The Hartford Financial Services Group
) is scheduled to report earnings for the fourth quarter of 2013 on
Tuesday, February 4. The insurance company, now focused on property
and casualty insurance, will likely be helped by a lack of natural
disasters in the U.S. through 2013. The P&C division is the
most important business for Hartford, accounting for more than 80%
of its core operating earnings (core earnings are a non-GAAP
measure reported by insurance companies which exclude the impact of
goodwill and other non-recurring items.)
Like most industry peers, Hartford has taken to pricing
initiatives to offset low yields from investments. Core earnings
went up 17% during the September quarter as the underlying combined
ratio (expenses to premiums), excluding catastrophes and prior year
reserve development, improved from 96.3% to 92.8%, helped by
Hartford's pricing and underwriting initiatives. We expect the
company to maintain this discipline through the fourth quarter.
See our full analysis of Hartford Financial
The commercial division of property and casualty insurance
offers group insurance contracts to companies and accounts for
two-thirds of the P&C premium volume. Hartford has been able to
maintain price increases of 8% along with retention rates of over
80% in small commercial and middle market lines. As a result of
these initiatives, the company's combined ratio improved from 99.1%
to 98.1% during the September quarter, allowing the underwriting
gain to increase from $14 million in the 2012 to $30 million.
Workers' compensation is the most important insurance line in
the commercial division, accounting for half of the premiums earned
by the division. Hartford is the third largest insurer in this
domain in the U.S. with a market share over 6.5%, behind Liberty
Mutual Group and
The Travelers Companies
). Travelers recently reported a 4% increase in workers'
compensation premiums for the December quarter and a 7% increase
for the full year.
The parallels between the companies necessitate a comparison.
Like Hartford, Travelers has also been implementing pricing
initiatives and reported a renewal premium change rate (the change
in average premium on policies that were renewed) of 8% while
maintaining a retention rate over 80% for the December quarter.
These rate increases exceeded loss trends, as the underlying
combined ratio improved by 1 percentage point to 91.5% for the
fourth quarter. Travelers' results were also helped by lower
catastrophe-related losses, which dropped from $ 1 billion in the
fourth quarter of 2012 to $53 million in 2013. As a result, the
company's net income for the period surged 225% as the combined
ratio improved 18 percentage points to 87.7%. We believe that
Hartford can replicate its peer's results.
Hartford also offers automobile and homeowners insurance to
individuals across the U.S. through its consumer division. The
company has an exclusive licensing agreement with the American
Association of Retired Persons (AARP), which allows the company to
market automobile and homeowners' insurance directly to 37 million
members enrolled in the AARP. More than 80% of the consumer
premiums come from this agreement. Last quarter, Hartford extended
the agreement to January 1, 2023, ensuring a stable source of
premiums for the company. As with the commercial division, Hartford
has been implementing price hikes in the consumer division. The
premium increase rate for auto insurance through the third quarter
was 5% while that for homeowners' insurance was 8%, but the company
still maintained retention rates of 88% and 92%, respectively, in
the two lines.
We expect high retention rates to help the division this
quarter, but profitability will depend on the underlying margins.
Despite a 3% increase in written premiums through the three months
ending September, the division's underwriting gain fell 32% as the
combined ratio increased from 87.9% to 91.9%, primarily due to less
favorable prior year reserve development. However, the price
increases allowed the underlying combined ratio (excluding
catastrophe related losses and prior year reserve development) to
improve 2.2 percentage points to 91.1%. A strong underwriting
discipline can help the company maintain profits in the coming
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