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Image source: Hartford Financial.

For insurance giant Hartford Financial Services Group (NYSE:HIG), the past several years have brought a huge recovery that has stemmed largely from an unusually benign claims environment, where catastrophic losses have been much lower than usual. Those following the insurance industry all know that those favorable periods inevitably come to an end, and coming into Monday's third-quarter financial report, Hartford Financial shareholders were preparing themselves to see falling year-over-year earnings and revenue.

As it turned out, the pullback for Hartford was more dramatic than expected, and that sent the stock downward after the announcement. Yet competitors like Travelers (NYSE:TRV) have fared somewhat better after their earnings reports, and Hartford executives remain optimistic about its long-term future. Let's look more closely at Hartford Financial's recent results and what investors can expect going forward.

Hartford loses its tailwinds
Hartford Financial's third-quarter results stood in stark contrast to the healthy growth that the insurance company has enjoyed in past quarters. Core earnings fell 24% from year-ago levels to $364 million, showed how well it has done at taking advantage of favorable pockets in the insurance industry. Total revenue of $4.52 billion was down about 5% compared to the year-earlier quarter, falling well short of the 2% decline that investors had expected, and core earnings per share of $0.86 were more than a dime per share less than the consensus forecast among those following the stock.

Hartford Financial suffered two big hits that contributed toward the poorer results. First, net investment income earned on the company's investment portfolio fell 10% from year-earlier levels, with falling income from limited partnerships being the primary culprit for the shortfall. Second, higher catastrophe losses and unfavorable development of loss reserves had a negative impact on Hartford's insurance units. Core earnings in the commercial lines segment dropped 19% year over year, while personal lines suffered a much steeper decline in core earnings of more than three-quarters. Relatively solid performance in mutual funds and group benefits weren't sufficient to pull up Hartford's overall results.

Hartford executives tried to accept the challenges in stride. "Our results this quarter reflect headwinds in several areas," CEO Christopher Swift said, "resulting in a decrease in core earnings." Nevertheless, Swift praised the company for growing its book value by 8% over the past 12 months, and Hartford clearly still believes that its full-year performance is going according to plan.

What Hartford Financial investors should expect going forward
An even closer look at Hartford's business shows some interesting cross-currents in assessing the insurer's results. In the commercial line business, Hartford has done best with its small-commercial segment, with a combined ratio of just 86.8%. Middle-market results were somewhat less encouraging at 93.8%, and specialty-commercial combined ratios were even higher at 99.1%. With combined ratios taking into account both loss experience from claims as well as expenses of administration, a figure below 100% is good, but the further below 100% it is, the more profitable the insurer is. For comparison purposes, Travelers' overall combined ratio fell to 86.9% for the third quarter, down from 90% in the previous year's third quarter.

Meanwhile, in personal lines, a number of negative elements affected performance throughout the segment. In automobiles, combined ratios deteriorated by more than 4.5 percentage points, with a rise in marketing expenses and higher liability and physical damage frequency showing up in claims histories. Similarly, combined ratios for the homeowners' insurance segment jumped nearly 5 percentage points, as non-weather related claims rose to take a bigger bite out of Hartford's profits. In particular, California wildfires more than doubled the quarter's catastrophe losses for the personal lines segment.

Investors reacted negatively to Hartford Financial's results, sending shares down almost 5% in after-hours trading immediately after the insurance company announced its latest results. Even though Hartford failed to hit its targets, long-term investors need to remember that the insurance business is full of volatile results, which is a natural byproduct of intentionally taking on risk in exchange for compensation. In the long run, more normal loss experience contributes toward a healthier pricing environment in which smart underwriting practices are rewarded.

Even if a tough quarter temporarily takes Hartford Financial shares away from the all-time highs they've hit recently, the company still appears to be doing what it should to succeed down the line.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.