Hartford Beats Market Expectations By Focusing On Profitability

The Hartford Financial Services Group (NYSE:HIG) beat market expectations as it reported a net income of $293 million for the third quarter of 2013, compared to $13 million for the same period in the prior year. However, it must be noted that the prior year’s results included a $388 million loss related to the sale of the individual life insurance business to Prudential Financial (NYSE:PRU). Core earnings, which exclude special one-time items, were up 17%, helped by strong results from the property and casualty (P&C) commercial and group benefits.

Apart from the individual life insurance business, Hartford also divested its retirement business last year to focus on P&C, group benefits and mutual funds. The P&C division is the most important business for Hartford, accounting for more than 80% of the company’s operational core earnings (excluding earnings from divested and corporate streams). P&C written premiums grew 2% over the prior year and the combined ratio, excluding catastrophes and prior year reserve development, improved from 96.3% to 92.8%, helped by the Hartford’s pricing and underwriting initiatives.

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The P&C division can be further subdivided into commercial insurance, 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 subdivision accounts for roughly two-thirds of the premium volume of the P&C division.

Profitable Gains In Commercial P&C

Commercial underwriting gain increased from $14 million in 2012 to $30 million this quarter, as the combined ratio improved from 99.1% to 98.1%. The company maintained price increases of 8% along with retention rates of over 80% in small, commercial and middle market lines. Low yields from fixed maturity investments have forced insurance companies to hike prices in order to maintain profitability. Around 65% of Hartford’s assets are invested in fixed maturity securities like government and corporate bonds, and the yields from these are important for the company’s top line. 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. ^[1] The yield has improved to 2.6% this year, but is still a long way off the pre-recession level. We expect Hartford to continue its pricing strategy in the coming years as the U.S. economy recovers.

Workers’ compensation is the most important insurance line in the commercial division, accounting for half of the premiums earned by the division. Premiums earned by the workers’ compensation line were in line with the prior year’s figure.  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). ^[2] The improving job market, which saw the unemployment rate fall to a four year low of 7.2% in September, will lead to increased demand for commercial P&C insurance in the next few years.

AARP To Help Consumer Insurance

Hartford’s consumer insurance division is driven by the company’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.  Around 80% of the division’s premiums come from this agreement. During the last quarter, Hartford extended the agreement to January 1, 2023 ensuring a stable source of premiums for the company. The premium increase rate for auto insurance through the third quarter was 5%, and 8% for homeowners’ insurance, and the company still maintained retention rates of 88% and 92% in the two lines, respectively.

High current year accident catastrophe losses and less favorable prior year development affected profitability in the third quarter, offsetting a 3% increase in written premiums. The combined ratio for the consumer division increased from 87.9% to 91.9% leading to a 32% decline in underwriting gain. Below 100%, the combined ratio is still at a profitable level and we expect the company to maintain pricing discipline in the coming years.

Group Insurance

The loss ratio – or the ratio of benefits, losses and loss adjustment expenses to premiums – for the group benefits division improved 2.6 points to 76.7% in the third quarter, primarily due to the company’s pricing strategy and favorable long-term disability recoveries. This offset a 12% decrease in group insurance premiums, leading to a 57% increase in core earnings from the division. As with the P&C operations, we expect Hartford to focus on profitability in the group insurance division, even at the cost of market share.

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1. Daily Treasury Yield Curve Rates, U.S. Department Of The Treasury [↩]
2. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩]