The Hartford Financial Services Group (NYSE:HIG) is expected to announce results for the third quarter of 2013 on Monday, October 21.  The insurance company sold off its individual life insurance and retirement divisions last year and is now focusing on three main businesses – property and casualty, group benefits and mutual funds.
The P&C division is the most important business for Hartford, accounting for more than 70% of its operational core earnings. The company reported a 39% year-on-year increase in earnings from the division last quarter (core earnings are a non-GAAP measure reported by insurance companies which exclude the impact of goodwill and other non-recurring items). Lower claims and losses, and a high retention rate drove growth through the three months ending June. Catastrophe-related losses dropped from $290 million to $186 million, allowing the combined ratio (expenses to premiums) to improve from 107.5% in 2012 to 105.4% in the same period in 2013. We expect further improvements in the combined ratio this quarter, particularly given the lack of natural disasters in the U.S. through the last three months.
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Hartford’s P&C business consists of two divisions: the commercial division, which offers group insurance contracts to companies; and the consumer division, which offers automobile and homeowners insurance to individuals across the U.S. The commercial division reported an underwriting gain of $25 million for the second quarter, 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. The company maintained a high retention rate of 79% along with written pricing increases of 9% – 10% in the middle market workers’ compensation and commercial property lines of 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, Inc. (NYSE:TRV).  The insurance line is closely linked with the U.S. job market, which has been recovering throughout the year. The unemployment rate in the country has improved from the peak of 10.1% observed during the financial crisis in 2009, to 7.2% in September.  We expect further improvements in the job market to fuel demand for workers’ compensation insurance.
The insurance market has also been affected by low yields from bonds, which are the main source of investment for insurance companies. Around 65% of Hartford’s assets are invested in fixed maturity securities such as government and corporate bonds. The 10-year Treasury bond yield, which can be used as a benchmark for bond yields, was around 5% before the financial crisis but fell to around 1.5% in 2012, primarily due to Fed policies.  Although the yield has improved to 2.60%, it is still a long way off the pre-recession level. As a result of low yields, insurance companies have had to resort to price hikes to maintain profitability, and we expect Hartford to maintain the pricing strategy in the short term.
The consumer insurance division is largely driven by Hartford’s exclusive licensing agreement with the American Association of Retired Persons (AARP), which allows the company to market automobile and homeowners’ insurance directly to 37 million members enrolled in AARP. Nearly 80% of the consumer division’s premiums come from the AARP agreement and this also helps the retention rate, which was above 85% last quarter for both homeowners and automobile insurance. New business premiums increased 9% for automobile insurance.
We expect high retention rates to help the division this quarter, but profitability will depend on the underlying margins. Although catastrophe-related losses dropped from $216 million to $142 million last quarter, the combined ratio for the consumer division was 101%, leading to an underwriting loss of $9 million. The loss and loss adjustment expense ratio improved from 87.2% to 76.5%, but the expense ratio (underwriting expenses to premiums) remained around 25% last quarter. Improving the expense ratio will allow Hartford to achieve higher profitability in the coming years.Notes:
- The Hartford To Announce Third Quarter 2013 Financial Results On Oct. 28 [↩]
- NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩]
- U.S. Department of Labor, Labor Force Statistics from the Current Population Survey [↩]
- Daily Treasury Yield Curve Rates, U.S. Department Of The Treasury [↩]