Among financial stocks, insurance companies tend to get less attention than big-name retail and investment banks. Yet the gains that Hartford Financial Services Group (NYSE:HIG) has produced since the financial-crisis lows have been equally impressive as those of some of its banking counterparts, and coming into Monday afternoon's first-quarter financial report, Hartford shares were at the best levels since 2008. Although Hartford's results looked less than stellar on their face, solid performance in the face of tough comparisons should still keep shareholders happy at least for the near future. Let's look more closely at how Hartford Financial did and what's to come for the insurance and financial services giant in the months ahead.
Hartford Financial's overall results were more of a reflection of how well the company did in the previous year's first quarter than of any serious deterioration in its fundamentals. Core earnings fell 10% to $452 million, and net income was down 6%. But a big drop in outstanding shares caused largely by Hartford's buyback activity kept the damage in per-share figures to a minimum, with net income per share of $1.08 actually beating the consensus estimates by more than a dime per share.
Looking more closely at Hartford Financial's results, the primary difficulty came from the company's core property and casualty insurance segment. In particular, a drop of more than a quarter in Hartford's personal lines business had a big impact on the insurance business, although an 11% drop in commercial-lines business also weighed on Hartford's results. For the commercial business, a $32 million gain last year related to assessments from the New York State Workers' Compensation Board accounted for most of the hit to the segment's core earnings, but a slight rise in catastrophic losses also weighed on its results. Catastrophic losses also played a major role on the personal-line side of the business. For both segments, premium volume rose slightly, pointing to potential gains ahead.
In addition, Hartford Financial's Group Benefits and Mutual Funds segments both produced gains from year-ago figures. Although those businesses bring in relatively little revenue compared to the core insurance business, they nevertheless helped to lessen the blow from Hartford's weaker insurance results.
CEO Christopher Swift argued that the results were reasonably good, saying that "The Hartford is off to a good start in 2015." In particular, Swift believes that Hartford Financial is doing well in making itself as efficient as possible "despite continued low interest rates and a U.S. [property and casualty] pricing cycle that is increasingly competitive." Even as favorable loss experience gives way to more normal conditions, Hartford Financial believes it's in good shape to weather the changing environment in the industry.
Can Hartford Financial stay ahead of the curve?
One area where Hartford Financial has struggled along with the rest of the industry is in squeezing as much investment income as possible from its asset portfolio. Investment yields excluding limited-partnership investments fell to just 4.1%, reflecting the difficulty in navigating the low-interest rate environment. That resulted in a 2% drop in investment income to $809 million, and the company's book value is up just 3% compared to the end of the first quarter of 2014.
What's clear, though, is that Hartford Financial thinks its own shares are perhaps the best investment available. The company bought back another $250 million in stock over the past quarter, bringing the total over the past 12 months to almost $1.75 billion. With the stock trading almost exactly at book value, repurchases have a neutral impact on price-to-book ratios but help raise per-share figures for core earnings and other vital benchmarks, and the company has another $650 million outstanding in the repurchase program that expires at the end of 2015. In addition, Hartford Financial is using available cash to redeem debt and improve the quality of its balance sheet.
The response to Hartford Financial's results was muted, with shares rising about half a percent in the first hour of after-hours trading following the announcement. As long as interest rates remain challenging, it could be tough for Hartford Financial stock to make much more headway after an impressive period of growth after the financial crisis.