Hartford Financial Services: A ‘Show Me’ Story With Re-Rating Potential

Summary

Hartford’s investor day may not have featured a raised 2022 guide but still offered investors lots of positives on the P&C and ROE fronts.

The strong balance sheet also presents plenty of upside to the repurchase run-rate.

With the valuation relatively undemanding compared to its double-digit ROE and book value growth, shares appear poised for a re-rating.

DenisTangneyJr/E+ via Getty Images Hartford Financial Services (NYSE: HIG ), a diversified financial company offering commercial insurance, personal insurance, group benefits, and mutual funds across the US, recently held its virtual investor day featuring optimistic commentary on the health and prospects of the business over the medium to longer-term. In particular, the P&C (“property & casualty”) insurance underlying combined ratio and ROE guidance were bright spots, reflecting expectations for recent favorable trends to continue into the upcoming years. Yet, HIG trades below P&C peers as investors continue to view it as a ‘show me’ story, likely only providing credit for results when delivered. But over time, I think the relatively low P/B value compared to its strong ROE and book value growth should result in a re-rating. Compelling Setup for Commercial Heading into 2022

HIG reaffirmed the near-term guidance laid out with its prior earnings report, with commercial lines NWP (“net written premiums”) growth guided at 4% to 5% in fiscal 2022 with an underlying combined ratio of 86.5% to 88.5% (vs. 88.8% YTD). While the flat guidance might disappoint some investors, management did indicate it is running ahead of plan with commercial lines growth coming in at 11% this year and expected to hit 4.5% in fiscal 2022, implying a solid 7-7.5% CAGR. And while HIG refrained from updating its margin guidance (beyond the 2%pts of underlying improvement expected in 2022), management commentary signaled pricing would not fall below loss in the near term. Interestingly, the event also offered a rare glimpse underneath the hood at HIG’s commercial business, providing important insight into enhancements the company has made in recent years. Most impressive was the profitability of the new Spectrum policy, which has produced an 85% underlying combined ratio in fiscal 2021. While the benefit from light non-cat property losses in FQ3 ’21 likely boosted the ratio somewhat, the fact that HIG’s new business line is already enhancing margins is a key positive. With the Navigators acquisition outperforming targets as well, HIG looks set to further build out its growth capabilities in specialty going forward. Positive ROE Guidance Outweighs Investor Day Disappointments

Hartford has also guided to a core ROE of 13% to 14% in fiscal 2022 (modestly above the 12.6% averaged over the 2018-2020 period), comprising P&C (14% to 15%), Group Benefits (10% to 11%) and Hartford Funds (54% to 55%). The underlying ROE could prove even stronger, however, considering the Group ROE is lower than P&C, which management attributed to a higher mix of intangibles in the segment. As such, on a tangible basis, Group would have contributed (not proven dilutive) to the overall ROE. I view the updated targets as achievable in light of the strong momentum on the core P&C side and the potential for share repurchases ahead. While there may have been some disappointment that HIG did not discuss plans to look for alternatives for the Mutual Funds business, I think the key positives from the event more than outweighed the modest disappointment here and of not raising targets. Instead, I think many of the offsetting factors for HIG remain unappreciated, including its extensive new products across almost all businesses and its improving expense levels. Source: Hartford Financial Services Presentation Slides Favorable Capital Allocation Update

Perhaps the most salient update from the investor day presentation was that HIG now has all the products it needs to achieve profitable growth and market-leading ROEs. This means plenty of excess capital will be available for use for both shareholder return (dividends and repurchases) and future growth ahead, although M&A remains a low priority. On the dividend front, HIG is guiding toward hold co dividends of $1.7-1.8 billion in fiscal 2022 (up from the $1.6 billion guided for fiscal 2021), with much of the increase coming from its P&C subsidiaries. Furthermore, HIG is also projecting a similar level of repurchases in fiscal 2023 relative to the annual pace in fiscal 2021/2022, implying another $1.5 billion based on the YTD run rate. I see further upside to the repurchase run-rate, however, if HIG normalizes its remittance capacity from current low levels – for context, the P&C division […]

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