Hartford Q4 Earnings Might Be Drained By Tax Act & Cat Loss

The Hartford Financial ServicesGroup, Inc. (NYSE:HIG) recently estimated the impact of the recent U.S. corporate tax law and catastrophe losses on the financial results of fourth-quarter 2017, to be reported after the market closes on Feb 8, 2018.

The company expects the results to witness a reduction of nearly $850 million due to the impact of tax cut and a decline of $117 million (after tax) owing to catastrophe losses.

Tax-Cut Impact

President Donald Trump signed the "Tax Cuts and Jobs Act" into law on Dec 22, 2017, as a result of which, statutory tax rate slashed from 35% to 21% effective January 2018. Notably, this drop in business tax will likely be conducive to economic growth. However, insurers might have to endure some short-term pains before enjoying the benefits.

Hartford expects this rate cut to affect its net deferred tax asset position based on its current accounting guidance and net deferred tax assets at the end of first nine months of 2017. This is also likely to hit its risk-based capitalization levels.

Despite anticipating a reduction in the net deferred tax asset position, Hartford expects a net favorable future economic impact from both the lower corporate income tax rate and the repeal and refunding of the corporate alternative minimum tax credits.

Although the near-term impact of this tax cut on insurers like The Hartford, Renaissance Holdings Ltd (NYSE:RNR) , CNO Financial Group, Inc (NYSE:CNO) , MetLife Inc. (NYSE:MET) and many more is not all positive, the long-term effects would definitely be more attractive. A lower tax rate would favor the bottom line and aid margins directly. Apart from boosting margins, the tax-rate reduction will also make U.S. insurers more competitive globally.

In addition, the tax reform, which includes lower domestic tax rates on repatriation of income stashed offshore, will well serve foreign insurers that moved abroad the profit generated in the United States to avoid tax.

Impact From Catastrophe Losses

Being a property and casualty insurer, Hartford is substantially exposed to catastrophic events, which weigh on its underwriting results. In 2016, catastrophe losses of $416 million had increased 25% year over year largely due to higher losses from wind and hail events. Again for the first nine months of 2017, catastrophe losses totaled $657 million, up 85% year over year.

For the fourth quarter of 2017, the company expects to incur catastrophe losses of $117 million (after tax), primarily in the Personal Lines segment and from wildfires in California.

Share Price Performance

Shares of Hartford have gained 13.1% in a year’s time, outperforming the industry’s rally of 10.6%.

Zacks Rank and Stocks to Consider

Hartford carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Zacks’ Best Private Investment Ideas

While we are happy to share many articles like this on the website, our best recommendations and most in-depth research are not available to the public.

Starting today, for the next month, you can follow all Zacks' private buys and sells in real time. Our experts cover all kinds of trades… from value to momentum . . . from stocks under $10 to ETF and option moves . . . from stocks that corporate insiders are buying up to companies that are about to report positive earnings surprises. You can even look inside exclusive portfolios that are normally closed to new investors.

Click here for Zacks' private trades >>