Property & Casualty Insurance Is Driving Hartford’s Growth

The Hartford Financial Services Group (NYSE:HIG) restructured its business to focus on property and casualty (P&C) insurance, selling off its retirement solutions and individual life insurance divisions in 2012. Hartford is now primarily focused on its P&C business, group benefits and mutual funds. As part of this strategy, Hartford completed the sale of its Japanese life insurance business, Hartford Life Insurance K.K., to Orix in 2014. ^[1] Although it is still a relatively small player in the P&C market – with a share of just under 2% at the end of 2014 – we believe Hartford has a lot of potential to create more value going forward. ^[2]

The P&C insurance division is the most important business for Hartford, accounting for nearly 80% of the company’s operational core earnings (excluding earnings from divested and corporate streams). In this note we take a quick look at the performance of Hartford’s P&C insurance operations and its outlook going forward. 

We have a price estimate of $40 for Hartford’s stock, which is about in line with the current market price.

See our full analysis of Hartford Financial here

Commercial Property & Casualty

Hartford’s operations in the division consist of two categories: the commercial and consumer markets. The commercial operations primarily provide workers’ compensation, property, automobile, liability and umbrella coverage to small and medium-sized businesses across the U.S. The commercial branch accounts for nearly two-thirds of the premiums and fees earned by the property and casualty division. Core earnings for the commercial line increased from $511 million in 2012 to nearly $1 billion in 2014. Hartford’s largest commercial revenue stream comes from the workers’ compensation line, which accounts for around half of its commercial premiums. According to the National Association of Insurance Commissioners (NAIC), Hartford is currently the second largest insurer in the U.S. in the workers’ compensation line with a market share of nearly 5.9%.

AARP Drives Consumer Insurance

The consumer division operations cater to individuals, mostly providing automobile and home insurance. Hartford’s consumer insurance business is driven by the company’s exclusive licensing agreement with the American Association of Retired Persons (AARP) which allows the company to market automobile and homeowners’ insurance directly to about 37 million members enrolled with the AARP. Around 80% of the division’s premiums come from this agreement, which is slated to last through 2023. Since 2012, premiums from the personal division have grown steadily from $3.6 billion to $3.9 billion in 2014. The company has been looking to improve margins in this segment, with a focus on underwriting discipline.

Underwriting Profitability Is Key

Ever since Hartford shifted its focus to Property & Casualty insurance, the company has shown tremendous improvement in underwriting profitability. The underlying combined ratio, which represents total expenses incurred to premiums earned before catastrophe and prior year development, improved 5 percentage points from 2012 to 2014. A ratio under 100% indicates that the company is earning an underwriting profit, while a ratio above 100% implies underwriting loss (which need to be offset by income from investments). Historically, P&C insurers have generally incurred underwriting losses. In comparison, The Travelers Companies, Inc. (NYSE:TRV), which has consistently reported an underwriting profit through the last few years, had an underlying combined ratio of 89% in 2014. Hartford’s underlying combined ratio in the personal lines decreased from 96% in 2012 to 92% in 2014. In the commercial line, it dropped from 98.3% in 2012 to 91.5% in 2014, as the company focused on rate increases and underwriting discipline. Additionally, the company also reduced its operating costs and other expenses by 23% during the period. We believe that Hartford will see better results in the coming years as it establishes its market position in the U.S. and continues to focus on underwriting profits. Also, the company’s plans to invest in strengthening its underwriting and claims management system should provide a boost to profitability, while product enhancements and new products should fuel business growth. We expect the combined ratio to remain well 100% and underwriting profitability to improve throughout our forecast period. In 2015 the company expects around 11% growth in core earnings, as well as a 100-200 basis point improvement in the combined ratio across business segments. ^[3]

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1. The Hartford Completes Sale Of Japan Annuity Company To ORIX Life Insurance Corporation, Hartford Press Release [↩]
2. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2014 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩]
3. 2014 Results and 2015 Outlook Presentation, Hartford Investor Relations [↩]