Hartford Financial Services Group Inc. (HIG) reported fourth-quarter 2013 operating earnings of 94 cents per share, exceeding the Zacks Consensus Estimate of 90 cents. Operating earnings also outpaced the year-ago earnings of 52 cents per share.
Lower catastrophe losses and an enhancement in the Property and Casualty (P&C) Commercial and Group Benefits margins drove Hartford Financial’s earnings upside.
Hartford Financial’s net income in the reported quarter was 65 cents per share that rebounded from a loss of 13 cents per share in the year-ago quarter. The improvement came on the back of higher core earnings and a decrease in net realized capital losses.
Total revenue of Hartford Financial for the reported quarter stood at $6.1 billion, down 20.9% year over year. However, total revenue significantly surpassed the Zacks Consensus Estimate of $2.79 billion.
Segment Results
Property & Casualty: This segment generated core earnings of $300 million, substantially higher than $54 million in the year-ago quarter, mainly driven by lower catastrophe losses and improved current accident year results. P&C reported net income of $346 million in the reported quarter, higher than $80 million in the year-ago period, aided by improved core earnings.
P&C written premiums increased 2% from the year-ago quarter to $2.3 billion, due to growth in both P&C Commercial Market and Consumer Markets. Meanwhile, combined ratio improved to 94.9 from 109.2 in the year-ago quarter, reflecting lower catastrophe losses. Combined ratio, excluding catastrophes and prior-year development (PYD), improved to 93.2 from 95.4 in the prior-year quarter, owing to the initiatives taken in the P&C Commercial business.
Investment income stood at $324 million, up 8% year over year, while underwriting gain was $128 million, rebounding from a loss of $229 million in the year-ago period. This segment reported catastrophe loss of $28 million in the reported quarter, substantially down from $335 million in the year-ago quarter.
Group Benefits: This segment generated core earnings of $55 million in the reported quarter, up 41% year over year due to improved results in the group long-term disability business. Net income came in at $58 million, increasing 26% from $46 million in the prior-year quarter, driven by higher core earnings, mitigated by a decline in realized capital gains.
Group Benefits’ fully insured premiums declined 10% to $821 million as per expectations, on account of non-renewal of the largest account in this segment, persistent pricing discipline and actions taken by management on the Association Financial Institutions block of business. The non-renewal in Group Benefits’ largest account was affected by pricing and other considerations. Meanwhile, loss ratio improved 430 basis points year over year to 72.7%, mainly due to better group disability results.
Mutual Funds: Core earnings at Hartford Financial’s Mutual Funds segment increased 25% year over year to $20 million due to enhanced retail and defined contribution mutual funds operations. Higher assets under management partly offset by higher expenses also contributed to the improvement. Asset under management stood at $96.7 billion as of Dec 31, 2013, up 10% from the year-ago quarter, due to improvement in Mutual Fund assets partially mitigated by declining Annuity assets, reflecting the divestiture of its U.S. Variable Annuity business.
Talcott Resolution: Core earnings at Talcott Resolution came in at $173 million, down 14% year over year, primarily driven by lowered earnings from divested businesses and continued run-off of the annuity block. This was partially offset by a decline in DAC amortization expenses and favorable investment income from limited partnerships and alternative investments. The segment reported net loss of $15 million that narrowed from the year-ago net loss of $148 million.
Corporate: Hartford Financial’s Corporate segment recorded core loss of $92 million, up from $55 million in the prior-year quarter. Corporate segment’s net loss was reported at $94 million, wider than $39 million in the year-ago quarter.
Full Year Highlights
Hartford Financial reported full-year 2013 operating earnings of $3.55 per share, exceeding the Zacks Consensus Estimate of $3.52. Operating earnings surpassed the year-ago earnings of $2.85 per share.
Lower catastrophes and higher P&C Commercial, Consumer Markets and Group Benefits margins aided the improvement.
Hartford Financial’s net income in the reported quarter came in at 34 cents per share that rebounded from a loss of 18 cents per share in the year-earlier quarter.
Total revenue of Hartford Financial stood at $26.2 billion, up from $26.1 billion in 2012.
Financial Update
Hartford Financial's total invested assets, excluding trading securities, were $78.7 billion as on Dec 31, 2013, compared with $105.3 billion as on Dec 31, 2012 due to t higher interest rates on invested assets and divestiture of the Retirement Plans and Individual Life businesses. Net investment income, excluding trading securities, for the reported quarter was around $827 million, down 20% year over year.
Hartford Financial’s shareholder equity stood at $18.9 billion as of Dec 31, 2013, down 16% from $22.4 billion as of Dec 31, 2012. Book value per share declined to $39.14 as of Dec 31, 2013 from $45.80 as of Dec 31, 2012. Excluding accumulated other comprehensive income (AOCI), Hartford Financial’s book value decreased 2% to $39.30 per share as of Dec 31, 2013 from $40.00 per share as of Dec 31, 2012.
Securities Update
During the quarter, Hartford Financial spent $225 million to repurchase 6.5 million shares. This aggregates to shares worth $663 million that were repurchased in 2013. Currently, Hartford Financial has $2 billion remaining under its new capital management plan for 2014–15.
Additionally, as of Jan 31, 2014, Hartford Financial repurchased equities worth $118 million.
2014 Outlook
Hartford expects full-year 2014 core earnings to be in the range of $1.65–$1.75 billion. This guidance includes post-tax catastrophe losses of $305 million, post-tax unfavorable prior-year development (PYD) of $22 million and limited partnership and post-tax other alternative investment of $112 million.
The company also provided the capital management plan for 2014 and 2015. In 2014 and 2015, Hartford Financial plans to repurchase equities worth $2 billion and repay debt maturities of $656 million.
Our Take
Hartford Financial surpassed our earnings estimate as well as the year-ago numbers. Although the top line surpassed our projection, it declined year over year.
Hartford Financial is focused on its margin improvement strategies. Revenue growth remained strong in its Property & Casualty segment and Mutual Funds segment. Further, its home and auto insurance contract extension with the American Association of Retired Persons (AARP) and the divestiture of Hartford Financial’s non-core businesses also bode well for long-term growth through capital generation and enhanced focus on core operations. All these coupled with efficient capital management initiatives keep Hartford Financial well poised to report better financial results going forward. Hartford Financial carries a Zacks Rank #3 (Hold).
Performnace of Other Better Ranked Insurers
Old Republic International Corporation (ORI) reported fourth-quarter 2013 operating net income of 33 cents per share, which outpaced the Zacks Consensus Estimate of 18 cents by 83.3%. The stock carries a Zacks Rank #1 (Strong Buy)
The Travelers Companies Inc. (TRV) reported operating net earnings of $2.68 per share in the fourth quarter of 2013, surpassing the Zacks Consensus Estimate by 23.5%. The stock carries a Zacks Rank #2 (Buy)
ACE Limited (ACE) reported operating net earnings of $2.39 per share in the fourth quarter of 2013, surpassing the Zacks Consensus Estimate by 19.5%. The stock carries a Zacks Rank #2 (Buy).
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