Hartford Earnings Preview: Underwriting Discipline Will Be Key

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

Hartford Financial (NYSE:HIG) is scheduled to report earnings for the fourth quarter and full year 2014 on Monday, February 2. [1] Hartford, which divested its individual life insurance and retirement businesses, is now focused on property and casualty, group benefits and mutual funds. Pursuant to the same plan, Hartford completed the sale of its Japanese life insurance business, Hartford Life Insurance K.K., to Orix earlier in 2014. [2] In our restructured model for the company that accounts for changes in the company’s business structure, P&C insurance (includes the commercial and consumer segments as well as investment income for the division) accounts for 85% of the company’s value, according to our estimates. The transition has helped the company register a 14% year-to-date increase in core EPS through Q3. The company’s aim to improve profitability has also helped its results, it will be important to sustain that momentum going forward. There have been efforts to not just improve underwriting but also operating efficiency. [3]

In this note we take a look at key trends that will drive Hartford’s performance for the fourth quarter. We expect Hartford to maintain the momentum it picked up during the last few quarters to end the year on a positive note. We have a price estimate of $44 for Hartford’s stock, which is about 10% higher than the current market price.

See our full analysis of Hartford Financial here

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?

Property And Casualty – Profitability In Focus

The property and casualty (P&C) insurance business accounts for more than 80% of the company’s core earnings. During 2014 the division performed well on the underwriting front. The combined ratio, or the ratio of claims and expenses to premiums earned, has been in the low-90s, indicating that Hartford has been able to generate underwriting profits. The underlying combined ratio, which excludes catastrophe-related losses, prior year reserve developments and other benefits, provides an even better peek into the company’s underwriting discipline. It improved by 4.3 percentage points between September 2013 and September 2014. It increased to 93.1% in Q2 from 89.6% in Q1 2014, but improved to 92% at the end of Q3 2014. We expect the company’s focus on improving underwriting profitability to lead to good results.

Premiums written in the P&C division increased by about 2.5% during the first three quarters of 2014 compared to a year ago. This was a result of growth coming from both the commercial and consumer segments, but largely from the latter. The consumer division is driven by Hartford’s exclusive licensing agreement with the American Association of Retired Persons (AARP) which is valid through 2023 and accounts for 80% of its premiums. Earned premiums from the exclusive AARP distribution channel increased to $2.3 billion during the first three quarters of 2014, compared to $2.1 billion in 2013. We believe that the AARP agreement, which allows the company to market automobile and homeowners’ insurance directly to over 37 million AARP members, will continue to provide a strong base for future growth.

Commercial P&C, which includes workers’ compensation, property, automobile, fidelity and general and professional liability insurance, showed modest growth of about 1.6% in written premiums during the first three quarters of 2014 compared to the prior year. Underwriting gains have shown tremendous improvement, growing from just $61 million during first three quarters of 2013 to $291 million for the same period in 2014.

What To Expect

There are two key aspects that could shape the P&C segment’s results during the fourth quarter – macroeconomic conditions and catastrophic losses. On the former, the U.S. economy has been on a sustained growth trajectory for most of 2014. The latest GDP figures suggest 5% growth in GDP during Q3 2014, up from 4.6% growth in Q2. In addition, as of December the unemployment rate had fallen to a low of 5.6%, compared to 6.6% in January. Improvement in the job market is a good sign for the workers’ compensation product line. Hartford is the third largest player in the workers’ compensation market with about a 6.5% market share. [4] Also, business spending in the U.S. grew during most of 2014 as exhibited by the increase in non-defense capital goods orders (excluding aircraft). [5] A growing economy translates into increased economic activity, which stimulates demand for commercial P&C insurance. As for the personal P&C segment, growth in home sales could benefit the company. [6] [7] We expect this to boost business growth for Hartford during the last quarter as well as in the upcoming quarters.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

Notes:
  1. Fourth Quarter 2014 The Hartford Financial Results Conference Call, Event Details, Investor Relations []
  2. The Hartford Completes Sale Of Japan Annuity Company To ORIX Life Insurance Corporation, Hartford Press Release []
  3. The Hartford Financial Services Group, Inc. Investor Presentation, November 2014, Investor Relations []
  4. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2013 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM []
  5. Value of Manufacturers’ New Orders for Capital Goods: Nondefense Capital Goods Excluding Aircraft Industries, Federal Reserve of St. Louis []
  6. New-Home Sales Hit Highest Level in Over Six Years in December, The Wall Street Journal []
  7. Housing Starts: Total: New Privately Owned Housing Units Started, Federal Reserve Bank of St. Louis []