Hartford Earnings: Weak Underwriting, Low Investment Income Impact Earnings

Hartford Financial (NYSE:HIG) announced its earnings for the first quarter of 2015 on Monday. The stock dropped by over 1% during the day as the company reported weak top and bottom line results. ^[1] The company reported a 10% year-over-year (y-o-y) decline in core earnings (earnings from the company’s core operations) to $452 million. Net income decreased by about 6% y-o-y to $467 million for the quarter, as income from investments declined. 

In this note, we look at the key metrics from these earnings. We have a price estimate of $40 for Hartford’s stock, which is slightly lower than the current market price.

See Full Analysis for Hartford here

Property And Casualty Is Well Positioned

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] Affected by a soft performance across business lines, core earnings from the division decreased 15% y-o-y. Below we take a look at the performance of commercial and personal insurance lines during the quarter.

Within the Commercial P&C insurance line, Hartford’s initiatives to tighten underwriting discipline and improve pricing resulted in an improved underlying combined ratio of 92.4%, down from 92.8% a year ago. Strong retention rates of 85% and 81% in the small commercial and middle market, respectively, along with a 2-3% renewal written price increase led to 3% y-o-y growth in written premiums in the commercial P&C segment. During the quarter, core earnings declined 11% y-o-y as Q1 2014 had included a favorable after-tax expense benefit of $32 million from the New York (NY) Workers’ Compensation Board. The workers’ compensation line, which is the largest individual line of business for Hartford, contributes nearly 50% of the commercial premiums earned. Excluding the impact of the benefit in Q1 2014, underwriting performance in the workers’ compensation line actually improved due to better pricing and relatively moderate claim-related losses. But higher underwriting expenses during Q1 2015 erased those gains.

Growth In Mutual Funds And Group Benefits Businesses

Mutual fund sales increased 28% y-o-y in the first quarter of 2015, resulting in 5% y-o-y rise in  core earnings from the business. Mutual funds assets under management (AUM) increased to $75.7 billion compared to $73.3 billion a year ago, due to an increase in sales as well as growth in market value.

The group life benefits division includes group life, accident and disability coverage, group retiree health and voluntary benefits products. During the first quarter, an improved loss ratio and lower expenses compared to premiums earned led to a 16% y-o-y increase in core earnings of $52 million from the division. The company also witnessed a 4% y-o-y growth in premiums on the back of a combination of higher sales and increased pricing.

Investment Income Remains Weak

The low interest rate environment in the U.S. as well as a drop in the value of invested assets led to a decline in net investment income from $829 million in Q1 2014 to $804 million in Q1 2015. ^[3]

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1. The Hartford Reports First Quarter 2015 Core Earnings Of $452 Million, $1.04 Per Diluted Share, And Net Income Of $467 Million, $1.08 Per Diluted Share, 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-Q Fling, April 27, 2015 [↩]