Looking At Hartford’s Non-Core Divestitures Through 2012

by Trefis Team
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The Hartford Financial Services Group (NYSE:HIG) had a very eventful 2012. During the earnings conference call in February, John Paulson, a big shareholder, suggested that the company might be able to generate greater returns by separating its life and property and casualty insurance businesses. The advice was based on the fact that Hartford was not performing as well as the insurance sectors in which it competed in 2011. P&C stocks increased by 14% and life insurance stocks by 21%. In contrast, Hartford’s stock was down 21%. A spin-off to two separate property & casualty and life insurance companies would make it easier to understand and benchmark against peers.

See our full analysis of Hartford Financial here

The company heeded the advice and spent most of the year working out deals to divest non-core operations and focus on its P&C business. This seems to have been a prudent move as nearly half of the company’s $22 billion revenues in 2011 were earned from the property and casualty division. Group life insurance accounted for 20% of the revenues with retirement products and investment income accounting for 15% each. Individual life insurance accounted for just 4% of revenues.

Looking at operating income with EBIT (around $1 billion total), there was about 10% contribution from the individual and group life insurance segments, with retirement products accounting for 20% and property and casualty 25%. The rest of its income was derived from investment income. Clearly it is the property and casualty business that is most valuable for Hartford, a fact demonstrated by our model. The company will do well to focus on this division in the coming years.

Divestitures

Moving on to the divestitures, in April Hartford announced its intention to sell its individual annuities new business capabilities to Forethought Financial Group. In July, the company reached an agreement with AIG (NYSE:AIG) to sell its broker-dealer business, Woodbury Financial Services. This deal closed in December. [1]

Management followed this up in September with the announcement that it would sell its retirement plans business to MassMutual for $400 million. (See our article, Hartford Trims Non-Core Businesses While Focusing On Property And Casualty, for more details)

On September 27th, Hartford announced that it will sell its individual life insurance business to Prudential Financial (NYSE:PRU) for a cash compensation of $615 million. (For more details see How Does Prudential’s Acquisition Of Hartford’s Life Insurance Business Affect Both Companies?)

The total benefit in terms of net statutory capital from all the transactions carried out so far is around $2.2 billion, including a $1.4 billion increase in freed up statutory surplus that Hartford maintained to support the businesses and an $800 million reduction in required risk-based capital. We believe that this money will be used to drive growth in the property and casualty business.

Property And Casualty Going Forward

Hartford saw a decline in its share of the U.S. property and casualty market in the last four years, falling from 2.23% in 2008 to 2.02% at the end of 2011. However, since management now has only the P&C and group insurance divisions to focus on, along with the cash from the divestitures at its disposal to help distribution and marketing, we expect the company to regain lost ground within the next three years.

But property and casualty insurance is a very tricky business and is subject to Mother Nature’s fury. In 2011, the division was hit hard by natural catastrophes like Hurricane Irene and Tropical Storm Lee. The division’s operating margin fell from 13% in 2010 to 2% in 2011 as a result of these disasters despite the company’s reinsurance policies. The division recovered well in the first nine months of 2012 but the top line will be affected in the fourth quarter by the impact of Superstorm Sandy.

The company expects claim costs of $350 million from the storm. [2] The property and casualty division reported $371 million in catastrophe related losses in the first nine months of 2012. The total catastrophe related losses last year $745 million, primarily due to Hurricane Irene and Tropical Storm Lee.  Given the estimates provided by the management for Sandy, we expect margins to remain around the 2011 figure.

Our current forecast shows a long-term recovery in margins but it is the based on the assumption that there will be no major natural disasters like Hurricane Irene or Superstorm Sandy in the coming years. You can modify the interactive chart below to gauge the effect a change in forecast would have on our price estimate.

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Notes:
  1. Hartford Financial Services Group Inc : The Hartford Completes Sale of Woodbury Financial Services to AIG, 4 Traders, 3 December, 2012 []
  2. Hartford’s Sandy Losses May Hit $350 Million – CEO, 4 Traders, 5th December, 2012 []
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