A Look At Hartford’s Revised Model and $44 Price Estimate

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HIG: Hartford Financial Services Group logo
HIG
Hartford Financial Services Group

Hartford Financial Services Group (NYSE: HIG) is one of the largest providers of property and casualty insurance to individual and business customers in the U.S. Of late, the company has seen a shift in its business strategy with the objective of growing its property and casualty, group life insurance and mutual fund businesses. As part of the strategy, the company trimmed many of its non-core businesses. In 2012, the company sold off its retirement plans business to MassMutual, and in 2013 the individual life insurance business was sold to Prudential (NYSE:PRU). In 2014, the company completed the sale of its Japanese annuity subsidiary, Hartford Life Insurance K.K. (HLIKK), for $963 million. [1]

We have incorporated the changes made by Hartford to its business and financial reporting structure in our valuation model of the company. Below we discuss the new structure of Hartford’s model and our outlook for the company.

Valuing the company at nearly $19 billion, we have a price estimate of $44 for Hartford’s stock. This is slightly higher than the current market price.

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See our full analysis of Hartford here

Hartford’s Three Divisions

To better understand the most important drivers contributing to Hartford’s stock price, our model includes the following three divisions:

a.) Property and Casualty Insurance – Constitutes around 85% of the price estimate.
b.) Group Life Insurance – Constitutes about 13% of the valuation.
c.) Mutual Funds & Corporate – Constitutes nearly 2% of the price estimate.

Increased Focus on Property and Casualty (P&C) Insurance

Following the divestiture of non-core business lines, Hartford’s management has realigned its strategy to focus on strengthening the company’s property and casualty insurance business in the U.S. [2] Hartford holds about 2% of the total property and casualty insurance market in the U.S. in terms of premiums earned. [3] In our model, we have further broken down the P&C division to account for the different products offered by Hartford.

  • Commercial P&C: Includes insurance products such as workers’ compensation, commercial automobile and other commercial insurance offerings (includes fidelity, general liability and property) for businesses and corporations. In 2013, commercial P&C premiums were just over $6 billion, nearly two-thirds of the premiums for the P&C division. During the first nine months of 2014, the commercial P&C segment generated revenues of about $4.7 billion. [4] Hartford is the third largest player in the worker’s compensation line of business, with about a 6.5% market share in the U.S. in terms of premiums earned. [3]

 

  • Consumer P&C: Includes homeowners and personal automobile insurance products. Consumer P&C accounted for about one-third of Hartford’s total P&C premiums at over $3.6 billion in 2013, while in 2014 during the first nine months the revenues increased to over $2.8 billion from $2.7 billion in 2013. Hartford has a partnership with the American Association of Retired Persons (AARP), whereby it is able to offer consumer insurance products directly to nearly 37 million AARP members.

  • Investment Income From P&C: Hartford invests the premiums its earns from P&C products in assets such as government and corporate bonds, equities and other products. Returns on investments are crucial for insurance companies, as the income generated allows them to pay for claims and other expenses. We have included a key driver – investment income as a percentage of commercial reserves – to better link the income generated from investments to the reserves the company is required to maintain under regulatory requirements in order to meet the payments of benefits and claims.

Group Benefits Is Also A Priority

Servicing a customer base of corporations and businesses of various sizes, Hartford is one of the largest group life insurance providers in the highly competitive U.S. market. [5] Hartford held around 10% share of the U.S. market in terms of premiums earned in 2013. The company offers group life, disability and accidental coverage and certain other services to employers and other groups.

The company also earns income from investing premiums earned within this division.

Mutual Funds And Corporate

The company had total Assets Under Management (AUM) – including retail, retirement and annuity mutual funds assets – of about $97 billion as of September 30, 2014. The major source of revenue for the division is fees charged, which are calculated as a percentage of AUM.

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Notes:
  1. The Hartford Completes Sale Of Japan Annuity Company To ORIX Life Insurance Corporation, Hartford Press Release []
  2. SEC 10K filing []
  3. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2013 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [] []
  4. SEC 10-Q Filing October 2014 []
  5. American Council of Life Insurers 2013 Fact Book []