Hartford’s Higher Rates Help Lift Margins And Outlook

by Trefis Team
Hartford Financial
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The Hartford Financial Services Group (NYSE:HIG) reported a net loss of $241 million for the first quarter of 2013, primarily affected by a one-time charge of $541 million on expanded hedging in Japan and a $138 million charge for a debt tender offer issued in March. Excluding the effect of one-time charges,  discontinued operations, losses on the extinguishment of debt and other non-operational charges, the core earnings for the quarter were up 7% from the prior years’ figure, indicating a solid underwriting performance by the insurance divisions. The property and casualty insurance division, which accounts for over 70% of the company’s premium income, reported a combined ratio (expenses to premiums) of 93%, indicating a negative cost of float for the three months ending March.

See our full analysis of Hartford Financial here

Focus On Profitability In Property And Casualty

Property and casualty insurance is now the main breadwinner for Hartford following the divestiture of retirement solutions and individual life insurance business arms in 2012. The division can further be subdivided into P&C commercial, catering to businesses and P&C consumer, which provides automobile and homeowners’ insurance to individuals. The premium contribution from these two streams was around 65% and 35% respectively, in the last quarter.

On the commercial side, strong underwriting actions led to margin expansion through the first quarter. The combined ratio for the sub-division improved by 5.7 basis points over the Q1 2012 figure to 94%. This was helped by both lower catastrophe-related losses and premium rate increases. The company reported an 8% increase in commercial lines renewal earned pricing while the total catastrophe ratio improved from 2.2% in the first quarter of 2012 to 0.4%. Policy retention and premiums from new business remained in line with the prior year’s figure.

Insurance companies invest the float collected from policyholders to generate returns. More than 80% of Travelers’ investments are in fixed maturity securities like government and corporate bonds. The prevalent low interest rates are putting pressure on the yields earned from investments. In the face of low yields and macroeconomic pressure, the management has indicated that it plans to maintain premium rate increases to drive underwriting profit.

The combined ratio for the consumer property and casualty division increased by 5 basis points over the prior year to 92%. This was primarily due to increased catastrophe related losses and non-catastrophe prior year reserve development. The catastrophe ratio increased from 2.8% to 3.1% while the prior year development ratio increased by 4.7 basis points. Hartford incurred increased catastrophe related losses due to tornadoes and thunderstorms in the Southeast and a blizzard in Texas, during the first quarter. The combined ratio for automobile insurance increased by 7.6 basis points while the homeowners’ insurance combined ratio improved from 83.8% to 82.7%, indicating higher claims from automobile owners than homeowners’. Excluding catastrophes and prior year development, the combined ratio improved from 88.8% to 88.6%.

Hartford delivered a strong performance in terms of premium growth driven largely by its exclusive licensing agreement with the American Association of Retired Persons (AARP). The agreement allows Hartford to market automobile and homeowners’ insurance directly to 37 million members enrolled in AARP and accounts for 77% of the consumer sub-division’s premiums. Earned premiums remained in line with the prior year’s figure. New business premiums grew by 20% in homeowners’ insurance, driven by high conversion rates in the AARP agency marketing line. We expect the AARP to play a significant role in driving growth for Hartford in the coming years. For more, please read: A Closer Look At Hartford’s Homeowners Insurance Business and A Closer Look At Hartford’s Automobile Insurance Business

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