The Hartford (HIG) competes with AIG (AIG) and MetLife (MET) in providing life and property & casualty insurance in the US and had a nearly 2.5% market share in the US property and casualty market in 2009.
We estimate that The Hartford’s property and casualty business in the US accounts for 37% of the $25.93 Trefis price estimate for The Hartford’s stock, which is about 7% above the current market price.
Below we look at potential upside and downside scenarios for The Hartford given shifts in two important components of its value – market share and operating margin.
(+10%) Upside – Gain in Market Share
The Hartford reaches diverse markets thorough multiple channels including direct sales to the consumers, brokers and independent agents. In addition to the multiple distribution channels, The Hartford has an exclusive licensing agreement to market property and casualty insurance with AARP (a non-profit social organization with more than 37 million members in the US).
This agreement will continue until January 2020 and provides The Hartford with an important competitive advantage as the retiring ‘baby-boomer’ demographic is expected to significantly boost AARP membership during this period.
We expect The Hartford’s share of the US property and casualty market to increase from 2.4% in 2010 to 2.6% in 2017. There could be an upside of 10% to the Trefis price estimate if The Hartford’s market share were to increase to about 3.5%.
(-12%) Downside – Fall in Operating Margin
In recent years, there has been substantial consolidation and convergence among companies in the insurance and financial services sector that has increased competition and put pressure on insurance companies to reduce pricing. The global economic slowdown in 2009 has only served to further reduce the pricing. As The Hartford struggles to grow its share in the US property and casualty market, it will find it difficult to maintain its operating margin when prices are falling.
We forecast The Hartford’s operating margin for the US property and casualty division to remain flat at 12.3% during the Trefis forecast period. There could be 12% downside to the Trefis price estimate is the margins decrease gradually, reaching 8% by the end of the Trefis forecast period.
Disclosure: No position