Hartford Insurance Rating Recommendation

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Hartford Insurance Rating Recommendation Powered By Docstoc
					Hartford Financial Services Group                                                                  Brett Kok
Inc. (HIG)
Date:                             4/12/2007               Consensus Estimate 03/06A 12/07E 12/08E
Sector:                            Financial              EPS                    8.68    9.63      10.26
Industry:                       Non-life Insurance        P/E                    11.16   10.05     9.44
Current Price:                        96.82               Long Term Growth Rate:             10.09%
52 Wk Price Range:                79.55-97.95             Ratio Analysis    Co.   Indus.  Sector SP500
Ave. Daily Vol:                     895,600               P/E (TTM)        11.16   12.23  15.57     20.45
Beta:                                  1.57               P/S (TTM)        1.16     1.60   3.53      2.85
Market Cap ($million):               31,000               P/B (MRQ)        1.66     1.62   2.42      3.99
Shares Out (million):                 320.2               ROA (TTM)        0.90     3.71   3.28      8.08
Inst. Hold %:                        92.2%                EBO Valuation                            $74.29
Div Yld:                             2.07%                Recommendation:                             Buy
Total Debt/Equity:                     .23                Stop-loss Price:                         $77.46
Member S&P 500?                        Yes                                  Price      6-mo prob     12-mo prob
                                                          Target Price      $109          28%           47%

                Investment Thesis                                               Summary
                                                            Fundamental Valuation:
   Homogeneous product that has the possibility of            Bearish- With a discount rate of 12.07% the
    a major loss. The market has incorporated this             EBO valuation of $74.29, this is $22.53 below
    into the stock price.                                      the current market price.

   Announcement of a partnership with Berkshire            Relative Valuation:
    Hathaway Inc. to insure high risk policies. The            Neutral- With one bullish and one bearish
    market has incorporated this into the price.               indicator the relative valuation is inconclusive.

                                                            Technical Analysis:
   The stock has outperformed the ETF and the
                                                               Bullish- There is two bullish indicators, with the
    S&P over the past year. The market has not
                                                               remaining four being neutral.
    fully incorporated this into the price.
                                                            Earnings Analysis:
   Hartford’s expansion in the Life segment and               Slightly Bullish- Positive earning surprises in the
    continually expanding in foreign markets. The              past four quarters. There has also been one
    market has incorporated this into the stock price.         more downward revision in the past four weeks.
   Hartford declared that it would repurchase $1           Analyst Recommendations:
    billion of its shares. The market has fully reacted        Neutral- A mean rating of 2.05 with a similar
    to the announcement.                                       distribution of buys, outperform, and hold.

   Hartford agreed to the sale of their medical stop       Institutional Ownership:
    loss insurance business to National Benefit                 Bullish- There has been an increase of 77 new
    Resources, Inc. The market has not fully                    institutional investors along with an increase in
    incorporated this announcement into the stock               shares held by 2.01%.
    price.                                                  Piotroski Analysis:
                                                                N/A




                                                                                                               1
Company Summary

Hartford Financial Services Group is headquartered in Hartford, Connecticut and was founded in 1810.
Currently, it is one of the largest providers of investments services and insurance in the United States.
Hartford primarily operates in the US but is expanding into foreign markets, with Japan being the front
runner.

Hartford is organized into two main business operations; Life and Property & Casualty. The Life segment
has six operating segments; Retail Products Group, Retirement Plans, Institutional Solutions Group,
Individual Life, Group Benefits, and International. The Life segment is approximately 50% of its business,
while the other 50% is Property & Casualty. The Property & Casualty is broken down into four segments;
the underwriting segments of Business Insurance, Personal Lines, Specialty Commercial, and the Other
Operations segment.

Business Insurance provides standard commercial insurance to small to medium sized businesses. Personal
Lines deals with automobile, homeowners, and home based business insurance coverage. Specialty Coverage
provides property and casualty insurance products to wholesalers and retailers to the larger commercial
clients. Lastly, the Other Operations segment includes all activities related to Heritage Holdings.

2005 Revenues                                                      $27.1 billion
2005 Net Income                                                    $2.3 billion
2005 Core Earnings¹                                                $2.2 billion
2005 Assets                                                        $285.5 billion
2005 Liabilities                                                   $270.2 billion
2005 Stockholders' Equity                                          $15.3 billion




Competition and Strategy

Insurance is a fairly homogenous product with very little differentiation between competitors. There are
three things that separates Hartford from their competition, they are; management decisions, diverse
portfolio products, and expansion.




                                                                                                             2
The unique aspect of Hartford’s management is their willingness to take risks and to minimize those risks by
creating business partnerships. A recent example would be creating a business partnership with one of their
biggest competitors, Berkshire Hathaway Inc., to offer insurance to high risk areas that their competition is
shying away from. This partnership among many others gives Hartford the opportunity to profit in harsh
conditions.

Hartford’s decision to expand its Life segment has reaped huge rewards. Originally, Hartford was primarily
selling life insurance and decided to enter into retirement planning. Since that decision they have expanded
their sales force to be one of the largest in the retirement plan industry. They are ranked as one of the top ten
in new 401(k) plans sold for 2005.

Hartford has expanded into the foreign market and its primary operations have been through the Life
segment. In Japan, Hartford has grown to be the number one provider of variable annuities with a 29%
market share as of March 31, 2006. During the second quarter of 2005 Hartford launched its European
subsidiary, Hartford Life Limited. They plan on selling annuity products through independent financial
advisors.

