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Tom Armistead
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I'm a well-informed retail investor and post on SA in order to expose my thought process to critical examination and comment from readers. It makes me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that encouraged me to... More
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Tom Armistead's Instablog
  • Hartford Financial: Sale Of Retirement Plan Business Liberates Capital 0 comments
    Sep 5, 2012 11:59 AM | about stocks: HIG

    Hartford Financial (NYSE:HIG) is responding well to the announcement, up over 3% on the day, so far.

    The move will liberate about $600 million of statutory capital. This is a step in the right direction, as the life side of the business has limited ability to pay dividends to the holding company. The release of capital opens the door for dividends, which can be deployed on buybacks, or debt reduction.

    The valuation problem here is about how fast capital can be released form the life operations and deployed to benefit shareholders. Since the annuity businesses have been placed in runoff, policyholder surrenders have occurred at a steady pace. In some cases, the policyholders are letting go of guarantees that are in the money.

    I took a shot at quantifying it, and assuming the life operations have an ROE of 2% and release capital at a rate of 12.5%, then discounting the cash flow at 12.5%, the life operations can be valued at half of book. Making an effort to allocate the present market value, it appears that the life operation is valued at about 22% of book:

    (click to enlarge)

    As a way of looking forward to a successful outcome for the project of refocusing on the P&C business, I assumed that the book value of the life operation was cut in half, that book value of the P&C operation increased 10%, and that the debt at the holding company was cut in half. These assumptions mean that $5 billion dollars is vaporized in the process. Here's the end result:

    (click to enlarge)

    Allowing four years to reach this result, annualized returns would be 17.6% to 24%, plus dividends.

    HIG would be vulnerable in the event of a downturn, which could easily be triggered by macro events. However, the possible returns justify the assumption of considerable risk. I plan to hold my position.

    Disclosure: I am long HIG.

    Themes: Insurance, Long Ideas Stocks: HIG
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