1 Company Growing Earnings 17% and Raising Guidance

Hartford (NYSE: HIG  ) announced earnings yesterday of $505 million, or $1.03 per share, compared to earnings of $433 million, $0.90 per share in the third quarter of 2012, an increase of 17%. In the second quarter Hartford issued an earnings-per-share outlook of $0.70 to $0.75 for the third quarter.

The results
Its total net income of $293 million ($0.60 per share) was well above the $13 million ($0.01 per share) reported in the third quarter of 2012, in which it had a net loss of $388 million as a result of the sale of its Individual Life business, but also reported a gain of $62 million from hedging activities, compared to a loss of $105 million in the current quarter.

Hartford said its gains were driven by core earnings growth in its largest segments, Commercial Property & Casualty (up $15 million to $176 million, or 9%) and its Talcott Resolution (up $12 million to $204 million, or 6%).

Hartford's performance in its Property & Casualty Commercial business rose thanks to an increase in earned premiums, which rose to $2.6 billion from $2.5 billion, or 2%. Gains were seen in both its commercial (up $15 million, or 1%) and consumer divisions ($28 million, or 3%). That compares very favorably to competitor Travelers Companies (NYSE: TRV  ) , which saw its insurance premiums up 2% in its business insurance segment but down 5% in its personal insurance.

The company's total Property & Casualty business did see a dip in net income of 6%, as it fell to $264 million compared to $282 million, however this was in large part due to $66 million of catastrophe losses in the third quarter of this year, compared to only $10 million last year.

Hartford's underwriting gains did fall in its consumer business as a result of higher catastrophe payouts, but its commercial underwriting gains improved to $30 million from $12 million. In addition its combined ratio (what it pays out compared to what it takes in), before prior year loss and loss adjustment expense reserve development (PYD) fell to a more favorable 93.3, versus 97.5 in the third quarter of the last year.

The Talcott Resolution is the runoff of Hartford's U.S. and international annuity, institutional and private-placement life insurance, retirement plans and individual life insurance businesses. The retirement plans and individual life insurance businesses were sold to MassMutual and Prudential, respectively, in January of this year.

Of the results, Hartford's Chairman, President and CEO Liam E. McGee said, "Hartford's third quarter and year-to-date results demonstrate our significant progress transforming the company. Margins are improving in our go-forward businesses, contributing to a 17% year-over-year increase in core earnings, and the company continues to reduce its overall risk profile."

Hartford also continued to aggressively repurchase stock in the quarter, as it had a total of $241 million in buybacks of common shares and warrants. In total, the company has had approximately $408 million in share repurchases through the first nine months of the year, and still has approximately $840 million remaining under its $1.25 billion repurchase authorization.

The takeaway
In March of 2012, Harford noted that it would begin focusing exclusively on its property & casualty, group benefits, and mutual funds businesses, with noting that its "sharper focus will lead to an organization that, over time, will be positioned for higher returns on equity, reduced sensitivity to capital markets, a lower cost of capital and increased financial flexibility."

Considering Hartford handily beat both its own and analyst expectations while raising its full year 2013 outlook to $1.7 billion -- which is well above its outlook of $1.45 to $1.55 billion issued in April of this year -- it proved this quarter that it is continuing to deliver on that plan and execute in its core operations.

Beyond current quarter
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  • Report this Comment On October 29, 2013, at 7:01 PM, equityanalyst342 wrote:

    Is this firm "executing" or are they just lucky due to a weak hurricane season? This has been the slowest hurricane season in 45 years. Nearly all the P&C carriers are posting favorable net income.

    (see link on 2013 hurricane season)

    http://www.insurancejournal.com/news/international/2013/10/2...

    A year ago, this firm had weak net income. Remember Hurricane Sandy? Meanwhile, many of their competitors, in spite of this hurricane, still posted strong and positive net income the same time last year even with Hurricane Sandy.

    Yes, they are "getting rate" on their renewals. So are all the other P&C Carriers.

    Moreover, I'm not impressed by "core earnings" as a metric for analyzing their results. This is an accounting device which is quite complicated. I look at premium earned, period.

    Q3 premium earned from property and casualty (P&C) operations for 9/30/13 is $2,488 million. Same time last year, Q3, 9/30/2012 premium earned from P&C operations was $2,494 million. In other words, P&C premium earned is flat year over year. And premium earned has been on a downward trend at this firm since 2007. Nearly all of the other major P&C carriers have seen premium earned stable or rising, overall, since 2007.

    And Group Benefits premium for Q3, 2013 is $817 million, compared to $926 million same time last year, Q3 2012. Also down.

    They also had realized investment gains of $1,528 million. Most of the other P&C carriers don't generate as large a percent of their sales from investment income. Granted, this is to cover their "run off" business. What if the stock market goes south? What happens to this strategy of excessive dependence on their investment base to generate revenue?

    In other words, their focus on providing insurance services in the U.S. is in essence stagnant from a total premium earned standpoint. And as far as I know, they have no major international insurance underwriting division like several of their competitors. They are withdrawing from overseas commitments (Japan, etc.) So they are focusing on the US, but premium earned isn't growing here.

    Most of their major competitors are growing their international underwriting operations. But their not. Something to think about over the medium and long term.

    And for Q1 and Q2 2013, net income was ($241) million and ($190) million respectively. In short, the company may still finish the year off with negative net income.

    In summary, I'm not convinced they are "executing" especially with premiums earned stagnant year over year. This has been one of the slowest hurricane seasons in nearly 50 years.

    I want to see this company post robust net income when there is normal hurricane activity. Jury is still out as far as I'm concerned about their executing.

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