Back to top

Image: Bigstock

The HartFord (HIG) Q3 Earnings Beat on Higher Revenues

Read MoreHide Full Article

The Hartford Financial Services Group, Inc. (HIG - Free Report) reported third-quarter 2016 adjusted operating earnings of $1.06 cents per share, which surpassed the Zacks Consensus Estimate by roughly 11.6%. Earnings also grew 23.2% year over year.

The outperformance was supported by higher net income and core earnings than third-quarter 2015. An 8% decrease in weighted average diluted common shares outstanding also drove the upside.

Growth in net income and core earnings can be mainly attributed to revenue growth on the back of strong performance in commercial lines and Group benefits segment. Also, improvement in personal lines in recent times supported the bottom-line growth. 

Total revenue of The Hartford came in at $4.7 billion, up 13% year over year. Higher net investment income and property and casualty (P&C) underwriting results led to the top-line improvement.

P&C underwriting gain was up $15 million over the prior-year quarter, primarily due to improved underwriting results in Commercial Lines.

Segment Results

Property & Casualty (P&C):

Commercial Line

Commercial Lines written premiums were $1,673 million, up 2% year over year. This was because the 5% growth in Small Commercial was partially offset by a 1% decline in Middle Market and a 4% decline in Specialty Commercial. Also, growth in Small Commercial business due the acquisition of Maxum Specialty Insurance Group contributed to the improvement.

Net income in the third quarter increased 29% to $272 million and core earnings rose 14.3% to $247 million, both on a year-over-year basis. Net realized capital gains of $25 million, which compared unfavorably with net realized capital losses of $12 million in the prior-year quarter, drove the upside.

Underwriting gain was $103 million for a combined ratio of 93.9% as against an underwriting gain of $90 million for a combined ratio of 94.5% in the year-ago quarter.

Underwriting gain increased 14%, while combined ratio improved 40 basis points. This was mainly because of lower unfavorable PYD, higher earned premiums and reduced expenses. The positives, however, were partially offset by higher catastrophe losses.

Catastrophe losses were $43 million in third quarter, primarily due to wind and hailstorms. This segment had incurred catastrophe losses of $8 million in third-quarter 2015.

Personal Line

Net income in the third quarter increased 52% year over year to $29 million, primarily due to a lower underwriting loss of $2 million for a combined ratio of 100.2%. The improvement in underwriting loss and combined ratio was supported by reduced catastrophe losses and lower underwriting expenses, partially offset by higher current accident year personal automobile losses and slightly unfavorable PYD.

Personal Lines written premiums were $1 billion, down 3% year over year. Lower retention in the AARP Agency and Other Agency channels along with a lower new business as a result price increases led to the downside.

Group Benefits:

This segment generated net income of $62 million, up 47.6% year over year, primarily due to higher net realized capital gains. Core earnings increased 8.5% year over year to $51 million due to higher earned premiums, lower group disability losses and reduced expenses, partially offset by higher group life losses.

Net income margin improved 180 basis points (bps) year over year to 6.7%. Core earnings margin expanded 10 bps to 5.6%.

Total loss ratio was 79.1%, up 230 bps from the third quarter of 2015 as higher group life loss ratio resulted in higher group life claims severity.

Group Benefits’ fully-insured ongoing premiums inched up 5% to $792 million due to strong persistency and increased pricing.

Mutual Funds:

Net income at the Mutual Funds segment was $21 million, down 5% year over year due to lower investment management fees from a shift to lower-fee mutual funds. Also, higher expenses incurred due to the acquisition of Lattice Strategies led to a decline in net income.

Average (Asset Under Maintenance) AUM increased 0.6% year over year to $93.0 billion, mainly due to market appreciation. The improvement was largely offset by the continued runoff of Talcott Resolution.

Talcott Resolution:

Talcott Resolution net income $78 million grew 5% over the prior-year quarter due to a lower unlock charge. This was partially offset by a reinsurance gain on dispositions in third-quarter 2015.

Core earnings were $104 million, down 3% year over year. This is because of  lower fee income due to the runoff of the annuity block and lesser net investment income from fixed maturities.

Talcott Resolution net investment income from LPs totaled $31 million, up from $6 million in the year-ago quarter.

Corporate: The Corporate segment recorded net loss of $55 million, substantially wider than a net loss of $3 million in the prior-year quarter. This was primarily due to a third-quarter 2015 income tax benefit of $60 million related to the reduction of the deferred tax valuation allowance on capital loss carryovers.

However, Corporate core losses were $54 million in the reported quarter owing to a $9 million improvement from third-quarter 2015 due to lower interest expenses and other expenses.

Financial Update

Net investment income of The Hartford increased by $30 million (after-tax) from third-quarter 2015. This upside was primarily driven by a $48 million (after-tax) increase in investment income from limited partnerships and other alternative investments.

The Hartford’s stockholders’ equity came in $18.7 billion as of Sep 30, 2016, up 6%  from $17.6 billion at year-end 2015. The increase was primarily driven by a $1.3 billion increase in AOCI from Dec 31, 2015, which largely reflects the impact of lower interest rates and tighter credit spreads on the fair value of the company's fixed income investment portfolio.
 
Book value per diluted share increased roughly 12% to $48.30 from year-end 2015. Excluding AOCI, The Hartford’s book value per share came in at $45.74 as of Sep 30, 2016, up 5% from the that as of Dec 31, 2015.

Share Repurchases and Dividend Update

In Oct 2016, the board of directors authorized a new $1.3 billion equity repurchase plan for common shares to remain effective between Oct. 31, 2016 and Dec. 31, 2017. This new program is an addition to the Hartford’s current $4.4 billion equity repurchase plan, which is scheduled to expire on Dec 31, 2016.

In the last four quarters, the company repurchased 34.5 million common shares for a total of $1.5 billion. The company now has approximately $195 million of authorized fund remaining for share buyback as of Oct 26, 2016.

In Oct 2016, the board approved a 10% increase in its divided payout. The quarterly dividend per share of 23 cents will be paid on Jan 3, 2017, to shareholders onrecord at the close of business on Dec 1, 2016.

HARTFORD FIN SV Price, Consensus and EPS Surprise

Zacks Rank and Performance of Other Insurers

The Hartford presently carries Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among the other insurers that have reported their third-quarter earnings so far, the bottom line at Progressive Corp. (PGR - Free Report) and The Travelers Companies Inc.. (TRV - Free Report) beat their respective Zacks Consensus Estimate, while RLI Corp. (RLI - Free Report) missed the same.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>

Published in