What To Expect From Hartford’s Q2 Results

Hartford Financial (NYSE:HIG) is scheduled to report its Q2 2016 earnings on Thursday, July 28. The company reported weak results in the first quarter, with core earnings decreasing 15% year-over-year (y-o-y) to $385 million on the back of a 14% decline in investment income. This decline was attributed to lower income from real estate partnerships and other alternative investments (such as hedge funds).

Interest rates have remained low since then, and economic uncertainty because of Britain’s vote to exit the EU has pushed government bond yields to extremely low levels, with German and Japanese bond yields entering into negative territory. This is likely to have adversely impacted Hartford’s investment income in the second quarter as well. In the upcoming Q2 results, we expect Hartford’s revenues to grow in mid single digits but earnings to decline to around $0.84 per share, in line with consensus estimates compiled by Reuters.

P&C Insurance Business In Focus

Hartford currently has three major lines of businesses – property and casualty insurance, group life insurance and investments. The P&C insurance division contributes about 70% of the company’s revenues and 75% of its core earnings. Hartford has a 1.89% share in the U.S. P&C insurance market in terms of premiums earned, and offers both commercial and consumer insurance products. 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 is comprised of personal automobile and homeowners’ multiperil products. ^[1]

In the first quarter this year, the company’s consumer business reported an underlying combined ratio – the ratio of claims and expenses to premiums earned (excluding catastrophe losses and prior year development reserves) – of 99.9%, showing an increase of 7.8 percentage points over the prior year quarter due to unfavorable automobile prior accident year development (PYD) and higher catastrophe losses. A ratio above 100% indicates underwriting losses, whereas below 100% means the company is making an underwriting profit.

During the second quarter, Hartford is likely to have faced similar headwinds, which could put pressure on its consumer division combined ratio and push it to slightly higher levels. The Insurance Council of Texas reported last month that insurance and reinsurance companies are set to pay for losses totaling about $2 billion due to severe hailstorms striking the state in April. ^[2] Owing to higher catastrophe losses, higher non-catastrophe weather related losses and lower net investment income, Hartford’s competitor Travelers reported a 28% decline in operating income and 450 basis point increase in its Business and International Insurance division’s combined ratio in Q2 2016. In Hartford’s upcoming Q2 results, we expect a similar adverse impact of catastrophe losses on the company’s Property & Casualty business as well.

On the other hand, Hartford’s commercial lines division is expected to report a slight improvement in its combined ratio, owing to better unemployment data which impacts the company’s workers’ compensation business. The U.S. unemployment rate was around 5% in the second quarter, slightly improving from 5.0% in April to 4.9% in June. It was around 5.3-5.4% during the same period last year. This is a good indicator for growth in this line of business for Hartford. We expect improving macroeconomic conditions to benefit the workers’ compensation insurance market, and Hartford – being the second biggest player in this segment – should be able to benefit from the economic recovery. ((Unemployment Rate – Bureau of Labor Statistics Data))

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1. 2015 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM, NAIC, March 28 2016 [↩]
2. San Antonio, Texas hailstorm insured losses to pass $2 billion, Artemis.bm, June 3 2016 [↩]