[Updated 03/11/2021] Hartford Financial Valuation Update
Hartford Financial stock (NYSE: HIG) has rallied 77% since the March 23 lows of last year and at its current price of $55 per share, it is 7% below its fair value of $59 – Trefis’ estimate for Hartford Financial’s valuation. The insurance giant, which is one of the largest providers of property and casualty (P&C) and life insurance products in the U.S., surpassed consensus estimates in its recently released fourth-quarter results. It reported total revenues of $5.33 billion, marginally lower than the year-ago period. This was mainly driven by a 2% y-o-y drop in earned premiums, partially offset by a slight increase in fee income and net investment income. Further, its net income fell by 2% y-o-y to $532 million, mainly driven by higher mortality in group life insurance due to the impact of the Covid-19 crisis and charge for asbestos and environmental (A&E) reserve development.
The company reported $20.52 billion in revenues for the full-year 2020 – marginally lower than the 2019 figure. While the earned premiums increased by 2% y-o-y, it was mainly due to a 7% growth in commercial P&C insurance driven by the acquisition of the Navigators Group. If we exclude the impact of acquisition from premiums’ amount, total commercial P&C written premiums declined 4% in 2020 due to lower new business and other changes to in-force policies. Its small business insurance and workers compensation premiums suffered due to the impact of the Covid-19 crisis, as a decline in business activity negatively impacted the cash-flow of small business entities, forcing them to curtail their operations and lay-off workers in many cases. Further, personal lines and group insurance premiums have also decreased in the year. Additionally, net investment income, which is very important for the profitability of any insurance company, dipped by 5% y-o-y due to the lower interest rate environment. That said, we expect the same trend to continue in the current year. Further, recovery in the interest rates to the pre-Covid-19 levels is likely to take some time. Overall, the above factors will likely restrict Hartford Financial’s revenues to $20.9 billion in FY2021. Further, the net income margin is likely to see a slight drop in the year, leading to an EPS of $4.53 for FY2021. This coupled with a P/E multiple of just below 13x, will lead to the valuation of $59.
[Updated 09/02/2020] Hartford Financial Stock Can Still Grow 30%
Hartford Financial stock (NYSE: HIG) lost more than 50% – dropping from $61 at the end of 2019 to around $31 in late March – then spiked 32% to around $40 now. But that means it’s still 34% lower than where it started the year!
This can be attributed to 2 factors. The Covid-19 outbreak and economic slowdown meant that market expectations for 2020 and the near-term consumer demand plunged. This could lead to lower investment yields and a drop in investment premiums due to a shift in customer focus from long term to near term survival, weighing on Hartford Financial’s top line. However, the multi-billion-dollar Fed stimulus in late March helped arrest the negative market sentiment, which is also evident from the stock recovery after that point.
But we believe there is more upside to come over the coming months
Trefis estimates Hartford Financial’s valuation to be around $52 per share – about 30% above the current market price – based on an upcoming trigger explained below and one risk factor.
The trigger is an improved trajectory for Hartford Financial’s revenues over the second half of the year. We expect the company to report $20.1 billion in revenues for 2020 – around 3% lower than the figure for 2019. Our forecast stems from our belief that the economy is likely to see some recovery in Q3. The recently released U.S consumer spending data also indicates a m-o-m growth of 8.5%, 5.6%, and 1.9% in May, June, and July respectively, which indicates a growth trend. If the momentum continues, it is likely to boost the net premiums amount and income from investment of insurance premiums – which is very critical for the profitability of any insurance company. This, in turn, would benefit the revenue trajectory over the coming months. The net income for the year is expected to drop to $1.7 billion – down 19% y-o-y, reducing the EPS figure to $4.76 for FY2020.
Subsequently, Hartford Financial’s revenues are expected to improve to $20.7 billion in FY2021, mainly driven by slight growth in commercial property & casualty and the group life insurance segment. Further, the net income margin is likely to see some recovery, leading to an EPS of $5.26 for FY2021.
Finally, how much should the market pay per dollar of Hartford Financial’s earnings? Well, to earn close to $5.26 per year from a bank, you’d have to deposit around $580 in a savings account today, so about 110x the desired earnings. At Hartford Financial’s current share price of roughly $40, we are talking about a P/E multiple of just below 8x. And we think a figure closer to 10x will be appropriate.
That said, the insurance business has some uncertainty right now. Growth looks less promising, and near-term forecasts are less than rosy. What’s behind that?
Hartford is one of the largest providers of property and casualty insurance products and life insurance products in the U.S. It has around $36.5 billion in identifiable assets between its property & casualty and group insurance segments (as per FY 2019 data). The company drives around 11% of its total revenues from income generated by the investment of insurance premiums. Therefore, its business model is very sensitive toward movement in investment yields. While the S&P 500 index is on a growth trajectory (up 55%) since the March bottom, any further weakening in the economic condition or an unanticipated uptick in the Covid-19 case count can reverse the momentum and could negatively affect HIG’s revenues.
The same trend is visible across Hartford Financial’s peer – Prudential Financial. Its revenues are also likely to suffer in FY2020 due to lower premiums and a drop in investment income. This would explain why Prudential Financial stock currently has a stock price of over $68 but looks slated for an EPS of around $10.09 in FY2021.
While Hartford Financial stock may be undervalued, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Apple vs. Emergent Biosolutions shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.