Hartford Financial Services Group (NYSE: HIG ) is an interesting property and casualty insurance play for bargain hunters who like to buy a quality company at a reasonable discount to book value.
Hartford Financial also has a lot of potential to improve its operating metrics, most notably, its combined ratio and benefit from momentum in the commercial P&C business. Further tailwinds for Hartford Financial's share price could come from higher industry earnings in an expanding economy and billions worth of share repurchases.
1. Solid core earnings trend
Hartford Financial is a property- and casualty insurance company specializing in commercial and consumer insurance solutions. It also offers group benefits and mutual funds.
Its P&C business accounted for 81% of total 2013 pro forma core earnings highlighting that Hartford Financial will continue to be heavily dependent on the underlying P&C insurance trends to create value for shareholders.
Harford Financial's core earnings have rebounded substantially over the last three years. In 2011, the insurance company achieved $1.1 billion in core earnings which have ultimately risen by a whopping 57% to $1.7 billion in 2013.
2. Commercial insurance is key value driver
Hartford Financial operates two segments in the property- and casualty business: Commercial P&C and Consumer Markets. Commercial P&C offers insurance solutions to businesses such as workers' compensation or professional liability insurance among others. This segment accounted for 63% of total 2013 written premiums and brought in $6.2 billion.
Consumer Markets, Hartford Financial's second P&C segment, largely serves the auto and homeowner insurance market and raked in $3.7 billion in premiums in 2013 or 37% of total P&C premiums.
In 2012, Hartford Financial reported core earnings of $511 million in its Commercial P&C business which rose to $827 million in 2013. Especially smaller companies with revenues of less than $15 million and payroll expenses of less than $5 million are a prime value driver for Hartford Financial: 50% of written premiums, $3.1 billion in 2013, originated from small businesses.
Hartford Financial's combined ratio in the Commercial P&C segment has also improved considerably over the last three years.
The combined ratio is a key performance indicator in the insurance business, that helps investors assess the company's underwriting discipline and ability to turn a profit on its policies.
Generally speaking, combined ratios of below 100.0 indicate an insurance company is actually turning a profit on its policies.
While Hartford Financial's combined ratio stood at 97.3 in 2011, this ratio has gradually improved to 93.0 in 2013.
The downward trend in Hartford Financial's combined ratio is the result of stronger commercial insurance pricing and cost controls.
3. Capital Management
Hartford Financial plans on deploying $2.0 billion for share buyback programs in 2014 and 2015. In each year, the insurance company intends to repurchase $1.0 billion worth of its own shares while it also offers investors a 1.69% yield.
Insurance companies probably shouldn't be bought for the dividend yield alone since there are a lot of more attractive dividend plays available in the stock market, but a little cash flow on the side certainly isn't causing headaches for investors.
4. Book value discount
Despite underlying core earnings strength, combined ratio improvements and a focus on lucrative commercial insurance solutions, Hartford Financial continues to trade at an 11% discount to book value, even though the company trades near its most recent 52-week high.
Many insurance companies still trade at discounts to book value which seems to be quite undeserved given the progress many companies, including Hartford Financial, have made over the last couple of years.
The Foolish Bottom Line
Hartford Financial makes a compelling value proposition: Core earnings are rising, its Commercial P&C combined ratio is trending downward and the commercial insurance segment could see further positive price momentum in 2014.
Moreover, the insurance company remains committed to share repurchases which could provide further tailwinds for Hartford Financial's share price in 2014 and 2015.
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