Hartford Financial Services Group (NYSE:HIG) is scheduled to report earnings for the first quarter of 2012 on Tuesday, April 30. Last year, the insurer sold off its life insurance business to Prudential Financial (NYSE:PRU), its retirement plans business to Massachusetts Mutual Life Insurance Company (MassMutual), its broker-dealer business Woodbury Financial Services to AIG (NYSE:AIG) and its Individual Annuity new business capabilities to Forethought Financial Group. The company’s operations now consist of property and casualty insurance, group benefits and mutual funds sold to retail accounts.
We expect the company to focus on property and casualty insurance, which accounted for nearly 70% of its earned premiums in 2012 and nearly 80% of its net income. Our $24 price estimate for Hartford's stock is in line with the current market price.
P&C Is the Key
In terms to direct premiums earned, Hartford was the 11th highest property and casualty insurer in the U.S. in 2012, with a market share of 2%. The company’s products can broadly be divided into two categories: commercial markets and consumer markets. The commercial operation provides workers’ compensation, property, automobile, liability and umbrella coverage to small and middle market businesses across the U.S. while the consumer market operations cater to individuals, providing automobile and home insurance. In terms of revenues, the commercial branch accounts for nearly two-thirds of the premiums and fees earned by the property and casualty division.
Workers’ compensation is Hartford’s main line of insurance on the commercial side. This line accounts for nearly half of the $6 billion premiums and fees earned by the commercial insurance branch. Hartford was the third largest insurer in this line in 2012, behind Liberty Mutual and The Travelers Companies, Inc. (NYSE:TRV). The company had a market share of 6.87% of the $46.5 billion market.
On the consumer side, Hartford has an exclusive licensing agreement with the American Association of Retired Persons (AARP), in place through Jan. 1, 2020. The agreement allows Hartford to market automobile and homeowners’ insurance directly to 37 million members enrolled in AARP. The AARP agreement has led to earned premiums of $2.8 billion through the last three years, 77% of the consumer division’s $3.6 billion net premiums. Hartford is also working on affinity agreements with the American Kennel Club, Sierra Club, the National Wildlife Federation and Direct Selling Association.
Hartford has around 2.02 million automobile policies in force with average monthly premiums per policy around $105. In homeowners’ insurance, the company has around 1.32 million policies in force with average monthly premiums per policy around $70. With increased focus following the divestiture of non-core businesses last year, we expect an increase in Hartford’s share of the P&C market in the coming years. (For more, please read these articles: "A Closer Look At Hartford's Homeowners Insurance Business" and "A Closer Look At Hartford's Automobile Insurance Business.")
Profitability is an issue for Hartford, the company has reported a combined ratio (expenses to premiums) of 110% for the last two years, indicating a very high cost of float. It must be noted that Hartford, like most other P&C insurers in the U.S., faced increased claims in the last two years due to catastrophes like Hurricane Irene and Storm Sandy. We expect the company to maintain underwriting discipline and earn profits, but will keep a close eye on the underwriting performance this year and update our model accordingly.
Disclosure: No positions.