Hartford Financial ( HIG ) announced strong third quarter 2016 results last week, 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.
Hartford currently has three major lines of businesses - 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 ( TRV ). The consumer P&C insurance division is comprised of personal automobile and homeowners' multiperil products.
In the third quarter, underwriting gains in Commercial lines increased by 14% y-o-y and the underlying combined ratio - the ratio of claims and expenses to premiums earned - improved by 60 basis points to about 94% on the back of better workers' compensation results which was partially offset by slightly higher catastrophe losses. Workers' compensation results were aided by a lower unemployment rate in the U.S in Q3 2016. The U.S. unemployment rate was around 4.9-5% in the third quarter, 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 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 an underlying combined ratio of 100.2%, showing an improvement of 90 basis points over the prior year quarter due to lower catastrophe losses partially offset by higher current year personal automobile losses and slightly unfavorable automobile prior accident year development (PYD). 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 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.
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