Improved P&C Underwriting Lifts Hartford’s Q2 Earnings

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

Hartford Financial (NYSE:HIG) announced solid earnings for the second quarter of 2015, reversing the decline in both core earnings and net income reported during the first quarter. [1] During the second quarter, Hartford reported core earnings of $389 million compared to just $144 million a year ago. Additionally, Hartford reported net income of $413 million compared to a loss of $467 million a year ago, when the company incurred a $617 million after-tax loss on discontinued operations from the sale of its Japan annuities business. The boost in Hartford’s earnings this quarter came on the back of improved underwriting results in the both the commercial and personal property and casualty (P&C) businesses, as well as higher core earnings from Talcott Resolution. The company benefited from a $48 million tax gain in the Talcott Resolution business as well as higher income from limited partnership (LPs) and other alternative investments.

In this note, we discuss key takeaways from Hartford’s second quarter results and the company’s strategy going forward. We have a price estimate of $42 for Hartford’s stock, which is slightly below the current market price.

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P&C Is Growing Stronger

One of the most visible impacts of Hartford’s decision to focus on the P&C insurance business – after the divestiture of its individual life insurance and non-core businesses – has been the company’s improved underwriting performance. During the second quarter, the company reported a underlying combined ratio – the ratio of claims and expenses to premiums earned, excluding catastrophe losses and prior year development reserves – of 88.9% for the P&C business. This is a 3.8 point improvement over the previous year. [2] A ratio above 100% indicates underwriting losses, whereas below 100% means the company is making an underwriting profit. Stronger underwriting, lower catastrophe related losses and improved margins added to the P&C division’s bottom line.

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In the commercial P&C segment, core earnings grew 25% year-over-year (y-o-y) to $263 million on the back of an increase in investment income, as well as higher margins in the workers’ compensation line. The workers’ compensation line, which is the largest individual line of business for Hartford, contributes nearly 50% of the commercial premiums earned. The company was able to focus on retaining business with strong margins, and also maintain strong pricing in the workers’ compensation line during the quarter. [3]

In the personal P&C division, where Hartford offers homeowners’ and personal automobile insurance, core earnings increased to $42 million from a $27 million net loss last year. This boost came largely on the back of lower catastrophe related losses. The underlying combined ratio improved to 89.1% from 91.1% a year ago on the back of low fire losses in the homeowners’ segment. Hartford recently renewed an exclusive marketing agreement with the American Association Retired Persons (AARP) that gives the company direct access to a 37 million-strong customer base for its personal P&C insurance products. [3] During the second quarter, the company registered 1% growth in premiums from AARP direct and 14% growth in premiums from AARP agency. Overall, total written premiums in the personal division grew 1% y-o-y during the second quarter.

Hartford’s Four Pronged Strategy

On the earnings call, Hartford’s management reiterated the company’s business strategy to capture growth. Christopher Swift, the CEO, listed out a four-pronged strategy to focus on product expansion, increasing distribution capabilities along with enhanced marketing and sales execution efforts, investment in talent and investment in technology. With this comprehensive strategy in place and improvement in results over the past few quarters, we expect Hartford to see further improvement in its underwriting profitability as well as new business business growth. [3]

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Notes:
  1. The Hartford Reports Second Quarter 2015 Financial Results And Announces Increased Capital Management Plan, Hartford Press Release []
  2. SEC 8-K Filing, July 27 2015 []
  3. The Hartford Financial Services Group’s CEO Christopher Swift on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha [] [] []