarter of 2012 on Thursday, 1st November. The company is going through a transitory phase as it seeks to divest non-core businesses and focus on property and casualty insurance following the advice of Paulson & Co, a big shareholder in Hartford. Following the divestiture of various business divisions, Hartford reported a 6% year-on-year decline in earned premiums and fees in the second quarter. Although earnings this quarter will be similarly impacted, we expect a long-term recovery in the property and casualty domain to drive business going forward. Our $21 price estimate for Hartford’s stock is in-line with the current market price.
Pre-Sandy Gains For Property And Casualty
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Property and casualty insurance is greatly affected by catastrophe-related losses due to natural disasters. Storm losses and litigation costs in the second quarter were 35% below the figure for 2011, leading to a 26% increase in P&C commercial net income. As there were no significant catastrophes in the third quarter, we expect an improvement in Hartford’s top-line. One measure to gauge the effect of natural events in the third quarter is the catastrophe loss reported by fellow P&C insurer The Travelers Companies (NYSE:TRV), which reported earnings earlier in October. The company reported an 85% year-on-year decline in catastrophe related losses during the period and we expect similar results from Hartford and AIG (NYSE:AIG).
Hurricane Sandy, which hit the East Coast of the U.S. this week, has caused widespread devastation. AIR Worldwide and Eqecat, firms used by the insurers to estimate the impact of the disaster, expect losses between $5 billion and $15 billion, almost three times that caused by Hurricane Irene last year.  This will impact the top-line in the fourth quarter and might have a residual effect on margins in the coming years; however it will have no influence on the third quarter results.
Hartford has already announced plans to sell off its retirement plans business to Massachusetts Mutual Life Insurance Company (MassMutual), individual annuities new business capabilities to Forethought Financial Group, Inc., the individual life insurance business to Prudential Financial (NYSE:PRU) and the broker-dealer business, Woodbury Financial Services, to AIG. The total benefit in terms of net statutory capital from all the transactions carried out so far is around $2.2 billion, including a $1.4 billion increase in freed up statutory surplus that it maintained to support the businesses and an $800 million reduction in required risk-based capital. We will keep a close eye on further developments and update our model as necessary.
Refer to our article Hartford Financial Worth $21 After Sale Of Non-Core Businesses for more details.Notes:
- Hurricane Sandy losses may be triple those of Irene, Reuters, 30th October [↩]