Improved Underwriting Boosts Hartford’s Results

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HIG: Hartford Financial Services Group logo
HIG
Hartford Financial Services Group

Hartford Financial (NYSE:HIG) reported double digit growth in its fourth quarter earnings on Monday, February 2. [1] Core earnings, a non-GAAP measure, increased 12% year-over-year (y-o-y) to $426 million in the quarter ended December 2014. The company posted a solid 22% y-o-y growth in net income to $382 million. [2] The growth came as a result of improved underwriting results in the property and casualty (P&C) division as well as certain reductions in corporate core losses. However, lower investment income partially softened the increase in earnings. The company’s cumulative share repurchases during 2014 and the increase in income boosted its net income per diluted share to $0.86 in Q4 2014, compared to just $0.65 last year.

With a solid performance Hartford ended 2014 on a high note. Full year core earnings were 9% better than in the previous year. Also during the year, Hartford continued its strategy of focusing on the P&C, Group Benefits and Mutual Funds businesses as it carried on with the divestment of its life insurance business. The focus on these businesses reflected in the company’s bottom line, as it improved operating margins across divisions.

We have a price estimate of $44 for Hartford’s stock, which is about 10% higher than the current market price.

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See our full analysis of Hartford Financial here

Property And Casualty Underwriting Profitability Improves

Hartford, one of the largest P&C insurers in the U.S., appeared to gain from its concerted efforts on the P&C business that now forms nearly 80% of its core earnings. Core earnings for combined P&C business operations improved by 5% y-o-y in the fourth quarter, and 7% y-o-y for the full year 2014. This came largely on the back of disciplined underwriting performance. The combined ratio, or the ratio of claims and expenses to premiums earned, improved 3.7 points to 93.8% for 2014. However, investment income declined 13% y-o-y during the year.

Business Growth In Commercial Line

Written premiums in the commercial line grew 6% y-o-y in Q4; this included a 5% rise in small commercial premiums, 6% rise in middle market premiums and 13% growth in specialty commercial premiums. The combined ratio improved by 4.7 points to 93.4% for the full year 2014.

Top Line Growth In Personal Line

The Personal Line registered a 2% y-o-y rise in core earnings and the combined ratio improved 1.4 points to 95.5% for full year 2014. On the back of strong pricing, premium retention and growth in auto new business written premiums, the segment posted a 3% y-o-y gain in Q4 2014. Written premiums from Hartford’s exclusive agreement with the American Association of Retired Persons (AARP) increased by a robust 33% y-o-y. The underlying combined ratio, or the combined ratio excluding catastrophe losses, improved 4 points to 91.8% in Q4 2014.

Group Benefits Margins Improved In 2014

Improved margins benefited core earnings in the Group Benefits division. Core earnings of $180 million were up by about 14% y-o-y for full year 2014. The total loss ratio (group life and disability combined), the ratio of claims to premiums, increased from 75.6% in 2013 to 76.2% in 2014. However, in Q4, core earnings were down to $45 million from $55 million in Q4 2013 due to weak performance in the disability segment.

Mutual Funds

The total assets under management (AUM) for its Mutual Funds increased by more than 3% y-o-y to just over $95 billion in 2014. This led to a near 17% y-o-y increase in core earnings from the business. Higher fee income and an income tax benefit led to a 35% y-o-y increase in core earnings of $27 million in Q4 2014.

Outlook For 2015

Going forward the company expects a 4-11% y-o-y growth in core earnings in 2015, as well as a 100-200 basis points improvement in the combined ratio across business segments. [3] With a strong focus on gaining competitive advantages in the commercial P&C business, the company plans to invest in product development and technology to benefit customers, distributors and employees alike. The company expects strong top line growth in the Group Benefits division, as suggested by an increase in new sales in 2015. The company also plans to return around $979 million to shareholders via its share repurchase program and spend over $1 billion on debt management in 2015.

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Notes:
  1. The Hartford Reports Fourth Quarter 2014 Core Earnings Of $426 Million, $0.96 Per Diluted Share, And Net Income Of $382 Million, $0.86 Per Diluted Share, Hartford Press Release []
  2. SEC 8-K Filing, February 2 2015 []
  3. 2014 Results and 2015 Outlook Presentation, Hartford Investor Relations []