Risk-Reward Balanced at Hartford Financial - Analyst Blog

On April 10, 2014, we issued an updated research report on Hartford Financial Services Group Inc. HIG. The company's focus on core business enhancement and efficient capital deployment positions Hartford Financial to generate long-term growth. However, a challenging regulatory environment, decline in investment income and exposure to catastrophe losses raise caution.

Following the industry trend, Hartford Financial has stabilized significantly, since mid-2010, with improved earnings performance, positive credit trends and strengthened capital and liquidity position. In the long run, a continuation of the stabilizing trends is expected if the regulatory landscape becomes more visible and credit quality continues to improve, albeit at a slower rate.

Hartford Financial has been vending its non-core businesses to focus on its U.S. operations and enhance its operating leverage. Divestitures of its Retirement Plans and Individual Life Insurance businesses and UK variable annuity (VA) business – Hartford Life International Limited (HLIL) – in 2013 have reduced risks and expenses associated with the VA block as well as strengthened the operational efficiency of the Talcott Resolution segment.

Further, the company has performed well in terms of generating new business over the last two years. New business premiums and policies-in-force increased across both the lines of businesses in 2012 and 2013. Further, with the completion of the new business quoting and issuance platform ICON and the imminent launch of a new commercial auto product in 2014, the company expects to expand its distribution thereby making way for new business generation. Hartford Financial also has an efficient capital deployment strategy that aims at boosting financial flexibility by reducing debt (by $1 billion) and returning more value to shareholders through share repurchase. Hartford Financial also scores strongly with the credit rating agencies.

With respect to earnings performance, this Zacks Rank #3 (Hold) stock also delivered positive surprises in three of the last four quarters, with an average beat of 8.09%.

However, on the tepid side, Hartford Financial has substantial exposure to catastrophic events and the unpredictable nature of such weather-related events continue to raise concern for the upcoming quarters, thereby posing operating risks. Moreover, net investment income of Hartford Financial varies significantly with changes in market conditions, thereby affecting the net income to a great extent.

In addition, the Talcott Resolution segment has been a drag for quite some time. For 2014–15 too, core earnings are expected to decline mainly due to lower fees attributable to higher surrenders. Hartford Financial's finances and operations are significantly impacted by the challenging regulatory environment and need heightened prudential requirements for combating these pressures.  

Other Stocks to Consider

Alleghany Corporation Y, AmTrust Financial Services Inc. AFSI and EMC Insurance Group Inc. EMCI are some better-ranked stocks in the insurance space, all with a Zacks Rank #1 (Strong Buy).