Hartford Delivers Strong Results Boosted By Underwriting Discipline

The Hartford Financial Services Group (NYSE:HIG) reported strong earnings for the fourth quarter of 2013, swinging to a net profit of $314 million from a loss of $46 million in 2012. Core earnings, which exclude special one-time items, were up 78%, helped by improved margins in the property and casualty business. Over the last year, Hartford has been restructuring its business to focus on P&C insurance, and the division accounted for 80% of the company’s earnings from continuing operations in P&C insurance, group benefits and mutual funds. Lower catastrophe related losses and underwriting discipline helped Hartford expand margins; catastrophe losses for the quarter were $28 million, down substantially from $335 million in the prior year. As a result, the combined ratio improved 14.3 percentage points to 94.9%, allowing Hartford to realize an underwriting gain of $128 million compared to a loss of $229 million last year.

P&C net written premiums increased 2% over the prior year, with 1% growth in commercial markets and 3% growth in consumer markets. The company has an exclusive licensing agreement with the American Association of Retired Persons (AARP) which accounts for 80% of its premiums from the consumer line. This agreement will allow the company to maintain volume growth in the coming years, but Hartford will have to maintain discipline to sustain bottom-line growth.

See our full analysis of Hartford Financial here

The Commercial Side

Hartford’s commercial insurance division offers group insurance contracts to companies in the U.S., focusing on small and mid-sized businesses. This division accounts for nearly two-thirds of the P&C premium volume and 80% of the core earnings. The combined ratio for the division improved from 112.3% in the December quarter of 2012 to 93.7%, with a massive 5% improvement in the underlying combined ratio (which excludes catastrophe losses and prior year reserve development) reaching 92.5%. This improvement was helped by the company’s pricing strategy, which exceeded loss trends; Hartford maintained a renewal written price increase rate of 8% throughout the year while keeping a policy count retention rate of over 80%.

Hartford has 1.2 million policies in force in the small commercial market and just 73,000 in the middle market. However, the average quarterly premium volume per policy is $600 for small markets and $7,600 for middle markets, with a nearly equal contribution to the total volume from both lines. This would suggest that the possibility for expansion is greater in middle markets. For the December quarter, premium volumes for both middle and small markets were in line with prior year figures. The small commercial market is more profitable than the middle market, with a combined ratio of 85.8% as opposed to 97% for the latter. We believe the company will try to maintain a prudent mix in both lines to maintain overall profitability in the coming years. Hartford expects to reduce the underlying combined ratio from 93% to 90% in 2014. This might mean compromising on premium growth in the middle markets to sustain margins.

Consumers

Through the consumer division, Hartford offers automobile and homeowners insurance to individuals across the U.S. This division is dependent on the AARP agreement, which allows the company to market automobile and homeowners’ insurance directly to 37 million members enrolled in AARP. For the December quarter, premium volume from this distribution line increased 5%.

Two-thirds of the consumer premiums come from the automobile insurance line, which has about 2 million policies in force, while the homeowners line has 1.3 million policies in force. Hartford maintained a price increase rate of 5% in the auto line with a policy count retention rate of 86%. For homeowners the price increase rate was 8% but the retention rate was still 86%.

In terms of profitability, homeowners insurance had a combined ratio of 78.3%, down from 86.1% last year while automobile insurance remained unprofitable with a combined ratio of 102%. This can largely be attributed to the company’s underwriting practices; the underlying combined ratio for homeowners was 70% while that for automobile was 102%. The full year underlying combined ratio for the consumer division was 90.6%, Hartford expects to improve this to 87% to 90% in 2014, but will have to improve underwriting in the auto division to achieve its target.

See More at Trefis | View Interactive S&P Capital IQ Analyses (Powered by Trefis)