What To Expect From Hartford’s Q4 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 Q4 2016 earnings on Thursday, February 2nd. The company announced strong results in the third quarter, with core earnings increasing 13% year-over-year (y-o-y) to $413 million on the back of strong underwriting results in the property and casualty (P&C) insurance business and a 6% increase in net investment income. This rise in investment income was attributed to higher income from limited partnerships (LPs) and other alternative investments. The company’s total revenues of $4.7 billion beat Reuters’ compiled consensus estimates of $4.68 billion by a small margin.

However, the company’s performance in the first three quarters of 2016 overall wasn’t as impressive. Hartford’s core earnings declined 24% y-o-y to $920 million on the back of weak underwriting results across businesses, especially 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.

In the fourth quarter, we expect Hartford’s revenues to have grown in low single digits on slightly better investment income but earnings to have declined to below $1.00 per share owing to higher catastrophe losses, similar to what Travelers (NYSE:TRV) experienced in the last quarter.hig-18
P&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]

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. Considering catastrophe losses are likely to have remained high in Q4, the division’s combined ratio is again expected to come in around 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 4.7% in the fourth quarter, about 20 basis points better than figures in the first three quarters of the year. It was around 5.0% 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 []