Margin Pressure Weighs on Hartford Financial, $19 Revised Value

Hartford Financial Services Group (NYSE:HIG) reported lackluster third quarter results. Its net income declined to about zero from $666 million in the third quarter of 2010 as the company incurred significant catastrophe losses and capital markets remained unfavorable. Losses from natural disasters including Hurricane Irene mounted to $134 million. ^[1] The company also incurred a $516 million expense related to deferred policy acquisition costs,which were expected. The company attributed its poor performance to weak economic recovery, large catastrophic events and volatile capital markets. Hartford reported a decline in operating margin across almost all of its product segments, which is probably the biggest point of concern for the company in near term. Hartford’s major competitors include MetLife (NYSE:MET), AIG (NYSE:AIG) and Prudential Financial (NYSE:PRU)

We have updated our  price estimate for The Hartford from $20 to $19, about 5% above the current market price. The new forecasts reflects our more conservative near-term margin outlook.

See our full analysis of Hartford Financial here

Margins declined from more than just natural disasters

The Hartford’s operating margin for commercial P&C insurance was 3.2% in Q3 2011 compared to 25% in same period previous year, while margins were -3% for consumer P&C insurance compared to 9.4% in Q3 2010. Similarly, the group life insurance operating margin declined from 5% to 2.5%, individual life insurance margin declined from 35% to -3.5%, and retirement plans operating margin declined from 21% to -30%. Although the deferred acquisition costs were primarily responsible for the significant decline in operating margins the fact that the Hartford could not find strength in any of its products is a cause for concern.

The third quarter was particularly bad for all P&C insurers because of huge catastrophe losses, but the booming variable and fixed annuity market could have compensated for it. MetLife recently reported a 79% increase in annuity sales in Q3 2011, whereas Hartford’s annuity fees and premiums declined by 5% in Q3 2011. In order to improve margins, the company needs to cut costs, hedge risks better and shift its focus to high growth products.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. The Hartford Reports Third Quarter 2011 Financial Results, Company Press Release [↩]