On Jan 5, 2015, we issued an updated research report on The Hartford Financial Services Group Inc. (HIG). We believe that the company’s core business strengthening capacities, efficient capital deployments and strong scores from credit rating agencies position it favorably for long-term growth.
The Hartford has been adept in divesting its non-core businesses. This has helped it focus more on its core operations thereby enhancing operating leverage.
Apart from lowering expenses, boosting profitability and improving returns to shareholders, these divestitures are enhancing financial flexibility by freeing up more capital. Notably, the latest divestiture of Hartford Life Insurance K.K. (HLIKK) has led to an income tax benefit of $241 million in the first nine months of 2014.
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. Over the long run, the stabilizing trend is expected to be maintained if the regulatory landscape becomes more lenient and credit quality improves, even if at a slower rate. The Hartford also scores strongly with the credit rating agencies.
The Hartford’s risk reduction measures and capital appreciations have increased the financial strength of the company considerably. This along with the sale of the Japan annuity business helped the company enhance its share repurchase program and raise its capital management plan for 2014–15.
Additionally, the board of directors of The Hartford increased its dividend by 20% in the last reported quarter. The company is now looking forward to more transactions that can increase the release of capital, thereby executing proficient capital management plans and enhancing shareholder value.
Moreover, The Hartford recorded improvement in new business premiums for the auto and home product lines over 2012, 2013 and also the first nine months of 2014. This contributed to the overall increase in premiums earned and written.
Earlier, the company reported strong third-quarter earnings, on the back of which it has been witnessing upward estimate revisions. Over the last 60 days, the Zacks Consensus Estimate for 2014 rose 1.8% to $3.32 a share as some estimates moved north. Over the same period, the Zacks Consensus Estimate for 2015 increased 0.3% to stand at $3.80 a share on upward estimate revisions. Rising estimates also reflect improved market confidence in the stock.
However, on the flip side, The Hartford is substantially exposed to catastrophic events. The winter storms and unfavorable weather conditions across various U.S. geographic regions resulted in increased catastrophe losses. Moreover, net investment income of The Hartford varies significantly with changes in market conditions, thereby affecting the net income to a great extent.
Additionally, 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. This segment incurred a loss in the first nine months of 2014. Given the soft performance of the U.S. VA business, we do not expect any long-term trend reversal. Moreover, The Hartford’s finances and operations are significantly impacted by the challenging regulatory environment which might lead to increased expenses going forward.
The Hartford currently sports a Zacks Rank #1 (Strong Buy). Other favorably-ranked stocks in the multiline insurance space include CNO Financial Group, Inc. (CNO), FBL Financial Group Inc. (FFG) and Ping An Insurance (Group) Company of China, Ltd. (PNGAY). All three have the same Zacks Rank as The Hartford.
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