The insurance industry got hit hard during the financial crisis, but ever since then, insurers like Hartford Financial Services Group (NYSE:HIG) have worked hard to recover. In particular, Hartford has keyed in on its highest-prospect business lines, choosing to pull back on less promising businesses in an effort to boost overall profitability. Along the way, CEO Chris Swift and his team have highlighted several key elements to Hartford's long-term success. Let's look more closely at what Hartford Financial executives said about the company and what investors should expect going forward.
"Our primary refocus going forward continues to be on the profitable expansion of [Property & Casualty], Group Benefits, and mutual funds businesses, where we hold competitive market positions."-- CEO Chris Swift
Prior to the financial crisis, Hartford Financial had grown into a colossus in the financial industry, with a wide range of product lines that sought to maximize its exposure to the boom throughout the whole sector. In response to the market meltdown, though, Hartford identified core areas in the property and casualty segment as well as in offering benefit plans to employer clients and in its mutual fund segment. It then started winding down areas like variable annuities, which it placed into a runoff entity. That long-term strategy has gone well, and with strong conditions in the P&C market, it's not surprising that Hartford's earnings have rebounded sharply as a consequence.
"Favorable weather patterns were clearly the primary force behind our outstanding property results. ... We know that quarter-to-quarter results will be subject to the presence of absence of severe weather." -- President Douglas Elliot
It's important not to put too much credit on the shoulders of Hartford executives for its recent earnings success, as the entire industry has benefited from a general lack of major catastrophic events. Over time, catastrophes tend to even out, and the longer that the market goes without a big loss event, the more pressure there is to reduce premiums. Going forward, investors need to be prepared for less favorable quarters, but you should still get general improvement when you back out volatile weather-related losses.
"We enjoyed favorable results from catastrophe and non-catastrophe property losses, and the performance of other lines of business remained strong. Across our [P&C] and Group Benefit businesses, we have strengthened our products, technology, and talent." -- Elliot
Weather aside, Hartford Financial has done a good job of capitalizing on favorable conditions throughout the insurance-products industry. Its mutual fund exposure has benefited from the long bull market in stocks following the financial crisis, yet at the same time, Hartford also has an opportunity to cater to those who grow nervous about the market's success with a range of other financial products. Of particular note is the group benefit business, where falling unemployment has helped put more employees of its group-employer clients into position to buy products and bolster Hartford's profits.
"The asbestos reserve strengthening reflects lower-than-projected improvement in new mesothelioma claims for a handful of our peripheral accounts. ... The environmental reserve strengthening was driven by higher new claim severity, including at a handful of Superfund sites."-- CFO Beth Bombara
Insurers manage risk, and Hartford has chosen to hang onto its exposure in key risk areas like asbestos and major environmental claims. Bombara pointed out that some of its competitors have chosen to obtain reinsurance in order to reduce their risk in this area, but Hartford believes that managing claims itself can lead to better long-term results. Keeping this risk on its books introduces some added volatility to Hartford's financials, but Bombara did note that if fairly expensive reinsurance pricing became more attractive in the future, Hartford would consider alternatives to retaining this risk.
"Any acquisition opportunity first needs to be strategic and financially compelling to make sense. ... An acquisition needs to be weighed generally in terms within organic build."-- Swift
The insurance industry has seen considerable consolidation, as weaker entities look to stronger counterparts to join forces. Hartford has looked at potential M&A deals, but Swift remains committed to making sure it doesn't sacrifice its organic growth efforts and rely solely on possible acquisitions in the future. Only if a potential deal brings the internal rates of return that Hartford wants to see is it likely that the insurance giant will move forward to try to make a deal happen.
Hartford Financial has recovered strongly in recent years, and it continues to look for ways to maximize its potential. Even with the amount of progress it has already made, Hartford believes that further opportunities are available that could help it do even more in the years to come.
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