The Hartford Financial Services Group Inc. (HIG) reported fourth-quarter 2014 operating earnings per share of 96 cents which surpassed the Zacks Consensus Estimate by 3.2%. Earnings also improved 22% from the year-ago quarter.
Better property and casualty (P&C) underwriting results, decline in Corporate core losses and reduction in share count led to this improvement.
Including loss from discontinued operations, pension settlement, net reinsurance gain on dispositions, net realized capital gains and post-tax deferred acquisition costs, restructuring and other expenses and an unlock charge totaling 10 cents in the reported quarter, The Hartford’s net income was 86 cents per share, up 32% year over year.
Total revenue of The Hartford came in at $4.6 billion, down 3.3% year over year, mainly due to lower premiums, fee income and net investment income. However, the figure breezed past the Zacks Consensus Estimate of $3.1 billion.
Segment Results
Property & Casualty (P&C): This segment’s core earnings were $316 million, up 5% year over year, mainly due to improvement in the current accident year (CAY) underwriting results. P&C reported net income of $327 million in the reported quarter, decreasing 5% from $346 million in the year-ago period.
P&C written premiums increased 5% from the year-ago quarter to $2.5 billion on the back of growth in both Commercial and Personal Lines. Moreover, combined ratio improved 370 basis points (bps) to 93.8. Combined ratio, excluding catastrophes and prior-year development (PYD), improved to 92.0 from 95.8 in the prior-year quarter.
Investment income was $282 million, down 13% year over year, while underwriting gain soared 152% to $159 million from $63 million. This segment reported catastrophe losses of $19 million in the reported quarter, narrower than $28 million in the year-ago quarter. This improvement was primarily attributable to a year-over-year decline in the number of catastrophe events in the quarter.
Group Benefits: This segment of The Hartford generated core earnings of $45 million in the reported quarter, down 18% year over year owing to a margin reduction in the group disability operations. Net income came in at $48 million, lower than $58 million in the prior-year quarter. This was mainly due to a decline in core earnings.
Group Benefits’ fully insured ongoing premiums declined 3% to $737 million. Meanwhile, loss ratio deteriorated 130 bps year over year to 76%, owing to less favorable group disability results.
Mutual Funds: Core earnings at The Hartford’s Mutual Funds segment increased 35% year over year to $27 million. Growth in fee revenues from increased average Mutual Fund assets under management (AUM) and encouraging state income tax benefit mainly led to the upside.
Total Net income in the quarter also rose 21% year over year to $23 million. Total AUM came in at $93.6 billion as of Dec 31, 2014, down 3% from $96.7 billion as of Dec 31, 2013. Decline in Talcott Resolution AUM including planned AUM transfers within the company during the reported quarter led to the downside.
Talcott Resolution: Core earnings at Talcott Resolution came in at $98 million, down 1% year over year. This decrease came on the back of the persistent run-off of the variable annuity (VA) block. The segment reported net income of $144 million, comparing favorably with a net loss of $15 million in the year-ago quarter.
Corporate: The Hartford’s Corporate segment recorded core losses of $60 million, narrower than the year-ago quarter loss of $92 million. The segment’s net loss was reported at $160 million, wider than $94 million in the year-ago quarter.
Full Year Highlights
2014 operating earnings per share came in at $3.36 that surpassed the Zacks Consensus Estimate of $3.34. Earnings also improved 16% from the year-ago quarter, primarily on account of the accretive impact of the share repurchases during the year.
Including net realized capital losses, after-tax and deferred acquisition costs (DAC), loss from discontinued operations associated largely with the Japan annuity business sold in June 2014, The Hartford’s net income was $1.73 per share, up 381% year over year.
Total revenue of The Hartford came in at $18.6 billion, down 10.1% year over year, mainly due to lower fee income and net investment income.
Financial Update
The Hartford's total invested assets, excluding trading securities, were $76.3 billion as of Dec 31, 2014, compared with $78.7 billion as of Dec 31, 2013. This decline stemmed from the sale of the Japan annuity business in the second quarter of 2014. Net investment income of The Hartford was $752 million in the reported quarter, down 7% year over year due to a decrease in investment income on other alternative investments (LPs), the effect of a reduction in Talcott Resolution AUM and lower annualized investment yields.
The Hartford’s shareholder equity came in at $18.7 billion as of Dec 31, 2014, down slightly from $18.9 billion as of Dec 31, 2013, due to share repurchases and dividend payouts. Book value per share increased to $42.84 as of Dec 31, 2014, from $39.14 as of Dec 31, 2013. Excluding accumulated other comprehensive income (AOCI), The Hartford’s book value increased 4% to $40.71 as of Dec 31, 2014 from $39.30 per share as of Dec 31, 2013.
Securities Update
In the reported quarter, The Hartford spent $300 million toward share buybacks, bringing the total repurchase worth to $1.8 billion as of Dec 31, 2014. Additionally, the company completed the accelerated share repurchase (ASR) program during the reported quarter. As of Jan 30, 2015, The Hartford has deployed $1.9 billion toward equity repurchases under its $2.775 billion capital management plan announced in 2014. This includes $101 million deployed for the period Jan 1, 2014 through Jan 30, 2015.
2015 Guidance
The Hartford expects full-year 2015 core earnings to be in the range of $1.55–$1.65 billion, higher than that of 2014. This includes post-tax catastrophe losses of $293 million in Commercial and Personal Lines and an unfavorable prior-year-development (PYD) of $21 million in Commercial Lines. Adjusted core earnings is expected to be in the range of $1.57–$1.67 billion, compared with $1.51 billion in 2014.
P&C catastrophe loss ratio is expected to deteriorate to 4.3 from 3.4 in 2014. Group Benefits core earnings post-tax margin is expected to be in the range of 5.0%–5.5%, compared with 5.2% in 2014.
The Hartford expects Talcott Resolution core earnings to decrease to $340–$370 million from $433 million in 2014.
Our Take
The Hartford surpassed the Zacks Consensus Estimate and also improved year over year mainly on improved P&C segment underwriting results which was driven by a decline in the number of catastrophic events. Solid fourth-quarter results helped the company exit 2014 on a high note. Notably, this multiline insurer succeeded to deliver positive earnings surprise in three out of the last four quarters with an average beat of 0.47%.
The Hartford is focused on capital deployment strategies. It has been enthusiastic about share repurchases that led to a decline in share count and largely mitigated the negatives in the quarter. Additionally, the completion of the ASR and execution of the capital management plans reflect the company’s focus on returning more value to its shareholders.
Zacks Rank
The Hartford currently carries a Zacks Rank #3 (Hold). Better-ranked stocks from the multiline insurance space include Assured Guaranty Ltd. (AGO), MGIC Investment Corp. (MTG) and CNO Financial Group, Inc. (CNO). While Assured Guaranty and MGIC Investment sport a Zacks Rank #1 (Strong Buy), CNO Financial has a Zacks Rank #2 (Buy).
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