How Did Hartford's P&C Business Perform In The First Half Of 2016?
Hartford Financial's ( HIG ) stock is down over 6% year-to-date (YTD) owing to weak underwriting results in the property and casualty (P&C) insurance business and a decline in net investment income. The P&C insurance division contributes about 70% of the company's revenues and 75% of its core earnings.
In the first six months of the year, the company's P&C business suffered a 41% decline in core earnings owing to weak underwriting results. The division's underwriting gains declined from $58 million in the first six months of 2015 to a loss of $178 million in the first six 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 450 basis points to 103.4%. A ratio above 100% indicates underwriting losses, whereas below 100% means the company is making an underwriting profit.
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.
Commercial P&C: Combined Ratio Improves
In the first two quarters of the year, underwriting gains in Commercial lines declined by 19% y-o-y, but the underlying combined ratio - the ratio of claims and expenses to premiums earned - improved by 100 basis points to 93.1% on the back of flat catastrophe losses and slightly better workers' compensation results. Workers' compensation results were aided by a lower unemployment rate in the U.S in Q2 2016. The U.S. unemployment rate was around 5% in the second quarter, slightly improving from 5.0% in April to 4.9% in June. It was around 5.3-5.4% 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 it increases to 95% owing to lower underwriting gains and higher catastrophe losses, there could be an 8-10% decline in the company's valuation, per our estimates.
Consumer P&C: Auto PYD & Catastrophe Losses Impact Combined Ratio
Hartford's consumer business reported an underlying combined ratio of 106.3% in the first six months of 2016, showing an increase of 10.6 percentage points y-o-y due to unfavorable automobile prior accident year development (PYD) and higher catastrophe losses.
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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