With operating earnings of $1.18 per share reported for the first quarter of 2014, Hartford Financial Services Group Inc. (HIG) has successfully managed to keep its positive surprise streak alive. Earnings outperformed the Zacks Consensus Estimate and the yearago number by 27%. The quarter marked the third straight quarter of positive earnings surprises
Growth in core earnings across Property & Casualty, Group Benefits and Mutual Funds business, and share repurchases over the last one year mainly drove Hartford Financial’s earnings.
Including net realized capital losses and post-tax deferred acquisition costs, Hartford Financial reported a net income of $1.03 per share that rebounded from a loss of 58 cents per share in the year-ago quarter.
Total revenue of Hartford Financial stood at $4.5 billion, down 51% year over year. However, the figure breezed past the Zacks Consensus Estimate of $2.8 billion.
Property & Casualty (P&C): This segment generated core earnings of $386 million, up 21% year over year, mainly driven by improved underwriting results. P&C reported net income of $363 million in the reported quarter, higher than $351 million in the year-ago period.
P&C written premiums increased 3% from the year-ago quarter to $2.6 billion on the back of growth in both P&C Commercial Market and Consumer Markets. Meanwhile, combined ratio improved to 89.8 from 93.6 in the year-ago quarter. Combined ratio, excluding catastrophes and prior-year development (:PYD), improved to 87.9 from 91.8 in the prior-year quarter, owing to better results in P&C Commercial and Consumer Markets.
Investment income stood at $326 million, up 4% year over year, while underwriting gain increased 64% to $253 million. This segment reported catastrophe loss of $86 million in the reported quarter, substantially higher than $32 million in the year-ago quarter. However, catastrophe losses were almost in line with the company’s guided figure of $87 million. Although catastrophe losses were high during the quarter, this did not undermine the improvement in underwriting gain. This was because of an improvement in current accident year results and favorable PYD.
Group Benefits: This segment of Hartford Financial generated core earnings of $45 million in the reported quarter, up 50% year over year owing to improved results in the group long-term disability business. Net income came in at $51 million, increasing 21% from $42 million in the prior-year quarter, driven by higher core earnings, partly mitigated by a decline in realized capital gains.
Group Benefits’ fully insured premiums declined 4% to $776 million as per expectations, on account of actions taken by management regarding the Association-Financial Institutions block of business. Meanwhile, loss ratio improved 290 basis points year over year to 74.5%, mainly attributable to better group long-term disability results.
Mutual Funds: Core earnings at Hartford Financial’s Mutual Funds segment increased 5% year over year to $21 million. Net income in the quarter increased 17% year over year to $21 million. Growth in net flows and higher equity capital market levels drove average assets under management (AUM.TO). As a result, revenues increased leading to growth in earnings. AUM stood at $98.3 billion as of March 31, 2014, up 6% from $92.4 billion as of March 31, 2013. Improvement in Mutual Fund assets mainly contributed to the upside. However, this was partially negated by a decline in Annuity assets, reflecting the divestiture of its Variable Annuity business.
Talcott Resolution: Core earnings at Talcott Resolution came in at $175 million, up 8% year over year, primarily driven by an increase in limited partnerships and other alternative investment income, decline in expenses associated with the Enhanced Surrender Value (ESV) and lower DAC amortization expenses. The improvement was partially offset by a decline in fee income that stemmed from the surrender activities related to the VA block over the last one year. The segment reported net income of $145 million that compared favorably with the year-ago net loss of $294 million.
Corporate: Hartford Financial’s Corporate segment recorded core loss of $63 million, narrower than the year-ago quarter’s loss of $73 million. This improvement was driven by a decline in interest expense resulting from the repayments of debt in 2013. The segment’s net loss was reported at $85 million, narrower than $358 million in the year-ago quarter.
Hartford Financial's total invested assets, excluding trading securities, were $79.7 billion as on March 31, 2014, compared with $78.7 billion as on Dec 31, 2013. This improvement was driven by a decline in market interest rates and credit spread tightening. Net investment income of Hartford Financial, excluding trading securities, in the reported quarter was $836 million, down 2% year over year.
Hartford Financial’s shareholder equity stood at $19.8 billion as of March 31, 2014, up 5% from $18.9 billion as of Dec 31, 2013. Book value per share increased to $41.56 as of March 31, 2014, from $39.14 as of Dec 31, 2013. Excluding accumulated other comprehensive income (AOCIF), Hartford Financial’s book value increased 2% to $40.17 as of March 31, 2014 from $39.30 per share as of Dec 31, 2013.
During the quarter, Hartford Financial spent $300 million to repurchase 8.8 million shares. Moreover, since April 1, 2014, the company deployed another $300 million toward share repurchases. This aggregates to shares worth $600 million that were repurchased through April 23, 2014 under its $2 billion authorization approved on Feb 24, 2014. The current authorization is scheduled to expire on Dec 31, 2015.
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 capital deployment strategies. The company has been particularly enthusiastic regarding its share repurchases in the last quarter which boosted earnings. This trend has been maintained and is expected to continue for the rest of the year.
Moreover, Hartford Financial has entered into an agreement to vend its Japan annuity company, Hartford Life Insurance K.K. (:HLIKK) to one of the subsidiaries of ORIX Corporation (IX). This deal, valued at $895 million, is expected to generate proforma capital benefits of $1.4 billion, inclusive of net sales worth $860 million and an estimated $540 million decline in capital needed by the U.S. life insurance subsidiaries. The transaction is scheduled to culminate by July 2014 and is pending regulatory approval. This divestiture reflects Hartford Financial’s efforts toward reducing market risks, countering net income volatility and enhancing financial flexibility.