Hartford’s Core Insurance Businesses Appear To Be On The Right Track

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The Hartford Financial Services Group (NYSE:HIG) reported a net loss of $190 million for the second quarter of 2013, compared to a net loss of $101 million in 2012. The company did, however, deliver a strong operational performance, as core earnings from its three main businesses – property and casualty, group benefits and mutual funds increased 28%, year-on-year. (Core earnings are a non-GAAP measure reported by insurance companies which exclude the impact of goodwill and other non-recurring items)

The P&C insurance division accounted for 71% of the company’s operational core earnings with a 39% year-on-year improvement in earnings as the combined ratio (expenses to premiums) improved from 107.5% to 105.4%. Excluding the impact of catastrophes and prior year reserve  development, the combined ratio improved from 93.6% to 91.8%, indicating a better underwriting performance. The division was also helped by a lack of natural catastrophes through the three months ending June, as catastrophe related losses dropped from $290 million to $186 million.

Following the divestiture of its individual life insurance and retirement planning businesses last year, Hartford has shifted focus to property and casualty and believes it can generate greater returns for its shareholders. Last quarter, the company expanded its share repurchase program by $750 million to a total of $1.25 billion, and also increased quarterly dividend by 50%.

We are currently updating our model for Hartford and will present a revised price estimate shortly. We are using a modification of the dividend discount model (DDM) to arrive at a price estimate for Hartford. In our model, we estimate the total income that can be returned to shareholders – through dividends and share repurchases – and discounting this value back to the present.

See our full analysis of Hartford Financial here

Property and Casualty

The P&C insurance division can further be subdivided into commercial and consumer divisions. Commercial P&C caters to businesses, providing products like workers’ compensation and multiperil insurance. Consumer P&C provides homeowners’ and personal automobile insurance to individuals using the American Association of Retired Persons (AARP) as a distribution medium.

For the second quarter, Hartford’s P&C commercial division reported an underwriting gain of $25 million, compared to a loss of $7 million during the same period in 2012. The combined ratio improved from 100.5% to 98.4% as catastrophe related losses fell from $74 million to $ 44 million. Standard commercial renewal written price increases were 8%, allowing net written premiums to increase by 1% over the prior year. The company also reported written pricing increases of 9%-10% in the middle market workers’ compensation and commercial property lines of insurance. Despite the price hikes, the retention rate in middle market rose from 73% to 79%.

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, Inc. (NYSE:TRV). We discuss the business in further detail in our article: A Look At Hartford’s Commercial Property And Casualty Insurance Business

Consumer Insurance

On the commercial side, catastrophe related losses dropped from $216 million to $142 million, but the company still reported an underwriting loss of $9 million as the combined ratio was 101%. Written premiums increased by 2% , helped by a 10% increase in new written premium from the AARP Direct and AARP Agency channels. New business premiums increase 9% in the automobile division but were down 13% for homeowners’. The policy count retention for both divisions was above 80% – 86% for auto and 87% for homeowners’ insurance. The AARP accounts for nearly 80% of the consumer division’s premiums, and we expect it 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 Benefits

The group benefits division reported a 9% year-on-year increase in core earnings as the loss ratio improved from 78.6% to 75.7%, largely due to the company’s pricing strategy. However, the same strategy also resulted in the loss of a large account, leading to a 13% decline in fully insured premiums. Hartford has a market share of 14% in the group insurance business in the U.S., we expect it to maintain focus on profitability in the coming years, in particular maintaining a loss ratio of around 78% and an expense ratio of 28%. Please read: Taking A Look At Hartford Financial’s Group Insurance Business for more.

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