Image source: Hartford Financial.
Insurance giant Hartford Financial Services Group (HIG 3.70%) suffered a pullback during the third quarter, with the company seeing net investment income from its asset portfolio drop 10% and having to deal with an uptick in catastrophic losses. Yet even though the insurer didn't give investors everything they wanted to see, CEO Chris Swift and his management team were upbeat about the company's long-term future. Let's take a closer look at some of the things that Hartford executives said about where the insurer is headed and what investors can expect to see in the future.
"While we had some challenges in the quarter, I'm pleased with the progress The Hartford has made during the year."-- CEO Chris Swift
Swift is always quick to take a longer-term view, especially after a tough quarter. Hartford has seen solid gains year to date, with a 17% rise in core earnings per share. As competition from AIG (AIG 1.56%) and other players in the insurance market has heated up, especially on the commercial side of the business, margins are coming under pressure. Yet Hartford has stayed focused on following its risk-management protocols, and it has strived toward goals of boosting its internal workforce and finding ways to grow in smaller and mid-sized markets. Although quarter-to-quarter results will be choppy, Swift remains convinced that Hartford is moving in the right direction.
"Our most significant event this quarter was the California wildfires, which resulted in $56 million of pre-tax losses." -- President Doug Elliot
For a long time, Hartford managed to escape without suffering any major catastrophic losses, but the third quarter changed that. Wildfires in California tore across the drought-stricken state, ravaging populated areas and threatening thousands of homes. That contributed in part to a rise of nearly 5 percentage points in Hartford's combined ratio for personal lines. Yet Elliot also noted that even with the wildfires, catastrophic losses were less than the company had expected, pointing toward the potential for worse losses in the future.
"Lower limited partnership returns negatively affected our results. ... We currently estimate that fourth-quarter limited partnership and other alternative investment income will be lower than the third quarter."-- CFO Beth Bombara
Hartford's drop in investment income came largely from poor performance from its limited partnership and hedge fund investments during the quarter. With tough conditions in the stock market, hedge funds didn't handle the volatility well, and limited partnerships continued to suffer from poor performance in the key energy sector. Hartford is still ahead of its year-to-date target, but it foresees continued pressure on overall income levels for the remainder of the year. Nevertheless, Bombara believes the added return potential is worth the volatility, and in the long run, Hartford's results have largely borne that belief out.
"Our consolidated portfolio yield held up well despite the headwinds from low interest rates."-- Bombara
Hartford, AIG, and other insurers are sensitive to interest rate movements, as most insurers have a substantial portion of their portfolios invested in fixed-income securities. Yet Bombara noted that even with Hartford having to accept lower rates in reinvesting proceeds from maturing bonds, it has received offsetting income from prepayment penalties on mortgage securities, make-whole call premiums on bonds that get redeemed early, and similar items. These amounts aren't what Hartford sees as routine, but they have helped boost annualized portfolio yields even in a weak rate environment, and that has been useful on the fixed-income side of the portfolio.
"The AARP relationship has been a wonderful 30-year relationship for us, and it's very strategically important. ... Over a longer period of time, it has performed very well."-- Swift
Some analysts were concerned about a rise in claims frequency stemming from the personal lines side of the insurance company, where AARP members make up roughly 80% of Hartford's book of business. Yet Hartford's experience has shown that these older drivers are generally safer than the overall driving population. By being smart about taking necessary steps to ensure that premiums and losses are in tune with each other without jeopardizing the long-term relationship, Hartford thinks that AARP will continue to play a key role in the insurer's growth strategy.
Hartford Financial suffered a slight setback during the third quarter, but longer-term, executives are upbeat about its potential to bounce back and perform even more strongly than it has in the past. Shareholders need to be prepared for the ups and downs of loss experience, but overall, Hartford has put itself in a solid position to thrive over time.
