Hartford Financial Stock: Revaluation Potential (NYSE: HIG)



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Hartford Financial Services (NYSE: HIG), a diversified finance company providing commercial insurance, personal insurance, group benefits and mutual funds in the United States, recently hosted its Virtual Investor Day with upbeat commentary on the health and outlook for the business in the medium and long term. In particular, the underlying P&C insurance (“P&C”) combined ratio and ROE forecast were positive, reflecting expectations for the continuation of recent favorable trends in the years to come. Still, HIG trades below its P&C peers as investors continue to view it as a “show me” story, likely only giving credit for the results when they are delivered. But over time, I think the relatively low P / B value compared to its strong ROE and book value growth should lead to a revaluation.

Convincing configuration for the commercial approach in 2022

HIG reaffirmed the short-term outlook set out in its previous earnings report, with NWP (‘Net Written Premium’) business line growth guided from 4% to 5% in FY2022 with a combined ratio below – underlying from 86.5% to 88.5% (vs. 88.8% year-to-date). While the fixed forecast may disappoint some investors, management has indicated that it is ahead of plan with business line growth of 11% this year and expected to reach 4.5% in fiscal 2022, which implies a strong CAGR of 7-7.5%. And while HIG refrained from updating its margin forecast (beyond the 2% underlying improvement expected in 2022), management comments indicated that prices would not fall below. short-term loss.

Hartford Financial P&C Underlying Combined Ratio

Source: Hartford Financial Services presentation slides

Interestingly, the event also offered a rare under the hood glimpse into HIG’s business operations, providing important insight into the improvements the company has made in recent years. Most impressive was the profitability of the new Spectrum policy, which produced an underlying combined ratio of 85% in fiscal 2021. Although the benefit of minor losses of non-cat property over the third quarter of 21 probably boosted the ratio somewhat, the fact that HIG’s new business line is already improving margins is a key positive. With the acquisition of Navigators also exceeding targets, HIG appears poised to further develop its growth capabilities in the specialty in the future.

Positive ROE Forecasts Outweigh Investors’ Day Disappointments

Hartford also moved towards a core ROE of 13% to 14% in fiscal 2022 (slightly above the average of 12.6% over the period 2018-2020), including IARD (14% at 15%), collective guarantees (10% to 11%) and Hartford Funds (54% to 55%). The underlying ROE could turn out to be even higher, however, given that the Group’s ROE is lower than that of P&C, which management attributed to a higher mix of intangible assets in the segment. As such, on a tangible basis, the Group would have contributed (not proven to be dilutive) to the overall ROE. I consider the updated targets to be achievable in light of the strong momentum on the core P&C side and the potential for future share buybacks. While there may have been some disappointment that HIG did not discuss plans to research alternatives for the mutual fund business, I think the main positives from the event more than made up for it. the modest disappointment here and not increasing the targets. Instead, I think there are many offsetting factors for HIG that remain underestimated, including its expanded new products across almost every business and improving spending levels.

Hartford Financial RCP and COE

Source: Hartford Financial Services presentation slides

Update on favorable capital allocation

Perhaps the most salient update to the Investor Day presentation was that HIG now has all the products it needs to achieve profitable growth and market-leading ROEs. This means that a lot of excess capital will be available to be used both for shareholder yield (dividends and buybacks) and for future growth to come, although mergers and acquisitions remain a low priority. On the dividend front, HIG plans to hold $ 1.7 billion to $ 1.8 billion in co-dividends in fiscal 2022 (up from the $ 1.6 billion forecast for fiscal 2021). ), much of the increase coming from its P&C subsidiaries. In addition, HIG is also forecasting a similar level of buybacks in FY2023 compared to FY2021/2022 annual pace, implying an additional $ 1.5 billion based on the YTD execution rate. . I see another benefit for the repurchase rate, however, if HIG normalizes its remittance capacity from current lows – for context, the P&C division pays out 75% of statutory profits versus 90% through its peers. With great capacity within the holding as well, given that HIG has pre-funded debt of $ 600 million, balance sheet flexibility could also promote an accelerated return on capital in the future.

Hartford Financial Dividends

Source: Hartford Financial Services presentation slides

Final take

The main takeaway from its recent Investor Day was the fact that Hartford’s ongoing transformation into a major mutual fund, group and mutual fund complex appears to be ahead of schedule. Yet investors still don’t seem to give HIG much credit for strong underwriting and growth initiatives or recent operational improvements, with its three key businesses all set for future margin expansion. Meanwhile, stocks appear significantly undervalued – HIG is trading below its peers P&C Chubb (NYSE: CB) and travelers (NYSE: TRV) despite being on track for a strong ROE of 13-14%. Over time, growth in ROE and book value should drive valuation, leaving plenty of room for outperformance ahead.

HIG vs CB vs TRV price at tangible book value
Data by YCharts



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