Will Hartford Turn To M&A For Growth?
Since June, The Hartford Financial Services Group’s (NYSE:HIG) stock has rallied, touching a lifetime high in August before slipping somewhat. The rise has been in tandem with the property and casualty (P&C) insurance industry in the U.S. at large, as most P&C insurers saw surges in August as well. This was mainly due to frenzied activity in the insurance space, with large scale M&A deals being finalized, especially in the P&C space. In this article we take a look at the benefits that could lead Hartford to make an acquisition and strengthen its position in the P&C space.
We have a price estimate of $44 for Hartford which is slightly lower than the current market price.
See our full analysis of Hartford Financial here
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What’s In It For Hartford?
Hartford is the twelfth largest property and casualty insurer in the U.S., with a market share of 1.92%. [1] Having completed the divestiture of its life insurance and retirement solutions businesses, the company has focused its resources on the P&C business, along with group insurance and mutual funds. However, Hartford has also faced some difficulty with respect to business growth. One key metric for the company is its operating margins, which have taken a hit across business segments. Most prominently, margins in the Workers’ Compensation line of business (one of the biggest drivers for Hartford) fell from over 23% in 2010 to around 20% in 2014. There are multiple reasons behind the drop, most prominently catastrophe-related losses and suppressed investment income due to low interest rates. This is where an acquisition could come in, as a successful acquisition and integration could allow the company to improve its operating efficiency and improve its scale.
Improve Operating Efficiency
One of the biggest advantages Hartford would gain with a prospective buyout or merger is to improve operating efficiency. For example, Hartford’s expenses – including general, administrative and other expenses, excluding benefits and claims – were about $4 billion in 2014 compared to annual revenue of about $15.7 billion. [2] In comparison, Travelers saw expenses of around $3.9 billion on annual revenues of $27 billion. [3] This indicates that Hartford has substantial scope to increase its efficiency in terms of expenses. Making an acquisition would allow the company to increase its revenue, while cutting out duplicative costs, thereby expanding its margins.
Expand Market Share
Given the level of competition in the market, organic growth is becoming more difficult to come by. Accordingly, making an acquisition could make sense for the company in terms of expanding its share of the P&C market in the U.S. (or other markets) without compromising on underwriting discipline. The recent acquisition of Chubb by Ace Group displays similar benefits for the companies involved. The deal is expected to lead to annual cost savings of about $650 million by 2018, in addition to improving distribution efficiency. [4]
Product Differentiation
Additionally, Hartford could seek a potential acquisition that would differentiate its existing product lineup or even add a new specialization, particularly in the P&C division. We will be keeping a close eye on the latest developments in the U.S. P&C insurance space and also on Hartford’s strategy to foster business growth going forward.
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