A Look At Hartford Financial’s Key Sources Of Value

Hartford Financial (NYSE: HIG), one of the leading property and casualty insurers in the U.S., operates four primary businesses – Commercial Lines, Personal Lines, Group Benefits, and Mutual Funds. Below, we delve into these businesses, their historical performances, and our expectations going forward.

• Commercial Lines, the largest segment, provides property and casualty insurance products and services to various industries across the world. The solutions include automobile insurance, workers’ compensation, property insurance, and general liability insurance solutions. In the U.S., this business is especially strong in the small commercial and middle market. The Spectrum policy, which combines both property and general liability coverage, has been doing well in the small commercial market. Commercial Lines contributes about 46% of Hartford’s revenue and saw 3.2% growth in 2017, on account of higher renewal written pricing, which provided a boost to the premiums generated per policy.
• Personal Lines encompasses property, automobile, and personal umbrella coverage to individuals and households in the U.S. Furthermore, the company provides an exclusive program for the members of AARP. 2017 was a relatively weak year for this business, as the number of in-force policies went down by 13.3% and 11.7% in the Automobile and Homeowners categories, respectively. Meanwhile, fee income and investment income experienced moderate growth. As a result, segment revenue declined by 4.8%.
• Group Benefits covers group life insurance, short-term and long-term group disability coverage, and other products such as retiree health insurance, critical illness, and hospital indemnity. Over the last few years, this segment has been the standout performer for the company. The 9.5% growth in 2017 was driven by higher retention rates. The top-line growth was further boosted by the acquisition of Aetna’s group life and disability business.
• Mutual Funds offer investment management and other related services to over 75 actively managed mutual funds, ETP traded on the NYSE, and life and annuity run-off business held for sale. The company’s smallest segment has been doing well over the past few years, with 2017 experiencing 13.5% revenue growth.

We have created an interactive dashboard analysis that shows Hartford Financial’s key revenue sources and the expected 2018 performance. You can adjust the revenue drivers to see the impact on the overall revenues, EPS, and price estimate.

Property & Casualty Business To Continue On Its Upward Trend

Commercial Lines has been a strong contributor to the company’s top line in the past few years, and we expect this trend to continue in the upcoming year. Workers’ compensation contributes about 48% to the segment’s earned premiums and has been performing well over the past few years. With the declining unemployment rate and improving economic conditions in the U.S., we expect another strong contribution from this business in 2018.  Furthermore, we expect the top line to be driven by growth in the Small Commercial, Middle Market, and Specialty Commercial business. Given that the company recently landed foremost renewal rights, we expect the segment to flourish further into the year. Meanwhile, the company has made progress on the technology front by expanding the functionalities of the ICON quoting platform, which should help the company gain traction among its customers. Underwriting improvements, optimal pricing strategies will likely drive growth in the Personal Lines sub-segment. Moreover, HIG has access to Aetna’s customer base to cross-sell its P&C products.

Acquisition Of Aetna’s Group Life And Disability Business To Boost Group Benefits

In 2017, Hartford executed two important deals that could shape the future of the company. It got rid of Talcott, a declining business, and acquired Aetna’s group life and disability business. The Aetna acquisition has made Hartford one of the biggest players in the Life and Disability business, and has deepened Hartford’s penetration in mid-size and large companies. With complete integration, we expect the company to realize the full potential of the deal in 2018, which will drive growth in earned premiums. Meanwhile, the deal includes a multi-year collaboration to sell Hartford’s life and disability products via Aetna’s medical sales team. This will deepen Hartford’s penetration in the market. Furthermore, Aetna’s expertise in the business should help the renewal retention rate.

We maintain our $61 price estimate for Hartford Financial, which is ahead of the current market price. Disagree? Detailed steps to arrive at Hartford’s price estimate are outlined in our interactive dashboard, and you can modify our assumptions to arrive at your own estimate for the company.

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