Hartford, CT – The Hartford (NYSE:HIG) reported core earnings of $364 million for the three months ended Sept. 30, 2015 (third quarter 2015), a 24% or $113 million decrease from core earnings of $477 million in third quarter 2014. The decrease from third quarter 2014 was principally due to several items, including a $60 million, after-tax, decrease in investment income, largely due to lower returns on limited partnerships and other alternative investments (LPs), a $31 million, after-tax, increase in unfavorable prior year loss and loss adjustment expense reserve development (PYD), and a $23 million, after-tax, increase in catastrophe losses.
“While The Hartford delivered strong underlying performance in Commercial Lines and Group Benefits, our results this quarter reflect headwinds in several areas, resulting in a decrease in core earnings,” said The Hartford’s Chairman and CEO Christopher Swift. “Lower net investment income, adverse prior year development in Commercial Lines and higher catastrophes and loss costs in Personal Lines were the primary contributors to the decrease from third quarter 2014.”
*Denotes financial measure not calculated in accordance with generally accepted accounting principles (non-GAAP).
The Hartford’s President Doug Elliot noted, “Current accident year Commercial Lines results were strong this quarter with a 1.0 point improvement in the combined ratio versus last year, and Group Benefits achieved higher core earnings and a margin of 5.5%. However, Personal Lines results were down due to catastrophes that were lower than our expectations but higher than third quarter 2014, as well as increased homeowners losses and higher marketing expenses. We also experienced a slight increase in quarterly auto frequency trends, although year-to-date trends remain moderate.”
Swift concluded, “Despite the challenges this quarter, I’m pleased with several achievements, including increasing 12 month core earnings return on equity to 9.1%, growing book value per share by 8%, and increasing core earnings per diluted share for the first nine months of 2015 by 17%. We remain focused on executing our strategy and will continue to adapt while maintaining our underwriting discipline in the evolving environment, including more competitive market conditions.”
Third quarter 2015 core earnings per diluted share declined 19% to $0.86 compared with $1.06 in third quarter 2014, including the effect of the 6% decrease in the company’s weighted average diluted common shares outstanding over the past 12 months due to the equity repurchase program.
Third quarter 2015 net income totaled $381 million, down 2% from net income of $388 million in third quarter 2014, as the core earnings reduction was largely offset by a lower unlock charge of $33 million, after-tax, compared with $102 million, after-tax, in third quarter 2014. In addition, third quarter 2015 net income included a $60 million third quarter 2015 income tax benefit in Corporate, although that was offset by net realized capital losses of $30 million, after-tax and deferred acquisition costs (DAC), compared with net realized capital gains of $27 million, after-tax and DAC, in third quarter 2014.
Third quarter 2015 net income per diluted share was $0.90, an increase of 5% compared with net income of $0.86 per diluted share in third quarter 2014, as the 2% decrease in net income was more than offset by the benefit of the company’s equity repurchase program on net income per diluted share.
Third Quarter 2015 Highlights:
- Core earnings decreased 19% over third quarter 2014 primarily due to unfavorable PYD and lower net investment income
- Combined ratio before catastrophes and PYD of 91.0 improved 1.0 point over third quarter 2014
- Standard Commercial renewal written pricing increases averaged 2%
Third quarter 2015 core earnings in Commercial Lines decreased $52 million, after-tax, or 19%, to $216 million, after-tax, compared with third quarter 2014 largely due to a $33 million, after-tax, decrease in net investment income and a $36 million, after-tax, increase in unfavorable PYD, which was partially offset by improved current accident year underwriting results. Net investment income, before tax, of $208 million declined by $42 million, or 17%, compared with third quarter 2014 as investment income on LPs decreased by $42 million. Unfavorable PYD in third quarter 2015 was primarily in the commercial auto liability line as a result of increased claims severity predominantly in the 2010 to 2013 accident years.
Commercial Lines underwriting gain was $90 million, before tax, in third quarter 2015 for a 94.5 combined ratio compared with a third quarter 2014 underwriting gain of $124 million, before tax, for a 92.1 combined ratio. Excluding the impact of PYD on both periods, third quarter 2015 underwriting results improved by $21 million, before tax, due to improved current accident year results, including stable catastrophe losses compared with third quarter 2014.
Third quarter 2015 combined ratio before catastrophes and PYD improved 1.0 point over third quarter 2014 to 91.0, reflecting improvement in Small Commercial and Specialty Commercial, and a slight deterioration in Middle Market. The Small Commercial combined ratio before catastrophes and PYD of 86.8 improved 0.7 point compared with third quarter 2014, driven by margin improvement in workers’ compensation and lower non-catastrophe property losses. The Middle Market combined ratio before catastrophes and PYD increased 0.3 point to 93.8 compared with third quarter 2014 due to a large property loss and higher underwriting expenses, which were mostly offset by improved workers’ compensation and general liability underwriting results. Specialty Commercial combined ratio before catastrophes and PYD improved 6.0 points to 99.1 due to margin improvement in Financial Products and Bond.
Third quarter 2015 written premiums in Commercial Lines grew 4% over third quarter 2014 to $1,639 million, reflecting renewal written price increases and strong retention in Small Commercial and Middle Market, which together comprise about 86% of Commercial Lines written premiums. Third quarter 2015 renewal written price increases averaged 2% in Standard Commercial, resulting from a 3% increase in Small Commercial and a 1% increase in Middle Market, exclusive of specialty programs and livestock. Policy count retention remained strong in both businesses at 84% in Small Commercial and 81% in Middle Market, stable or slightly improved compared with second quarter 2015 and third quarter 2014.
The complete earnings release is available here: The Hartford Third Quarter 2015 Results