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The Hartford's Q3 Earnings Strong on Better P&C Results

The Hartford Financial Services Group Inc. (HIG) reported third-quarter 2014 operating earnings per share of $1.06 that surpassed the Zacks Consensus Estimate by 26.2%. Earnings also improved 25% from the year-ago quarter.

Better property and casualty (P&C) underwriting results and growth in income from limited partnerships and other alternative investments (LPs) mainly led to this improvement.

The Hartford Financial Services Group Inc - Earnings Surprise | FindTheBest

Including net realized capital gains and post-tax deferred acquisition costs, restructuring and other expenses and an unlock charge totaling 20 cents in the reported quarter, The Hartford’s net income was 86 cents per share, higher than 60 cents in the year-ago quarter.

Total revenue of The Hartford came in at $4.8 billion, down 1.9% year over year, mainly due to lower premiums and fee 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 $353 million, up 34% year over year, mainly due to improvement in the current accident year (CAY.V) underwriting results. P&C reported net income of $367 million in the reported quarter, increasing 39% from $264 million in the year-ago period.

P&C written premiums increased 2% from the year-ago quarter to $2.6 billion on the back of growth in both P&C Commercial Market and Consumer Markets. Moreover, combined ratio improved 480 basis points (bps) to 91.4.

Combined ratio, excluding catastrophes and prior-year development (:PYD), improved to 90.2 from 92.8 in the prior-year quarter.

Investment income was $316 million, up 7% year over year, while underwriting gain soared 129% to $218 million from $95 million. This segment reported catastrophe loss of $40 million in the reported quarter, narrower than $66 million in the year-ago quarter. Catastrophe losses were also much lower than the company’s guided figure of $134 million. This improvement was mainly 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 $38 million in the reported quarter, up 6% year over year owing to improved results in the group life and disability operations. Net income came in at $37 million, higher than $31 million in the prior-year quarter. This was mainly driven by higher core earnings and a decline in net realized capital losses.

Group Benefits’ fully insured ongoing premiums declined 10% to $738 million, on account of lower premiums from the planned reduction of the Financial Institutions block of business (scheduled to culminate by 2014-end). Meanwhile, loss ratio deteriorated 90 bps year over year to 77.6%, mainly due to business mix changes.

Mutual Funds: Core earnings at The Hartford’s Mutual Funds segment increased 22% year over year to $22 million. Growth in fee revenues from increased average assets under management (AUM.TO) mainly led to the upside in earnings. Total Net income in the quarter also rose 16% year over year to $22 million. AUM came in at $96.2 billion as of Sep 30, 2014, up 4% from $92.4 billion as of Sep 30, 2013. Improvement in Mutual Fund assets mainly contributed to the improvement. However, this was partly offset by a decline in Annuity assets, reflecting the divestiture of its Variable Annuity (:VA) business.

Talcott Resolution: Core earnings at Talcott Resolution came in at $122 million, up 6% year over year. This improvement came on the back of an increase in investment income on LPs. This was partly offset by decreased fee income stemming from lower account values. The segment reported net income of $28 million, higher than the year-ago income of $7 million.

Corporate: The Hartford’s Corporate segment recorded core loss of $58 million, wider than the year-ago quarter loss of $16 million. The segment’s net loss was reported at $66 million, wider than $28 million in the year-ago quarter.

Financial Update

The Hartford's total invested assets, excluding trading securities, were $76.2 billion as on Sep 30, 2014, compared with $78.7 billion as on 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 $810 million in the reported quarter, up 3% year over year due to an increase in investment income from LPs.

The Hartford’s shareholder equity came in at $18.8 billion as of Sep 30, 2014, down slightly from $18.9 billion as of Dec 31, 2013. Book value per share increased to $42.43 as of Sep 30, 2014, from $39.14 as of Dec 31, 2013. Excluding accumulated other comprehensive income (AOCIF), The Hartford’s book value increased slightly to $39.82 as of Sep 30, 2014 from $39.30 per share as of Dec 31, 2013.

Securities Update

In the reported quarter, The Hartford spent $845 million toward share buybacks, bringing the total repurchase to $1.5 billion as of Sep 30, 2014.

Capital Management Plans for 2014–15

The Hartford raised its 2014–15 capital management plans by $1.275 billion in Jul 2014, bringing the total to $3.931 billion. This $1.275 billion rise comprises a $775 million increase in the previous $2 billion share repurchase authorization (announced in Feb 2014), thereby making it $2.775 billion. As of Oct 24, 2014, the company deployed $1.6 billion for equity repurchases. The remaining $500 million of the $1.275 billion will be utilized for debt repayment.

Additionally, The Hartford’s board of directors declared a quarterly cash dividend of 18 cents per share on Oct 16, 2014. This dividend is payable on Jan 2, 2015, to shareholders of record as of Dec 1, 2014.

Our Take

The Hartford surpassed the Zacks Consensus Estimate and improved year over year as well mainly on improved P&C segment underwriting results driven by a decline in the number of catastrophic events. The third quarter of 2014 witnessed four catastrophes while the year-ago quarter had six such events that dampened the results at the time. In fact, this helped the company to report catastrophe losses at a much lower level than the value guided in the last quarter.

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 Hartford upped its capital management plans for 2014–15 in Jul 2014, thanks to closure of the sale of the Japan annuity company, Hartford Life Insurance K.K. (:HLIKK) to one of the subsidiaries of ORIX Corporation (IX). We expect such capital deployment activities of the company to raise investors’ confidence in the stock.

Zacks Rank

The Hartford currently carries a Zacks Rank #2 (Buy). Among stocks in the insurance space, American International Group, Inc. (AIG) and Kemper Corporation (KMPR) have the same Zacks Rank as The Hartford and are worth considering.

Read the Full Research Report on AIG
Read the Full Research Report on HIG
Read the Full Research Report on IX
Read the Full Research Report on KMPR


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