The Hartford Financial Services Group (NYSE:HIG) is scheduled to announce results for the second quarter of 2013 on Monday, July 29, with a conference call to discuss the results on Tuesday.  Investors will be keeping a close eye on the performance of the property and casualty division, which is now Hartford’s main focus following the divestiture of its individual life insurance and retirement plans businesses last year.
At the end of 2012, Hartford was the eleventh highest property and casualty insurer in the U.S., with a market share of just 2%.  However, with the company shifting its focus to property and casualty this year, we expect it to offer competitive pricing to gain market share. Profitability will also be a key factor. After reporting a a combined ratio (expenses to premiums) of 110% for the last two years, Hartford was able to turn around its underwriting performance in the first quarter of 2013, with a combined ratio of 93%. With a lack of natural disasters through the three months ending June, we expect the company to maintain its underwriting discipline.
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Gains From Interest Rate Increases
Around 65% of Hartford’s assets are invested in fixed maturity securities like government and corporate bonds. The returns from these investments are largely linked to interest rates which have been low in the last few years due to the Federal Reserve’s Quantitative Easing program which includes $85 billion in monthly bond purchases. However, recent speculation that the program might be coming to an end has led to an increase in bond yields. The 10 year Treasury yield has climbed from 1.76% at the end of 2012 to around 2.75%. 
The Travelers Companies, Inc. (NYSE:TRV), one of the biggest P&C insurers in the U.S., recently reported an after tax investment gain of $87 million for the three months ending June. Higher yields from investments will allow Hartford to expand margins.
Hartford’s P&C business can be divided into two sub-divisions: the commercial division, which offers insurance solutions to companies and the consumer division, which caters to individuals, offering homeowner’s and personal automobile insurance.
The commercial property and casualty business includes insurance lines like workers’ compensation, commercial property, commercial automobile, package business, liability and fidelity and surety insurance. Workers’ compensation is the most important line of insurance for Hartford accounting for half of the commercial premiums earned by the company. Hartford is the third largest insurer in this domain in the U.S. with a market share over 6.5%, behind Liberty Mutual Group and The Travelers Companies. 
The workers’ compensation line is closely linked the U.S. job market, which has seen signs of recovery in the last few months. The unemployment rate in the U.S. has recovered remarkably from the peak of 10.1% observed during the financial crisis in 2009 and reached a four-year low of 7.5% in April, staying around 7.6% through May and June.  Employment in the manufacturing and construction sectors, which are closely linked with workers’ compensation has been strong. Manufacturing employment has increased by 4.3% since 2010 while jobs in the construction industry have increased by 5.4% since the start of 2011. 
Hartford is well positioned to gain from growth in the market, and we expect it to retain market share in the coming years. We discuss the business in further detail in our article: A Look At Hartford’s Commercial Property And Casualty Insurance Business
Hartford has an exclusive licensing agreement with the American Association of Retired Persons (AARP), in place through January 1, 2020. The agreement allows Hartford to market automobile and homeowners’ insurance directly to 37 million members enrolled in AARP. The AARP agreement has led to earned premiums of $2.8 billion through the last three years, 77% of the consumer division’s $3.6 billion net premiums. In the first quarter of 2013, high conversion rates in the AARP agency marketing line led to a 20% year-on-year increase in new business premiums in homeowners’ insurance. We expect the AARP to play a significant role in driving growth for Hartford in the coming years. For more, please read: A Closer Look At Hartford’s Homeowners Insurance Business and A Closer Look At Hartford’s Automobile Insurance Business
Group Life Insurance
Hartford is the eighth largest group life insurance company in the U.S. However, its market share has gone done from over 17% in 2009 to 14% in 2012.  Hartford’s group premiums fell from $4.15 billion in 2011 to $3.81 billion in 2012 as the company’s market share dropped from 16% to 14%. Hartford’s loss ratio or ratio between benefits and loss expenses to premiums has increased from 77.9% in 2010 to 79.5% while its expense ratio or ratio between insurance operating costs and other expenses to premiums has been around 28% through the last three years. Despite this, its pre-tax margins have been suppressed (between 2%-5%), largely due to low returns from its investments in bonds.
Like the P&C division, the group insurance division will also benefit from improving economic conditions and a recovering job market. We expect the company to maintain loss ratio of around 78% and an expense ratio of 28% in the coming years but will keep a close eye on developments. Please read: Taking A Look At Hartford Financial’s Group Insurance Business for more.Notes:
- Events & Presentations, Investor Relations [↩] [↩]
- NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩]
- Analysis: Higher interest rates? Not a problem for some U.S. stocks, Reuters, July 16 [↩]
- U.S. Department of Labor, Labor Force Statistics from the Current Population Survey [↩]
- Overview and Outlook for the Workers Comp Market: Growth, Performance and the Economic Environment, Insurance Information Institute [↩]
- ACLI Life Insurers Fact Book 2012 [↩]