Hartford Reports Strong Q4 Results On Improved Commercial P&C Underwriting Performance

Hartford Financial (NYSE:HIG) announced robust fourth quarter 2015 results, with core earnings increasing 4% year-over-year (y-o-y) to $445 million on the back of solid growth in the commercial property and casualty (P&C) business, which offset weaknesses in the personal P&C business and Talcott Resolution. Owing to this increase in core earnings and lower outstanding common shares through the quarter, core earnings per share (EPS) increased 11% y-o-y to $1.07. In fact, over 60% of the increase in EPS in the fourth quarter was due to the decreased weighted average shares outstanding – from 442.6 million in Q4 2014 to about 416 million in Q4 2015. ((Hartford Press Release, Feb 5 2016)) For full year 2015, the company reported an increase of over 6.5% in core earnings to $1.65 billion but total revenues declined by about 1% to $18.4 billion. Core EPS for full year 2015 was $3.88, an increase of 15% over the year ago figure of $3.36.

In this note, we discuss key takeaways from Hartford’s fourth quarter results and the company’s strategy going forward. We have a price estimate of $45 for Hartford’s stock, implying an upside of about 10% to the market price.

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Commercial P&C Reports Robust Growth

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 2015, the company’s P&C business reported an underlying combined ratio – the ratio of claims and expenses to premiums earned, excluding catastrophe losses and prior year development reserves – of 91%, showing an improvement of 50 basis points over the previous year. A ratio above 100% indicates underwriting losses, whereas below 100% means the company is making an underwriting profit. Hartford delivered an underwriting profit driven by stronger commercial P&C underwriting results partially offset by lower personal P&C underwriting results, lower net investment income and higher catastrophe related losses.

In the commercial P&C segment, core earnings grew 15% y-o-y to $289 million in Q4 2015 on the back of higher underwriting margins partially offset by lower investment income. 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. ^[1]

In the personal P&C division, where Hartford offers homeowners’ and personal automobile insurance, core earnings declined 22% y-o-y to $51 million in the fourth quarter. The underlying combined ratio deteriorated by 1.5 points y-o-y to 95.3% on the back of higher catastrophe losses, increased automobile loss costs and higher non-weather related losses in homeowners. 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. During the fourth quarter, total written premiums in the personal division grew over 2.6% y-o-y to $936 million.

Hartford’s Guidance And Objectives For 2016

Hartford expects core earnings in 2016 to range between $1.575 billion to $1.675 billion, which represents growth of 5% y-o-y excluding Talcott Resolution. The company also intends to repurchase $1.3 billion in shares this year, similar to its repurchases in 2015. On the earnings call, management stated that its objectives for this year are: expanding core earnings excluding Talcott; efficiently maintaining Talcott’s capital self-sufficiency and manage its runoff and return of capital; and use excess capital generated to increase shareholder value.

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1. The Hartford Financial Services Group’s CEO Christopher Swift on Q4 2015 Results – Earnings Call Transcript, Seeking Alpha, Feb 5 2016 [↩]