The Hartford Financial Services Group (NYSE:HIG) has restructured itself in the last year to focus on property and casualty insurance by selling off its retirement solutions and individual life insurance businesses in 2012. Although still a small player in the P&C market with market share of just 2% at the end of 2012, we believe Hartford can unlock significant value by improving the profits of its operations. 
Looking At The Combined Ratio
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- How Has HIG’s Revenue Composition Changed In The Last Five Years?
- How Much Has HIG’s Revenue & Earnings Grown In The Last Five Years?
- Hartford Reports Strong Q4 Results On Improved Commercial P&C Underwriting Performance
The combined ratio, which represents total expenses incurred to premiums earned, is one of the most important metrics for evaluating property and casualty insurers. Hartford reported a combined ratio of 105.4% for the second quarter of 2013. Although the figure is an improvement over 107.5% reported for the same period of 2012, it still represents an underwriting loss for Hartford. In contrast, The Travelers Companies, Inc. (NYSE:TRV) has consistently reported an underwriting profit through the last few years with the exception of 2011 when Hurricane Irene and Tropical Storm Lee led to high catastrophe related losses. The company even withstood the devastation of Hurricane Sandy in 2012, with an underwriting profit of $226 million for 2012 and a GAAP combined ratio of 97%.
However, this is not an alarming statistic for Hartford as several P&C companies in the U.S. run on underwriting losses. Some companies might also take on underwriting losses to gain market share by setting lower premium rates. The P&C industry as a whole has run on underwriting losses for 37 of the last 45 years.  We believe that Hartford will see better results in the coming years as it establishes its market position in the U.S. and shifts its focus on improving profits.
Hartford’s operations can be divided into two categories: property and casualty commercial and consumer markets. Broadly, the commercial operation provides workers’ compensation, property, automobile, liability and umbrella coverage to small and middle market businesses across the U.S. while the consumer market operations cater to individuals, providing automobile and home insurance. The commercial branch accounts for nearly two-thirds of the premiums and fees earned by the property and casualty division.
In commercial insurance, Hartford’s main business comes from the workers’ compensation line of insurance, which accounts for half of the division’s premiums. According to the National Association of Insurance Commissioners (NAIC), Hartford is currently the third largest insurer in the U.S. in the workers’ compensation line with a market share of nearly 7%. On the consumer side, Hartford has an exclusive licensing agreement with the American Association of Retired Persons (AARP) which allows it to market automobile and homeowners’ insurance directly to 37 million members enrolled with 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. The current agreement with AARP is in place through January 1, 2020, and will provide a stable source of income for the consumer markets division. The company also has affinity agreements with the American Kennel Club, Sierra Club, the National Wildlife Federation and Direct Selling Association. For more on insurance operations and prospects, please read: A Closer Look At Hartford’s Homeowners Insurance Business, A Closer Look At Hartford’s Automobile Insurance Business and A Look At Hartford’s Commercial Property And Casualty Insurance Business.
The combined ratio for the commercial division was 96% in 2010 but increased to 112% in 2011 and 106% in 2012, largely because of high-catastrophe related claims incurred due to Hurricane Irene and Hurricane Sandy. The combined ratio for the consumer division has remained around 100% during this period. We believe that as Hartford is able to gain market share in the next few years, it will keep premium rates lower and thus run into underwriting losses with a combined ratio of around 100% or above for both divisions. However, in the long term, we expect a combined ratio of around 98% for both the commercial division and the consumer division. There is 10% upside to our price estimate should the ratio fall below 95% through the decade.
We analyze the effect of the combined ratio and Hartford’s investments in our next article: An Overview Of Hartford’s Property And Casualty Business Part 2Notes: