An Overview Of Hartford’s Property And Casualty Business Part 2

by Trefis Team
Hartford Financial
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In our previous article on The Hartford Financial Services Group (NYSE:HIG), we discussed the company’s property and casualty operations and their profitability. To recap, Hartford is the eleventh largest P&C insurer in the U.S. with a market share of 2%.  ((NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM)) The company divested its retirement solutions and individual life insurance operations last year and will be looking to expand its P&C operations in the coming years. The combined ratio or the expenses incurred to premiums for the company has been above 100%, indicating an underwriting loss. While storms like Hurricane Irene and Sandy have contributed to the high ratio in the last two years, Hartford’s expansion policy also means that it will likely offer lower premium rates, thus keeping its combined ratio high at least in the near term.

See our full analysis of Hartford Financial here


Insurance companies primarily invest the premiums collected from the insurance operations to generate returns whilst establishing reserves to provide for the estimated costs of paying claims under the policies written. These reserves include estimates for both claims that have been reported by the company and those that have been incurred, but not reported. Reserves are highly regulated, especially in the U.S. where each state sets its own minimum capital requirements. Hartford has maintained a premiums to reserved ratio of around 40% for the commercial division and around 60% to 65% for the consumer division through the last few years. (Note that property and casualty other reserves have been included in P&C consumer for our analysis)

Hartford primarily invests premiums in ‘safe’ fixed maturity securities like government and corporate bonds, which account for around 65% of its investment portfolio. The yield from these securities dropped from around 6.5% in the pre-recession period to less than 4% in 2012, largely because of the artificially low interest rates set by the Federal Reserve by its Quantitative Easing programs. The program involves purchasing assets like long-term treasuries and mortgage-backed securities from commercial banks and other financial institutions, thereby increasing liquidity and reducing long-term interest rates. The 10-year Treasury bond yield, which can be used as a benchmark for bond yields, was around 5% before the financial crisis but fell to around 1.5% in 2012. [1]

Investment returns on reserves were around 10% for the commercial division and around 12% for the consumer division in 2007, before the onset of the financial crisis. In the last three years, investment income as a percentage of reserves have dropped to around 6% for both divisions. However, with improvements in the U.S. economy, especially the job market, the Fed is expected to start tapering the program soon and experts expect an announcement regarding the same during the September 17 meet. The Fed has indicated a threshold of 6.5% unemployment rate as a target for the economic recovery before it might start increasing interest rates and with the rate reaching a four-year low of 7.4% in July, speculations regarding the tapering have sent bond yields soaring. [2] The 10-year Treasury bond yield climbed from 1.6% in May to 2.8% at the end of August. [1]

Rising bond yields will allow Hartford to expand margins whilst maintaining an underwriting strategy geared towards gaining market share. The pre-tax margin for the property and casualty division was around 9% in 2012, but could increase to more than 20% by the end of the decade as the returns on investments return to pre-recession levels.

There is 30% upside to our price estimate for the company’s stock should the investment income as a percentage of reserves reach 10% by 2014. You can modify the interactive chart below to gauge the effect a change in forecast would have on our price estimate or Hartford.

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  1. Daily Treasury Yield Curve Rates, U.S. Department Of The Treasury [] []
  2. Bernanke Offers Possible Timetable for Tapering []
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