How Has Hartford’s Investment Yield Trended In Recent Years?

Hartford Financial (NYSE: HIG) saw its investment yield figure remain stable in 2017. This was somewhat surprising, considering that the Fed hiked interest rates three times in 2017, and Hartford’s investment portfolio is largely comprised of fixed maturity securities. In this note, we take a closer look at Hartford’s investment portfolio and whether its yield will improve going forward.

As shown in the table above, fixed maturity securities generate about 81% of the company’s net investment income and have experienced a decline in yields in 2017. These investments are exposed to several risks such as credit risk, inflation risk, but more notably, interest rate risk. Interest rates play an important role in determining the profitability of insurance companies, as the companies invest the premiums they get from policyholders, primarily in fixed income securities. Yields on fixed income securities – such as corporate and municipal bonds, and loans – are largely dependent on the prevailing interest rate environment. Accordingly, changes in interest rates can have a substantial impact on insurance companies’ investment yields, and in turn their earnings.

For Hartford, most of the net investment income growth in 2017 came from limited partnerships and other alternative investments. As a result, investment income from Commercial Lines business, which contributes about 59% of the total investment income, experienced 3.5% growth. The decline in the yield of fixed maturity securities was primarily because of lower make-whole payment income and an increase in investment expense. Mortgage loans, which – along with fixed maturity securities contribute about 89% of the total investment income – have also seen weakness in investment yields because of prepayment penalties. However, income from these investments has been on an upward trend, which indicates that Hartford’s assets have increased in this asset class.

We capture the trends in investment yield for Hartford – Hartford’s Investment Income Contribution  – through an interactive dashboard. You can modify assumptions such as investable assets, yield, premiums and other revenue, earnings margin, and P/E multiple to see the impact on Hartford’s valuation.

What Lies Ahead?

The low interest rate environment that has been prevalent since the financial crisis of 2008 put considerable pressure on yields for the U.S. insurance industry. However, the insurance industry has seen a notable improvement in investment income over the last few quarters, as the Federal Reserve has stuck to its plan of raising benchmark interest rates at least three times each year over 2017-19 as of now. Given the positive outlook for the U.S. economy, it is likely that benchmark rates will continue to be raised steadily per the Fed’s plan. This bodes well for insurers’ yields moving forward.

We expect Hartford to see an improvement in investment yields of fixed maturity securities on the back of the aforementioned trends. Furthermore, workers’ compensation, which contributes about 48% to the Commercial Lines’ earned premiums, has been performing well over the past few years. With the declining unemployment rate and improving economic conditions in the U.S., we expect another strong contribution from this business in 2018. This should translate to an increase in invested assets. That said, the yield on the Group Benefits investment portfolio will likely be lower due to the acquisition of Aetna’s group life and disability business. Per acquisition accounting rules, the acquired portfolio must be marked to market.

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