Hartford Financial Earnings Preview: Pricing And Margins In Focus

The Hartford Financial Services Group (NYSE:HIG) is scheduled to report earnings for the fourth quarter of 2013 on Tuesday, February 4. ^[1] The insurance company, now focused on property and casualty insurance, will likely be helped by a lack of natural disasters in the U.S. through 2013. The P&C division is the most important business for Hartford, accounting for more than 80% of its core operating earnings (core earnings are a non-GAAP measure reported by insurance companies which exclude the impact of goodwill and other non-recurring items.)

Like most industry peers, Hartford has taken to pricing initiatives to offset low yields from investments. Core earnings went up 17% during the September quarter as the underlying combined ratio (expenses to premiums), excluding catastrophes and prior year reserve development, improved from 96.3% to 92.8%, helped by Hartford’s pricing and underwriting initiatives. We expect the company to maintain this discipline through the fourth quarter.

See our full analysis of Hartford Financial here

Commercial Insurance

The commercial division of property and casualty insurance offers group insurance contracts to companies and accounts for two-thirds of the P&C premium volume. Hartford has been able to maintain price increases of 8% along with retention rates of over 80% in small commercial and middle market lines. As a result of these initiatives, the company’s combined ratio improved from 99.1% to 98.1% during the September quarter, allowing the underwriting gain to increase from $14 million in the 2012 to $30 million.

Workers’ compensation is the most important insurance line in the commercial division, accounting for half of the premiums earned by the division. 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 (NYSE:TRV). ^[2] Travelers recently reported a 4% increase in workers’ compensation premiums for the December quarter and a 7% increase for the full year.

The parallels between the companies necessitate a comparison. Like Hartford, Travelers has also been implementing pricing initiatives and reported a renewal premium change rate (the change in average premium on policies that were renewed) of 8% while maintaining a retention rate over 80% for the December quarter. These rate increases exceeded loss trends, as the underlying combined ratio improved by 1 percentage point to 91.5% for the fourth quarter. Travelers’ results were also helped by lower catastrophe-related losses, which dropped from $ 1 billion in the fourth quarter of 2012 to $53 million in 2013. As a result, the company’s net income for the period surged 225% as the combined ratio improved 18 percentage points to 87.7%. We believe that Hartford can replicate its peer’s results.

Personal Insurance

Hartford also offers automobile and homeowners insurance to individuals across the U.S. through its consumer division. The company has an 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 the AARP. More than 80% of the consumer premiums come from this agreement. Last quarter, Hartford extended the agreement to January 1, 2023, ensuring a stable source of premiums for the company. As with the commercial division, Hartford has been implementing price hikes in the consumer division. The premium increase rate for auto insurance through the third quarter was 5% while that for homeowners’ insurance was 8%, but the company still maintained retention rates of 88% and 92%, respectively, in the two lines.

We expect high retention rates to help the division this quarter, but profitability will depend on the underlying margins. Despite a 3% increase in written premiums through the three months ending September, the division’s underwriting gain fell 32% as the combined ratio increased from 87.9% to 91.9%, primarily due to less favorable prior year reserve development. However, the price increases allowed the underlying combined ratio (excluding catastrophe related losses and prior year reserve development) to improve 2.2 percentage points to 91.1%. A strong underwriting discipline can help the company maintain profits in the coming years.

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1. Q4 2013 The Hartford Earnings Conference Call, Event Details, Investor Relations [↩]
2. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩]