Hartford’s Earings Preview: Property And Casualty The Focus After Divestiture

by Trefis Team
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The Hartford Financial Services Group (NYSE:HIG) is expected to announce earnings for the fourth quarter of 2012 Tuesday, February 5. The insurance company divested its non-core operations including its individual life insurance business, retirement plans business and its broker-dealer business, Woodbury Financial Services in 2012, and expects a realized capital loss in the fourth quarter due to these transactions. As most of the transactions closed in January 2013, Hartford will eventually realize a $2.2 billion net statutory gain. [1]

Having disposed of non-core businesses, Hartford will have to rely on its property and casualty (P&C) insurance operations to generate income. We will keep a close eye on the progress made by the division, which accounted for half of the company’s revenues in 2011.

Our $22 price estimate for Hartford’s stock is 10% below the current market price.

See our full analysis of Hartford Financial here

Divestiture

Hartford completed the sale of its broker-dealer business, Woodbury Financial Services, to AIG (NYSE:AIG) in December 2012. The insurer has also sold its life insurance business to Prudential Financial (NYSE:PRU), its retirement plans business to Massachusetts Mutual Life Insurance Company (MassMutual) and its individual annuity new business capabilities to Forethought Financial Group, Inc. 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 it maintained to support the businesses and an $800 million reduction in required risk-based capital.

Property And Casualty

We expect Hartford to invest its available capital to boost its property and casualty business. The division accounted for half of the company’s revenues in 2011 and a quarter of the EBIT. The fourth quarter top line will be affected by the claims incurred due to the devastation caused by 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 in 2011 were $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 figure for 2011.

Hartford faces stiff competition in the U.S. P&C market from companies like AIG and The Travelers Companies, Inc. (NYSE:TRV). There are approximately 2,462 total P&C companies in the U.S. Although Hartford reported a 2% increase in its premium income in 2011, it was outpaced by growth in the market, resulting in a loss of market share. However, with increased focus on the P&C division, we expect Hartford to consolidate its market share in the next few years with long term expansion in the years to come. The fourth quarter earnings and the income for the fiscal year will help us gauge the progress made by the division.

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Notes:
  1. Hartford Financial Services Group Inc : The Hartford Completes Execution Milestone; Closes On Planned Business Sales, 4-traders, January 2, 2013 []
  2. Hartford’s Sandy Losses May Hit $350 Million – CEO, 4 Traders, 5th December, 2012 []
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