(HIG) Hartford Financial Services Group Refunds Premiums – Cuts Rate

Hartford Financial Services Group Inc. (HIG) has agreed to refund premiums worth $24 million to its accidental death and dismemberment policyholders in New York, according to Reuters. The refund pertains to the minimum medical loss ratio (MLR) provision of the Patient Protection and Affordable Care Act.

The New York Department of Financial Services said that the company reached a settlement with the state regulators after failing to meet the minimum MLR requirement. MLR is the ratio of total loss incurred in claims plus adjustment expenses to total premium earned.

The Patient Protection and Affordable Care Act requires insurance companies to spend a minimum stipulated percentage of premiums earned on payment of claims. In case the insurer fails to do so, it is required to refund the difference between the actual claims paid and the minimum requirement.

Hartford is required to maintain a 60% MLR, but the company misjudged the amount required for its claims. Hence, it was unable to reach the threshold and, eventually, now has to end up refunding the premium. Consequently, 300,000 policyholders in New York who are covered by the company’s accidental death and dismemberment policies, will receive premium refunds from the company.

Additionally, Hartford will also cut its premium rates by 45% for both existing and new policyholders. Moreover, the existing policyholders will receive a 35% discount on their premiums for the next three years. This implies that the current policyholders will have to pay an annual premium of about $35 only, over the next three years.

The premium refund will not materially affect the company’s financial position, as it had a cash balance of $2.58 billion at the end of 2011. Moreover, the reduced premium rates are expected to boost Hartford’s membership significantly in the upcoming years. However, the decline in premium revenues due to the rate cut and discount is expected to substantially reduce the company’s earnings in the next few years.

Hartford, which competes with insurance companies like American International Group (AIG) and MetLife Inc. (MET), is one of the largest multi-line insurance and investment companies in the U.S. Currently, the shares of the company carry a Zacks #3 Rank (short-term Hold rating). Considering the fundamentals, we maintain a long-term Neutral recommendation on Hartford.

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