What To Expect From Hartford’s Q3 Results

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

Hartford Financial (NYSE:HIG) is scheduled to report its Q3 2016 earnings on Friday, October 28. The company announced weak results last quarter, 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’s total revenues of $4.68 billion missed Reuters’ compiled consensus estimates by $46 million.

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 hovering around zero%. This is likely to have adversely impacted Hartford’s investment income in the third quarter as well. However, owing to likely lower catastrophe expenses in the third quarter, we expect Hartford’s revenues to have grown in low single digits and earnings to have improved to around $1.00 per share in Q3 2016, in line with consensus estimates compiled by Reuters.hig-9P&C Insurance Business In Focus

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Hartford currently has three major lines of business – 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]

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In the first six months of the year, the company’s P&C business suffered a 41% decline in core earnings owing to weak underwriting results. The division’s underwriting gains declined from $58 million in the first six months of 2015 to a loss of $178 million in the first six months of 2016 due to higher catastrophe losses. This resulted in the division’s combined ratio – the ratio of claims and expenses to premiums earned – to increase by 450 basis points to 103.4%. A ratio above 100% indicates underwriting losses, whereas below 100% means the company is making an underwriting profit. Considering there were possibly lower catastrophe losses in Q3, the division’s combined ratio is expected to come in at below 100%.

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 4.9-5% in the third quarter, consistent with figures in the first two quarters of the year. It was around 5.1-5.3% 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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Notes:
  1. 2015 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM, NAIC, March 28 2016 []