How Did Hartford’s P&C Business Perform In 2016?

Hartford Financial‘s (NYSE:HIG) stock performance in 2016 was strong despite the underwriting struggles faced by the company. Hartford’s stock is up about 20% in the last year, owing to strong underwriting in the third quarter, but the company’s overall performance in the first three quarters leaves much room for improvement, especially in the Property and Casualty division. The P&C insurance division contributes about 70% of the company’s revenues and 65% of its core earnings.

In the first nine months of the year, the company’s P&C business suffered a 23% decline in core earnings owing to weak underwriting results. The division’s underwriting gains declined from $129 million in the first nine months of 2015 to a loss of $84 million in the first nine 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 280 basis points to 101.1%. A ratio above 100% indicates underwriting losses, whereas below 100% means the company is making an underwriting profit.
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]

Commercial P&C: Combined Ratio Improves

In the first three quarters of the year, underwriting gains in Commercial lines grew by 17% y-o-y, and the underlying combined ratio – the ratio of claims and expenses to premiums earned – improved by 90 basis points to 93.3% on the back of flat catastrophe losses and slightly better workers’ compensation results. Workers’ compensation results were aided by a lower unemployment rate in the U.S in Q2 and Q3 2016. The U.S. unemployment rate was around 4.9-5% in the third quarter of 2016, consistent with figures in the first two quarters of the year. It was around 5.1-5.3% 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 it increases to 95% owing to lower underwriting gains and higher catastrophe losses, there could be an 8-10% decline in the company’s valuation, per our estimates.

Consumer P&C: Auto PYD & Catastrophe Losses Impact Combined Ratio

Hartford’s consumer business reported an underlying combined ratio of 104.2% in the first nine months of 2016, showing an increase of 6.7 percentage points y-o-y due to unfavorable automobile prior accident year development (PYD) and higher catastrophe losses.

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.

Have more questions about HIG? Please refer to our complete analysis for HIG

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap |More Trefis Research

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