Hartford Reports Strong Results, Underwriting Discipline Offsets Adverse Weather Conditions
The Hartford Financial Services Group (NYSE:HIG) reported strong results for the first quarter of 2014, as core earnings rose 23% over the prior year. [1] Hartford has been restructuring operations to focus on Property and Casualty insurance, and also announced the sale of its Japanese life insurance business, Hartford Life Insurance K.K, to Orix Corp. [2] P&C operations accounted for 85% of the company’s core earnings from continuing operations for the three months ended March and were up 21% over the prior year. Core earnings from group benefits were up 50% while those from mutual funds increased 5% over the prior year. The company also benefited from higher returns from its investments as its annualized investment yield rose 10 basis points to 4.4%.
See our full analysis of Hartford Financial here
Property And Casualty Profitability
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The combined ratio is a metric used to measure the profitability of an insurance company and represents the expenses incurred as a percentage of premiums earned by the company. A combined ratio of less than 100% indicates that the company is able to generate underwriting profit from its operations. However, this profitability is tough to maintain; the P&C industry as a whole has run on underwriting losses for 38 of the last 46 years. [3] Despite severe winter conditions, Hartford reported a combined ratio of 89.8% for the first quarter, an improvement of 3.8 percentage points over the prior year. This includes a 2 percentage point benefit from a reduction in the estimated liability for New York State Workers’ Compensation Board assessments.
The underlying combined ratio, which excludes catastrophe-related losses, prior year reserve development and the benefit related to the New York assessment, improved 1.9 percentage points to 87.9%. This reflects a strong underwriting performance for the company, which led to a 64% increase in the underwriting gain while written premiums were up 3%. We expect the company to maintain its focus on profitability in the coming years.
Commercial And Consumer
Hartford’s P&C operations comprise of commercial insurance, which offers group insurance contracts to companies in the U.S., focusing on small and mid-sized businesses; and consumer insurance, which provides automobile and homeowners insurance to individuals. The commercial business accounted for nearly 70% of the P&C core earnings during the first quarter.
Hartford reported a 1% increase in commercial written premiums, with 3% growth in small commercial and 4% in middle market. The company maintained renewal written price increase rates of 7% and 6%, respectively, in these two lines while the policy count retention rate improved 1% to 83% for small commercial and 4% to 81% for middle market. New business premium volume rose 14% for the middle market segment. The gains in these two lines were partially offset by an 8% decline in written premiums for specialty commercial. The combined ratio for the small commercial segment was 86%, while that for middle market was 96%. Small commercial accounts for more than half of the commercial division’s premium income, and we expect the company to focus on the more profitable segment in the coming years.
Hartford reported a 6% increase in written consumer premiums while the underwriting gain increased 74% through the first quarter of 2014. The renewal written price increase rate for automobile insurance was 5%, while that for homeowners’ insurance was 8%. The retention rates for the two lines were 89% and 93%, respectively. Homeowners’ insurance is more profitable for Hartford, with a combined ratio of 75%, while the automobile line of insurance has a combined ratio of 91%.
The consumer division is driven by Hartford’s exclusive licensing agreement with the American Association of Retired Persons (AARP) which accounts for 80% of its premiums. Earned premiums from the AARP direct distribution line increased 2% over the previous year while those from the AARP agency distribution line were up 58%. We believe that the AARP agreement, which allows the company to market automobile and homeowners’ insurance directly to 37 million AARP members, will provide a stable platform for future growth.
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