On Jul 1, 2014, we issued an updated research report on Hartford Financial Services Group Inc. (HIG). The company's focus on core operations, efficient capital deployment and constant upgrade in services are expected to drive long-term growth. However, exposure to catastrophic events, weak investment portfolio and a challenging regulatory environment are concerns.
Hartford Financial has been focused on enhancing core operations by de-risking its portfolio. For this, the company resorted to divestitures over the past couple of years. The latest of its endeavors include the closure of the sale of Hartford Life Insurance K.K. (:HLIKK), which is expected to generate capital benefit of $1.4 billion. To make its business better, Hartford Financial also collaborated with IBM in Apr 2014. Moreover, the net unrealized gains position of the company also improved over the past few years.
Moreover, Hartford Financial’s capital appreciation, repayment of government funds and measures to de-risk the balance sheet increased its financial strength. This has helped the company to increase its share repurchase program and repay debts in the first quarter of 2014. Additionally, new business premiums have increased in the auto and home product lines over the last two years. To improve services further, the company launched an online quoting platform in Jun 2014. The introduction of the commercial auto product on this new quote-to-issue platform completes the small product offering of the company, and is expected to generate returns going forward. Hartford Financial also scores strongly with the credit rating agencies.
On the flip side, Hartford Financial’s substantial exposure to catastrophic events continues to raise caution. Catastrophe losses increased in the last reported quarter and the unpredictable nature of these events is a further operating risk. The company has also witnessed a decline in net investment income over the past few years. Significant fluctuations in the fixed income or equity markets could weaken the company’s financial position further.
Moreover, the Talcott Resolution segment has been a drag for quite some time, given the lowered earnings from divested businesses and continued run-off of the annuity block. In anticipation of higher catastrophes and expenses associated with policyholder initiatives on the U.S. annuity business, earnings in this segment are expected to decline more than 50% in the second quarter of 2014. Another concern for Hartford Financial is the challenging regulatory environment that is likely to affect the company’s finances and operations adversely.
Earlier, Hartford Financial reported first-quarter 2014 earnings of $1.18 per share that outperformed the Zacks Consensus Estimate and was higher than the year-ago quarter figure by 27%. Notably, this Zacks Rank #3 (Hold) insurer delivered positive earnings surprises in three of the last four quarters with an average beat of 12.10%.
Other Stocks to Consider
Better-ranked players in the industry that look attractive at current levels include CNO Financial Group Inc. (CNO), AXA Group (AXAHY) and Radian Group Inc. (RDN). While Radian sports a Zacks Rank #1 (Strong Buy), CNO Financial and AXA Group have a Zacks Rank #2 (Buy).