Hartford Financial Looks Fairly Valued Even After Sandy’s Impact

The Hartford Financial Services Group’s (NYSE:HIG) stock has climbed nearly 35% in the last three months. This uptrend has coincided with the company’s decision to offload non-core operations such as its individual life insurance business, retirement plans business and its broker-dealer business, Woodbury Financial Services, following the advice of Paulson & Co, a big shareholder in the company. We believe that the stock is now fairly valued.

Our $22 price estimate for Hartford’s stock is in-line with the current market price.

See our full analysis of Hartford Financial here

One Down Two To Go

Hartford recently completed the sale of Woodbury Financial Services to AIG (NYSE:AIG). ^[1] This deal will not affect Hartford’s earnings to come, but more significant deals are expected to close shortly.

One such deal is the sale of its retirement plans business to Massachusetts Mutual Life Insurance Company (MassMutual). The retirement plans business includes $54.9 billion in assets under management with more than 33,000 plans and 1.5 million participants. The division had done well in the first half of 2012, breaking into the top 20 insurers in the U.S., in terms of variable annuity sales with a total of $475 million. ^[2] This transaction is expected to close by the end of the current year.

Another deal of particular significance is the sale of Harford’s life insurance business to Prudential Financial (NYSE:PRU) on 27^th September, 2012. The deal will complete in the first quarter of next year with Hartford receiving $615 million in cash compensation. The business includes more than 700,000 life policies and investment assets, with a statutory book value of around $7 billion reserved for future claims on these policies. The transaction will likely be completed in the first quarter of 2013.

The total benefit in terms of net statutory capital from all the transactions carried out so far is around $2.2 billion, including a $1.4 billion increase in freed up statutory surplus that it maintained to support the businesses and an $800 million reduction in required risk-based capital. We expect Harford to invest this capital to boost its property and casualty business.

Sandy And The P&C

In 2011, Hartford earned nearly half of its $22 billion revenues from the property and casualty division. Although the percentage is likely to go up next year, following the divestitures, the top-line will be influenced by Superstorm Sandy. The company expects claim costs of $350 million from the storm. ^[3] The property and casualty division reported $371 million in catastrophe-related losses in the first nine months of 2012. The total catastrophe related losses last year was $745 million, which was primarily due to Hurricane Irene and Tropical Storm Lee.  Given the estimates provided by the management for Sandy, we expect margins to remain around the figure for 2011.

Going forward, we expect a long-term recovery in margins, reaching historical values. This forecast is based on the assumption that there will be no major natural disasters like Hurricane Irene or Superstorm Sandy in the coming years. You can modify the interactive chart below to gauge the effect a change in forecast would have on our price estimate.

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1. Hartford Financial Services Group Inc : The Hartford Completes Sale of Woodbury Financial Services to AIG, 4 Traders, 3 December, 2012 [↩]
2. U.S. Individual Annuities Sales Survey, LIMRA [↩]
3. Hartford’s Sandy Losses May Hit $350 Million – CEO, 4 Traders, 5^th December, 2012 [↩]