Hartford Earnings Preview: Underwriting, Investments In Focus

Hartford Financial (NYSE:HIG) is scheduled to report earnings for the first quarter of 2015 on Monday, April 27. ^[1] During the first three months of 2015, property and casualty (P&C) insurance companies have faced two key challenges in the U.S. market: the severe weather conditions that prevailed during the period, and the low interest rate environment in the U.S. that has led to weaker returns on investments. In this note we discuss the impact of these factors, which are likely to drive Hartford’s earnings for the quarter.

We have a price estimate of $39 for Hartford’s stock, which is slightly lower than the current market price.

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Hartford currently has three major lines of businesses – property and casualty insurance, group life insurance and investments. The P&C insurance division contributes roughly 80% of the company’s core earnings. Hartford has a 1.93% share in the U.S. P&C insurance market in terms of premiums earned and offers both commercial and consumer insurance products. ^[2] In the commercial segment, Hartford is the second largest player in the worker’s compensation space in the country, behind Travelers (NYSE:TRV). The consumer P&C insurance division comprises of personal automobile and homeowners’ multiperil products. Hartford has a crucial tie-up with the AARP for marketing and distribution of consumer P&C insurance products to AARP’s 37 million strong membership base. The company has been increasingly focused on improving its underwriting profits as opposed to expanding market share. Hartford posted a solid 22% y-o-y growth in net income to $382 million during the fourth quarter of 2014 as it benefited from a strong underwriting performance. However, low income from investments continued to drag down overall earnings.

Strain On Underwriting

One of the most visible impacts of Hartford’s decision to focus on the property and casualty insurance business after the divestiture of its individual life insurance and non-core businesses has been the company’s improved underwriting performance. The combined ratio, or the ratio of claims and expenses to premiums earned, for the P&C division improved 3.7 points to 93.8% in 2014. In comparison, its combined ratios were 98.1% and 104.6% in 2013 and 2012, respectively. ^[3] A ratio above 100% indicates underwriting losses, whereas below 100% means the company is making an underwriting profit.

However, the first three months of 2015 saw extreme weather conditions in the U.S. Severe winter conditions accompanied by snowstorms hit the eastern parts of the U.S., while drought conditions continued to persist in the western parts of the country. Such adverse conditions generally lead to increases in claims and higher catastrophe-related losses for insurance companies. Travelers’ Q1 earnings, reported earlier this week, exhibited the adverse impact. Travelers’ combined ratio increased from 85.7% in the first quarter of 2014 to 88.9% in 2015. ^[4] We expect Hartford’s property and casualty unit to experience a similar strain on its underwriting during the quarter.

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1. The Hartford To Announce First Quarter 2015 Financial Results On April 27, Hartford Press Release [↩]
2. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2014 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩]
3. SEC 10-K Filing, Hartford [↩]
4. Travelers’ Stock Drops As Q1 Profits Fall 21%, Trefis [↩]