Hartford Financial ( HIG ) announced mixed first quarter 2017 results, with both core earnings and revenues marginally missing market expectations but investment income and the Personal Auto business reporting improvements. The company’s core earnings of $1.00 per share marked a 5% increase from the prior year quarter but missed estimates by 2 cents. The gain was driven by a 5% rise in net investment income and a 7% decline in share repurchases. The rise in investment income was attributed to higher income from limited partnerships (LPs) and other alternative investments.
Hartford reported a net income of $378 million in Q1 2017 compared with net income of $323 million in Q1 2016, owing to lower net realized capital losses partially offset by higher catastrophe losses. Current accident year catastrophe losses rose 66% to $98 million in the first quarter. In terms of the top line, the company’s total revenues of $4.66 billion were 5.6% higher than the prior year quarter but missed analyst estimates of $4.70 billion.
Hartford currently has three major lines of businesses – property and casualty insurance, group life insurance and investments. The PC 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. PC 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 PC insurance division is comprised of personal automobile and homeowners’ multiperil products.
In the first quarter, underwriting gains in Commercial lines decreased by 53% y-o-y and the combined ratio – the ratio of claims and expenses to premiums earned – worsened by 490 basis points to about 96.0% on the back of higher net unfavorable prior accident year development (PYD) and higher catastrophe losses.
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 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 99.3%, showing an improvement of 60 basis points over the prior year quarter due to improvement in the automobile business partially offset by higher higher catastrophe losses and higher non-catastrophe weather and fire losses in the homeowners business. 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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