Hartford Q2 Earnings Preview: Property And Casualty Is Key

-1.36%
Downside
103
Market
102
Trefis
HIG: Hartford Financial Services Group logo
HIG
Hartford Financial Services Group

The Hartford Financial Services Group (NYSE:HIG) is scheduled to report earnings for the second quarter of 2014 on Wednesday, July 30. [1] Hartford continued to implement its strategy of restructuring its businesses in order to focus on property and casualty (P&C) insurance, group insurance and mutual funds as it completed the sale of its Japanese annuity subsidiary, Hartford Life Insurance K.K. (HLIKK), to ORIX Life Insurance Corporation for $963 million. [2]

Hartford’s P&C core earnings from continuing operations for the quarter ended March 2014 were up 21% over the prior year. Hartford owns around 2% of the market in terms of premiums earned in the U.S., where State Farm leads with a 10% share of the market. [3] Hartford is also focusing on the Group Benefits division, where core earnings saw an increase of 50% year-over-year. Earnings from the mutual funds division also increased 5% year-over-year. The company also benefited from higher returns from its investments as its annualized investment yield rose by 10 basis points to 4.4%.

Last week Travelers (NYSE:TRV), a competitor in the P&C space, reported a drop in operating income by 18% year-over-year, and only a marginal increase in revenues by 2% year-over-year. [4]

Relevant Articles
  1. Up 19% YTD, What To Expect From Hartford Financial Stock?
  2. Hartford Financial Stock Lost 4% YTD, Is Correction In The Cards?
  3. Hartford Financial Stock Is Undervalued
  4. Is Hartford Financial Stock Fairly Priced?
  5. Hartford Financial Stock Lost 1.2% In One Week, What’s Next?
  6. Is Hartford Financial Stock Fairly Priced?

We are in the process of revising our price estimate for Hartford’s stock.

See our full analysis of Hartford Financial here

In Focus: Property And Casualty Insurance

Hartford has been driving its efforts and resources towards the P&C business ever since it divested its life insurance and annuities businesses. P&C business accounts for 70% of the company’s total revenues. Hartford offers commercial products that include coverage for workers’ compensation, commercial automobiles and other liability and fidelity insurance. Offerings for the consumer segment include homeowners’ and automobile insurance.

Commercial

Workers’ compensation is the most important product line for the company in the commercial space and is largely affected by the performance of the economy and the job market. Uncertain economic growth trends in the U.S. portend soft results for the company in Q2. The U.S. economy, which expanded by over 2% in Q4 2013, contracted by 2.9% in Q1 2014. [5] In Q2, for which the official government data is still unavailable, conditions seem to have improved only slightly, though there has been some improvement on the employment side. More job creation, especially in the manufacturing sector, translates into growing demand for this insurance, and we expect Hartford to benefit from improving market conditions.

Consumer

Hartford has an exclusive agreement with the American Association of Retired Persons (AARP), from which 80% of the company’s consumer premiums are earned. The agreement allows Hartford to reach over 37 million AARP members directly to market its automobile and homeowners’ insurance products. This in turn provides a great opportunity for growth for the company. We expect growth in Q2 to be solid given the fact that in the first quarter, earned premiums grew 2% and 58% through the AARP direct distribution and AARP agency distribution, respectively, and the current penetration levels within AARP leave room for expansion. [6]

P&C Underwriting

The company has maintained profitability in the P&C division as a whole by focusing on improving its combined ratio (ratio of  losses from claims to premiums). In the first quarter, the company reported a combined ratio of 89.8%, an improvement of 3.8 percentage points year-over-year despite severe winter conditions in the U.S. Even the underlying combined ratio, which excludes catastrophe related losses, improved to 87.9% from 89.8% year-over-year. For the upcoming results we expect the strong underwriting performance to continue as no major catastrophes were reported during the period. [6]

See More at TrefisView Interactive Institutional Research (Powered by Trefis)
Get Trefis Technology

Notes:
  1. Events & Presentations, Investor Relations []
  2. SEC 8-K Filing, July 2 2014 []
  3. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2013 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM []
  4. Company 8-K SEC Filing, The Travelers Companies Inc., July 22 2014 []
  5. News Release June 25 2014, Bureau of Economic Analysis []
  6. SEC 10-Q Filing, April 30, 2014 [] []