Hartford Q3 Earnings Preview: Property And Casualty Insurance In Focus

The Hartford Financial Services Group (NYSE:HIG) is scheduled to report earnings for the third quarter on Tuesday, October 28. ^[1] During the second quarter, the company reported a 38% year-over-year drop in core earnings to $144 million. ^[2] Total revenues also declined marginally from $4.7 billion in the second quarter of 2013 to $4.6 billion in 2014. The decline was due to a higher prior year loss and loss adjustment expense reserve development for asbestos as well as the sale of its Japan annuity business to ORIX Life Insurance Corporation.

We will be keeping a close watch on the P&C business as well as the company’s underwriting discipline during the third quarter. We have a price estimate of $42 for Hartford’s stock, which is about 10% higher than the current market price.

See our full analysis of Hartford Financial here

Property And Casualty Insurance Most Important

Property and casualty insurance, which caters to both commercial and consumer markets, is key to Hartford’s overall performance, accounting for about 60% of the company’s revenues. Hartford holds a 2% market share in the U.S. P&C market. ^[3]

During the second quarter, written premiums for the commercial P&C business increased 2% year-over-year, fueled by growth in the liability, property and automobile insurance businesses. ^[4] On the other hand, workers’ compensation revenues declined from $741 million in Q2 2013 to $734 million in the second quarter of 2014. The improving employment environment in the U.S. is expected to aid growth in the commercial P&C segment, especially the workers’ compensation line. During the third quarter, the U.S. unemployment rate has declined from 6.2% in July to 5.9% in September. ^[5]

During the second quarter, consumer insurance premiums grew 4% year-over-year on the back of growth in new business premiums, stable policy retention and pricing increases. Hartford’s association with the American Association of Retired Persons (AARP) and other groups increased new business in personal automobile insurance, which in turn led to an increase of 9% year-over-year in new business premiums of $138 million. We expect growth to remain steady.

Underwriting Discipline Will Matter

Underwriting discipline is a key determinant of the company’s profitability. Within the commercial P&C segment, the combined ratio (the losses to premiums ratio) improved by 4.2% year-over-year to 94.2% in the second quarter. This was driven by lower unfavorable prior year development reserves as well as fewer accident claims.

However, increased catastrophe-related losses and unfavorable prior year development reserves caused the underwriting losses in the consumer P&C division to increase from $9 million in the second quarter of 2013 to $60 million in 2014.

We expect the company’s underwriting to improve given an increased focus on enhancing profitability in the P&C division.

Will Increased Efforts To Streamline Business Strategy Pay Off?

During the third quarter, the company appointed some new leadership in order to better align its business strategy. This is in line with the company’s efforts to increase the size and profitability of the property and casualty, group life and mutual funds businesses. ^[6] In July, the company also announced an investment in insurance policy management systems to improve efficiency and delivery in the P&C division. ^[7] A focus on automation, real-time data analytics and reporting is expected to increase operational efficiency.

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1. Events & Presentations, Investor Relations [↩]
2. The Hartford Reports Second Quarter 2014 Financial Results And Expansion Of 2014-2015 Capital Management Plan, Press Release [↩]
3. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2013 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩]
4. SEC 8-K Filing [↩]
5. U.S. Unemployment Rate, Bureau of Labor Statistics [↩]
6. The Hartford Announces New Leadership Appointments To Advance Business Strategy, Hartford Press Release [↩]
7. The Hartford Makes Strategic Investment In Technology, Hartford Press Release [↩]