Hartford’s Q3 Earnings Helped By Better Pricing, Lack Of Disasters

The September quarter was quite a busy period for The Hartford Financial Services Group (NYSE:HIG) as it announced the divestiture of three of its non-core businesses and reiterated its focus on the property and casualty business in the U.S. Net revenues jumped by 42% over the prior year period, helped by price increases and higher returns from investments while net income benefited from reduced catastrophe-related losses from $60 million in the third quarter of 2011 to $403 million. Although the company will likely be affected by Superstorm Sandy in the fourth quarter, we expect the P&C division to drive sustainable growth in the coming years. Our $22 price estimate for Hartford’s stock is in-line with the current market price.

See our full analysis of Hartford Financial here

Property And Casualty

Hartford reported 8% insurance price increase in the commercial line of property and casualty insurance last quarter, a slight increase from 7% reported in the first half of the year. This did not have a significant impact on sales as net premiums written during the quarter were nearly unchanged from last year.  Mother Nature also played a hand in improving Hartford’s earnings as catastrophe-related losses for the P&C division stood at $7 million prior to Superstorm Sandy. At the same time last year, Hurricane Irene and various thunderstorms in Midwestern U.S. led to catastrophe-related losses of $134 million in the commercial segment.

Although Hartford’s management has not provided any guidance on the impact of Sandy, firms used by the insurers to estimate the impact of the disaster, AIR Worldwide and Eqecat, expect total losses between $5 billion to $15 billion, almost three times that caused by Hurricane Irene last year. ^[1] These losses will be reflected in the company’s fourth quarter earnings. We do not expect a significant residual effect from the storm in the coming years and expect Hartford to maintain its margins through prudent underwriting and price management.

Investment Income

Hartford reported loss of $1.8 billion from equity securities trading in the third quarter of last year. This time around, it reported $710 million investment income from the same. Due to the capricious nature of the markets, it is quite difficult to accurately forecast net investment income from equity trading. Our current model accounts for a suppressed short-term yield curve with higher returns coinciding with an eventual global economic recovery.

Divestiture

Last quarter Hartford announced the sale of its retirement plans business to Massachusetts Mutual Life Insurance Company (MassMutual), its individual life insurance business to Prudential Financial (NYSE:PRU) and its broker-dealer business, Woodbury Financial Services, to AIG (NYSE:AIG), leading to a net statutory capital benefit of about $2.2 billion. We will track further announcements regarding the divestiture of its non-core businesses and update our model accordingly.

Refer to our article : Hartford Financial Worth $21 After Sale Of Non-Core Businesses for more details.

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1. Hurricane Sandy losses may be triple those of Irene, Reuters, 30^th October [↩]