Hartford Financial stock is trading slightly below fair value
[Updated 03/12/2021] Hartford Financial Assessment Update
Hartford Financial Stocks (NYSE: HIGH) has climbed 77% from the lows of March 23 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 Assessment. The insurance giant, which is one of the largest providers of P&C and life insurance products in the United States, has beaten consensus estimates in its recently released fourth quarter results. It said total revenue of $ 5.33 billion, slightly lower than the previous year. This was mainly due to a 2% year-over-year decrease in earned premiums, partially offset by a slight increase in commissions and net investment income. In addition, its net income fell 2% year-on-year to $ 532 million, mainly due to higher mortality in group life insurance due to the impact of the Covid-19 crisis and of the charge for the development of asbestos and environmental reserves (A&E).
The company reported revenue of $ 20.52 billion for full year 2020 – slightly lower than the 2019 figure. While earned premiums increased 2% year-on-year, this is mostly due to 7% growth in commercial property and casualty insurance driven by the acquisition of Navigators Group. Excluding the impact of the acquisition of the premium amount, the total commercial P&C premium written decreased by 4% in 2020 due to lower new business and other in-force policy changes. Its small business insurance and workers ‘compensation premiums suffered from the impact of the Covid-19 crisis as a decline in business activity negatively impacted small businesses’ cash flow. companies, forcing them to downsize their operations and lay off workers in many cases. In addition, personal and group insurance premiums also fell during the year. In addition, net investment income, which is very important to the profitability of any insurance company, fell 5% year-on-year due to falling interest rates. That said, we expect the same trend to continue over the current year. Additionally, it should take some time to restore interest rates to pre-Covid-19 levels. Overall, the above factors will likely restrict Hartford Financial revenues to $ 20.9 billion in fiscal 2021. Additionally, net profit margin is expected to decline slightly during the year, leading to EPS of $ 4.53 for fiscal 2021. This , coupled with a P / E multiple just below 13x, will lead to a valuation of $ 59.
[Updated 09/02/2020] Hartford Financial shares may rise another 30%
Hartford Financial Stocks (NYSE: HIG) lost more than 50% – from $ 61 at the end of 2019 to around $ 31 at the end of March – then has climbed 32% to around $ 40 now. But that means it’s still 34% less than at the start of the year!
This can be attributed to 2 factors. The Covid-19 epidemic and the economic downturn have brought down market expectations for 2020 and consumer demand in the short term. This could lead to lower investment returns and lower investment premiums due to a shift in client focus from long-term to short-term survival, weighing on Hartford’s revenue. Financial. However, the Fed’s multibillion-dollar stimulus measures in late March helped stop negative market sentiment, which is also evident from the rally in stocks after this point.
But we think there is more potential to come over the next few months.
Trefis estimates Hartford Financial Assessment at around $ 52 per share – around 30% above the current market price – based on an upcoming trigger explained below and a risk factor.
The trigger is an improved trajectory for Hartford Financial revenues over the second half of the year. We expect the company to report 2020 revenue of $ 20.1 billion, about 3% lower than the 2019 figure. Our forecast stems from our belief that the economy is expected to experience some recovery. resumed in the third quarter. Recently released data on consumer spending in the United States also shows growth in 8.5%, 5.6% and 1.9% in May, June and July respectively, indicating a growing trend. If the momentum continues, it is likely that it will increase the net amount of premiums and the investment income of insurance premiums, which is very critical to the profitability of any insurance company. This, in turn, would benefit the revenue path over the next few months. Net income for the year is expected to fall to $ 1.7 billion, a 19% year-over-year decline, reducing EPS to $ 4.76 for fiscal 2020.
Thereafter, Hartford Financial’s revenues are expected to improve to $ 20.7 billion in fiscal 2021, mainly due to slight growth in the P&C and group life segment. . In addition, the net profit margin is expected to see some recovery, leading to EPS of $ 5.26 for fiscal 2021.
Finally, how much should the market pay per dollar of Hartford Financial profit? Well, to make almost $ 5.26 a year from a bank, you would have to deposit around $ 580 into a savings account today, which is around 110 times your desired earnings. At the current Hartford Financial stock price of around $ 40, we’re talking about a P / E multiple just below 8x. And we think a figure closer to 10x will be appropriate.
However, the insurance industry is currently experiencing some uncertainty. Growth looks less promising and short-term forecasts are less than optimistic. What is behind this?
Hartford is one of the largest providers of P&C and life insurance products in the United States. It has approximately $ 36.5 billion in identifiable assets between its P&C and group insurance segments (based on fiscal 2019 data). The company derives approximately 11% of its total income from income generated from the placement of insurance premiums. Therefore, its business model is very sensitive to changes in investment returns. While the S&P 500 Index has been on a growth path (up 55%) since the March trough, any further weakening in the economic situation or an unexpected rise in the number of Covid-19 cases may turn the tide and could negatively affect HIG’s revenues.
The same trend is visible through Hartford Financial peer – Prudential financial. Its income is also expected to suffer in fiscal 2020 due to lower premiums and lower investment income. This would explain why Prudential Financial stock is currently priced over $ 68, but is expected to achieve EPS of around $ 10.09 in fiscal 2021.
While Hartford Financial Stocks may be undervalued, 2020 has created a lot of price discontinuities that may offer some exciting business opportunities. For example, you will be surprised at how the valuation of stocks for Apple vs Emerging Biosolutions shows a disconnect with their relative operational growth. You can find a lot of these discontinuous pairs here.