Key Takeaways From Hartford’s Q2

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

Hartford Financial (NYSE: HIG) recently announced solid second quarter 2017 results, with both core earnings and revenues beating the market expectations. Other than a marginal decline in investment income, the core income from all of the company’s segments grew in the quarter. HIG’s core earnings grew by nearly 11% excluding the $228 million losses in Q2’16 due to unfavorable prior accident year development (PYD). The increase in core earnings was driven by disciplined underwriting, improved group life mortality and growth in commercial auto sales. In terms of the top line, the company’s total revenues of $4.76 billion were nearly 2% higher than the prior year quarter and beat consensus estimates by nearly $350 million.

Segment Results

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Hartford currently has three major sources of value – property and casualty insurance, group life insurance and investments. The P&C insurance division contributes about 70% of the company’s revenues and 66% of its core earnings. Hartford has a 1.85% 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. The consumer P&C insurance division is comprised of personal automobile and homeowners’ multi-peril products. [1]

In the first quarter, the commercial lines income increased by 8% y-o-y and the combined ratio – the ratio of claims and expenses to premiums earned – worsened by 40 basis points to about 94.6% due to higher auto and property losses and higher underwriting expenses.

As shown in the interactive chart below, we expect Hartford’s commercial lines combined ratio to stabilize around 91-92% by the end of our forecast period. However, if it remains at current levels of 95% owing to continued lower underwriting gains and higher catastrophe losses, there could be an 8-10% decline in the company’s valuation, per our estimates.

Hartford’s consumer business reported a combined ratio of 101.4%, showing a marked improvement over the prior year quarter due to a favorable PYD of $10 million in Q2’17 against unfavorable PYD of $76 million in Q2’16 and improvement in the automobile business, partially offset by higher catastrophe losses. A ratio above 100% indicates underwriting losses, whereas below 100% means the company is making an underwriting profit.

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 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 Hartford Financial? Please refer to our complete analysis for Hartford Financial

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Notes:
  1. 2016 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM, NAIC, March 27 2017 []