The Hartford Financial Services Group (NYSE:HIG) is looking to focus on property and casualty insurance following the divestiture of its individual life insurance and retirement solutions businesses in 2012. The P&C division accounted for nearly 70% of the company’s operational revenue (excluding the divested businesses grouped as Talcott Resolution in its 10-K filing) last year. Hartford is currently the eleventh largest property and casualty insurer in the U.S. with a market share of 2.05% and will be looking to expand its business in the coming years. 
Hartford’s P&C business can be divided into two sub-divisions: the commercial division, which offers insurance solutions to companies, and the consumer division, which offers homeowner’s and personal automobile insurance to individuals. The commercial division accounts for close to two-thirds of the premiums earned by the P&C division and is the main focus of our discussion in this article. To know more about the performance and outlook for the consumer division, refer to our articles: A Closer Look At Hartford’s Homeowners Insurance Business and A Closer Look At Hartford’s Automobile Insurance Business.
Our $24 price estimate for Hartford’s stock implies a discount of 10% to the current market price.
Workers’ Compensation Is The Key
The commercial property and casualty business includes insurance lines like workers’ compensation, commercial property, commercial automobile, package business, liability and fidelity and surety insurance. Workers’ compensation is the most important line of insurance for Hartford accounting for half of the commercial premiums earned by the company. Hartford is the third largest insurer in this domain in the U.S. with a market share over 6.5% behind Liberty Mutual Group and The Travelers Companies, Inc. (NYSE:TRV). 
The workers’ compensation line of product accounts for 10% of the total P&C premiums generated in the U.S. The product covers medical benefits, disability benefits, death benefits and vocational rehabilitation benefits. Countrywide premiums from the product line increased from $43.5 billion in 2010 to $46.53 billion in 2012.  We expect continued growth in the market with stimulus provided by the recovering job market.
The unemployment rate in the U.S. has recovered remarkably from the peak of 10.1% observed during the financial crisis in 2009 and reached a four-year low of 7.5% in April.  Employment in the manufacturing and construction sectors, which are closely linked with workers’ compensation has been strong. Manufacturing employment has increased by 4.3% since 2010 while jobs in the construction industry have increased by 5.4% since the start of 2011. 
The rate increases by property and casualty insurers are also likely to drive growth in the market. Investment income is a big source of income for P&C insurers. ((ref:1)) Most companies invest in fixed maturity securities, the yield from which is influenced by interest rates. The current low interest rate environment will cut into the investment yield that insurers can earn. We expect insurance rates to increase across the industry as companies look for profits from underwriting to compensate for a decline in investment income. This will allow the market to reach $53 billion in premiums by the end of the decade.
Hartford earns around $3 billion in premiums from workers’ compensation. Its market share has increased steadily over the last few years from 5.5% in 2010 to over 6.5% in 2012. Hartford primarily focuses on small to medium sized businesses, with an annual payroll under $5 billion and revenue and property values under $15 billion using a distribution network of brokers and independent agents across the U.S. The $2.2 billion net capital gain that the company realized from the sale of its non-core business last year will help finance expansion in the business at a time when other companies are likely to adopt a more conservative approach in the face of low returns from investments. We expect Hartford’s market share to approach 7% by the end of our forecast period, leading to earned premiums of around $3.7 billion by 2019.
Automobiles Will Also Help
Commercial automobile insurance is also a big business for Hartford, accounting for 10% of the premiums earned by the commercial P&C division. Hartford is the eighth largest insurer in this domain in the U.S. with a market share of just under 2.5%, which it has maintained over the last three years.
Commercial automobile premiums account for 5% of the P&C premiums in the U.S. Total premium volume from this line of insurance increased from $24.3 billion in 2010 to $24.6 billion in 2012.  The market is expected to grow in the coming years with a recovery in the U.S. economy. Commercial vehicle sales have grown by a high rate of 10% in the last three years, following the 35% plunge from 2007 to 2009.  Increased vehicle sales will lead to an increase in demand for insurance driving growth in the market. Low yields from investments in bonds will also force insurers to hike premium rates, leading to an increase in premium volume. We expect total commercial automobile premiums in the U.S. to reach $30 billion by 2019. If Hartford is able to maintain its market share through this period, it can earn around $750 million in premiums from the commercial automobile line of insurance.
We are currently updating our model for Hartford to include separate forecasts for the aforementioned lines of insurance. We currently show a forecast for total P&C premiums earned by the company. You can modify the interactive chart below to gauge the effect a change in forecast will have on our price estimate.Notes:
- National Association of Insurance Commissioners (NAIC) [↩] [↩] [↩] [↩]
- U.S. Department of Labor, Labor Force Statistics from the Current Population Survey [↩]
- Overview and Outlook for the Workers Comp Market: Growth, Performance and the Economic Environment, Insurance Information Institute [↩]
- Auto & Truck Sales – Bureau of Economic Analysis [↩]