How Will Hartford Build On Its Property And Casualty Insurance Business?

Having sold its retirement and individual life insurance businesses last year, The Hartford Financial Services Group (NYSE:HIG) is looking to realign its operations to generate higher returns on equity. Following the sale of its life insurance business to Prudential Financial (NYSE:PRU), its retirement plans business to Massachusetts Mutual Life Insurance Company (MassMutual), its broker-dealer business Woodbury Financial Services to AIG (NYSE:AIG) and its individual annuity new business capabilities to Forethought Financial Group, the insurance company’s operations now consist of property and casualty insurance, group benefits and mutual funds sold to retail accounts.

We believe that the property and casualty business will be the main driver for the stock in the coming years. Excluding investment income, the P&C division accounted for around 70% of the revenues earned by the aforementioned business operations in 2012. Nearly 80% of the company’s net income, excluding corporate expenses came from the property and casualty operations.

Our $24 price estimate for Hartford’s stock is in line with the current market price.

See our full analysis of Hartford Financial here

What Is The Business And Where Does Hartford Stand?

The property and casualty operations can be divided into two categories: property and casualty commercial and consumer markets. Broadly, the commercial operation provides workers’ compensation, property, automobile, liability and umbrella coverage to small and middle market businesses across the U.S. while the consumer market operations cater to individuals, providing automobile and home insurance. The commercial branch accounts for nearly two-thirds of the premiums and fees earned by the property and casualty division.

In terms of the P&C market in the U.S., Hartford is currently the eleventh largest insurer in terms of direct premiums earned with a market share of 2%. ^[1] The company has been losing market share in the last four years, but with a renewed focus on the management’s part, we expect this slide to be arrested.

What Are Hartford’s Main Strengths?

To understand its strengths, we can look at both branches of the property and casualty division.

Commercial Insurance

In commercial insurance, Hartford’s main business comes from the workers’ compensation line of insurance. This line accounts for nearly half of the $6 billion premiums and fees earned by the commercial insurance branch. According to the National Association of Insurance Commissioners (NAIC), Hartford is currently the third largest insurer in the U.S. for workers’ compensation behind Liberty Mutual and The Travelers Companies, Inc. (NYSE:TRV). The company has a market share of 6.87% of the total $46.5 billion market. The workers’ compensation market is mainly dominated by six players that include AIG (NYSE:AIG), Zurich Insurance Group and the State Insurance Fund, apart from the previously mentioned insurers. These six together account for 40% of the market while the cumulative share of the next 19 insurers is just 30%.

Hartford primarily focuses on small businesses with an annual payroll of under $5 million and revenue and property values under $15 million. It also focuses on medium sized business. These markets have been adversely affected by the economic downturn. Also, various state legislative reforms have regulated workers compensation indemnity costs leading to rate reductions.

However, we expect growth in these markets as the economy recovers and the U.S. government encourages new businesses. Combined with strict underwriting discipline and competitive prices set by the company, we expect the workers’ compensation line of business to drive growth for the commercial markets segment of property and casualty insurance in the coming years.

Consumer Markets

Hartford’s exclusive licensing agreement with the American Association of Retired Persons (AARP) is the main driver for the consumer markets division. The agreement allows Hartford to market automobile and homeowners’ insurance directly to 37 million members enrolled in the AARP. Most of these members are from the “baby boomers” generation, just over the age of 50. The AARP agreement has led to earned premiums of $2.8 billion through the last three years, i.e. 77% of the consumer division’s $3.6 billion net premiums. The current agreement with AARP is in place until January 1, 2020, and will provide a stable source of income for the consumer markets division. The company also has affinity agreements with the American Kennel Club, Sierra Club, the National Wildlife Federation and Direct Selling Association.

What Is Hartford’s Weakness; How Can The Company Improve?

The premiums earned by the consumer markets division dropped from $3.9 billion in 2010 to $3.6 billion in 2012. This decline was largely due to a drop in the number of policies in force, from 3.6 million in 2010 to 3.3 million. This was more pronounced in 2011, while 2012 saw some signs of recovery. The number of automobile policies dropped from 2.2 million in 2010 to 2 million in 2011, and remained around the same in 2012. In the homeowners’ line, the drop was from 1.4 million to 1.3 million from 2010 to 2011, with the number remaining around 1.3 million in 2012.

These numbers indicate a slight turnaround on the company’s part, particularly if we consider that the policy retention has increased from 83% in 2010 to 85% in 2012 in the automobile line of insurance and from 85% to 86% in the homeowners’ line.

While the AARP agreement will ensure a stable income for Hartford, the future growth in revenues will have to be from an increase in the number of policies in force. A lot of this comes down to Hartford’s marketing and distribution. Following last years’ divestiture of non-core operations, we expect a marketing push from Hartford in the coming years, which might involve deals similar to the agreement with the AARP. We will keep a close eye on developments and will update our model accordingly.

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1. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩]