Hartford’s Q2 Earnings Fall More Than Expected On Underwriting Losses, Investment Income

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

Hartford Financial (NYSE:HIG) announced weak second quarter 2016 results, with core earnings declining almost 69% year-over-year (y-o-y) to $122 million on the back of weak underwriting results in the property and casualty (P&C) insurance business and a decline in net investment income. This decline in investment income was attributed to lower income from limited partnerships (LPs) and other alternative investments. The company total revenues of $4.68 billion missed Reuters’ compiled consensus estimates by $46 million. However, this wasn’t the worst part of Hartford’s results.hig-20hig-25

Owing to higher catastrophe losses, lower investment income and a greater than expected prior accident year development (PYD) related to the asbestos and environment (A&E) lines, the company’s adjusted core earnings declined by 66% y-o-y to $0.31 per share, missing consensus estimates of $0.84 per share by a long margin. As a result, Hartford’s stock fell over 10% in after-hours trading following the announcement Thursday. hig-24Segment Results

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]hig-22

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In the second quarter, underwriting gains in Commercial lines declined by 35% y-o-y and the underlying combined ratio – the ratio of claims and expenses to premiums earned – worsened by 280 basis points to 95% on the back of higher catastrophe losses, which were partially offset by slightly better workers’ compensation results. Workers’ compensation results were aided by a lower unemployment rate in the U.S in Q2 2016. 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.

As shown in the interactive chart below, we expect Hartford’s commercial lines combined ratio to stabilize around 91-92% levels by the end of our forecast period. However, if remains at current levels of 95% owing to continued lower underwriting gains and higher catastrophe losses, there could be an 8-10% decline in the company’s valuation, per our estimates.

Hartford’s consumer business reported an underlying combined ratio of 112.6%, showing an increase of 13.4 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.

As shown in the interactive chart below, we expect Hartford’s consumer lines combined ratio to gradually improve going forward and stabilize around 92-93% by the end of our forecast period. However, if the the company is unable to improve its underwriting gains and the consumer lines combined ratio remains high at around 100%, there could be a 10-12% decline in the company’s valuation, per our estimates.

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Notes:
  1. 2015 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM, NAIC, March 28 2016 []