On Sep 26, 2014, we issued an updated research report on The Hartford Financial Services Group, Inc. (HIG). We believe that the company’s divestitures, capital management endeavors and strong auto and home product lines position it to generate long-term growth. However, a weak investment portfolio, exposure to catastrophe losses and sluggishness in the Talcott Resolution segment are concerns.
Earlier, The Hartford reported second-quarter 2014 results that missed the Zacks Consensus Estimate and declined year over year as well. An increase in prior-year loss and loss adjustment expense reserve development (PYD) for asbestos and environmental (A&E) mainly dragged the results.
The Hartford has been vending non-core businesses to concentrate on its U.S. operations and enhance operating leverage. Apart from lowering expenses, boosting profitability and improving returns to shareholders, these divestitures are also enhancing financial flexibility by freeing up more capital. The company divested its Japan annuity company, Hartford Life Insurance K.K. (HLIKK) in Jul 2014 that is expected to generate pro-forma capital benefit of about $1.4 billion, of which $1 billion will be deployed for undertaking increased capital management.
Following the industry trend, The Hartford has stabilized significantly, since mid-2010, with improved earnings performance, positive credit trends and strengthened capital and liquidity position. The company also scores strongly with credit rating agencies.
The Hartford’s capital appreciation, repayment of government funds and measures to de-risk its balance sheet have increased its financial strength. The company has been increasing its share repurchase authorizations and dividends from time to time, reflecting its focus to enhance shareholders’ return. The latest increase in both buyback authorization and quarterly dividends was in the month of July. The Hartford also raised its 2014–15 capital management plan in Jul 2014 by $1.275 billion.
After witnessing weakness in its auto and home product lines for some years, The Hartford has recorded improvement in new business premiums over the last two years. In particular, states like Florida, Illinois and Arizona reflected considerable improvements.
On the flip side, The Hartford’s substantial exposure to catastrophe losses is a concern. Catastrophe losses also increased in the first half of 2014 mainly due to the winter storms and unfavorable weather conditions across various regions in the U.S. Moreover, net investment income of The Hartford varies significantly with changes in market conditions, thereby affecting the net income to a great extent. Net income also declined in the first half of 2014 due to a fall in income from fixed maturities and limited partnerships.
Moreover, the Talcott Resolution segment has been a drag for quite some time owing to lowered earnings from divested businesses and continued run-off of the annuity block. Given the soft performance of the U.S. VA business, we do not expect any long-term trend reversal. Further, the challenging regulatory environment and adverse effects of the Patient Protection and Affordable Care Act are likely to increase expenses, which would weigh on the company’s financials.
Other stocks in the same sector that are faring well at current levels include American International Group, Inc. (AIG), MGIC Investment Corp. (MTG) and Radian Group Inc. (RDN).
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