Historical Revenue and Earnings:

                           Historical Revenue                               Historical Earnings
                  FY 12/06     FY 12/05       FY 12/04             FY 12/06     FY 12/05        FY 12/04
1st Quarter         6,543         6,002         5,732               $2.41          $2.26         $1.96
2nd Quarter         4,971         6,064         5,444               $1.57          $2.03         $1.48
3rd Quarter         7,407         7,307         5,416               $2.45          $1.80         $1.68
4th Quarter         7,579         7,710         6,105               $2.45          $1.55         $2.11
Total              26,500        27,083        22,697               $8.88          $7.64         $7.23

        Hartford’s historical earnings slipped from last year but its historical earnings per share
increased compared to last year. This is a $1.24 or a 16.2% increase over the prior year, this is
attributable to fewer losses in the Property and Casualty segment.




                                                                                                                3
I. Fundamental Valuation
HIG                    PARAMETERS                           FY1       FY2      Ltg
                       EPS Forecasts                           9.63    10.26   10.09%            Model 1: 12-year forecasting horizon (T=12).
                       Book value/share (last fye)            58.44                                          and a 7-year growth period.
                       Discount Rate                        12.07%
                       Dividend Payout Ratio                19.34%
                       Next Fsc Year end                       2007
                       Current Fsc Mth (1 to 12)                  4
                       Target ROE (industry avg.)           12.04%

                       Year                                   2007      2008     2009     2010         2011       2012        2013       2014    2015     2016     2017     2018
                       Long-term EPS Growth Rate (Ltg)                         0.1009   0.1009       0.1009     0.1009      0.1009
                       Forecasted EPS                         9.63     10.26    11.30    12.43        13.69      15.07       16.59
                       Beg. of year BV/Shr                  58.440    66.208   74.483   83.594       93.624    104.666     116.822
                       Implied ROE                                     0.155    0.152    0.149        0.146      0.144       0.142

ROE                    (Beg. ROE, from EPS forecasts)         0.165    0.155    0.152    0.149        0.146      0.144       0.142      0.138    0.133    0.129    0.125    0.120
Abnormal ROE           (ROE-r)                                0.044    0.034    0.031    0.028        0.026      0.023       0.021      0.017    0.013    0.008    0.004    0.000
growth rate for B      (1-k)*(ROEt-1)                         0.000    0.133    0.125    0.122        0.120      0.118       0.116      0.115    0.111    0.108    0.104    0.101
Compounded growth                                             1.000    1.133    1.275    1.430        1.602      1.791       1.999      2.228    2.475    2.742    3.027    3.332
growth*AROE                                                   0.044    0.039    0.039    0.040        0.041      0.042       0.043      0.038    0.031    0.023    0.012   -0.001
required rate (r)                                   0.121     0.121    0.121    0.121    0.121        0.121      0.121       0.121      0.121    0.121    0.121    0.121    0.121
discount rate                                                 1.121    1.256    1.408    1.577        1.768      1.981       2.220      2.488    2.789    3.125    3.503    3.925
div. payout rate (k)                                0.193
Add to P/B             PV(growth*AROE)                         0.04     0.03     0.03     0.03         0.02        0.02       0.02       0.02     0.01     0.01     0.00     0.00
Cum P/B                                                        1.04     1.07     1.10     1.12         1.15        1.17       1.19       1.20     1.21     1.22     1.22     1.22
    Add: Perpetuity
   beyond current yr   (Assume this yr's AROE forever)         0.33     0.26     0.23     0.21         0.19       0.17        0.16       0.13     0.09     0.06     0.03     0.00
Total P/B              (P/B if we stop est. this period)       1.37     1.33     1.33     1.33         1.34       1.34        1.35       1.33     1.31     1.28     1.25     1.22
Implied price                                                 82.99    80.63    80.88    81.12        81.36      81.60       81.83      80.76    79.44    77.91    76.18    74.29

Check:
Beg. BV/Shr                                                   58.44    66.21    74.48    83.59        93.62     104.67      116.82     130.20   144.67   160.23   176.91   194.71
Implied EPS                                                    9.63    10.26    11.30    12.43        13.69      15.07       16.59      17.93    19.29    20.68    22.06    23.44
Implied EPS growth                                                     0.065    0.101    0.101        0.101      0.101       0.101      0.081    0.076    0.072    0.067    0.062



Inputs:

       1. EPS Forecasts and long-term growth rate (LTG originated from www.reuters.com on April 13, 2007.
       2. Book value per share derived from www.reuters.com on the balance sheet for the last fiscal year end.
          I divided the total equity of $18,876,000,000 and the total common shares outstanding of
          323,000,000 (18,876,000,000/323,000,000= 58.44) to the book value per share of $22.80.
       3. Discount rate: The discount rate was calculated using a 20-year US Treasury bond set at a rate of
          5.0% on April 6, 2007 as the risk free rate. Using this rate and 9.5% the expected market return, I
          calculated the discount rate, using a bet of 1.57, (.05+1.57(.95-.05)= 12.07%) as 12.07%.
       4. Dividend payout ratio is 19.34% TTM (trailing twelve months) as reported by www.reuters.com.
       5. Next fiscal year-end is December 31, 2007.
       6. Current fiscal month is April 2007.
       7. Target ROE= 12.04% for the industry average according to www.reuters.com.

Output and Sensitivity Analysis:
   1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the EBO
       valuation is $74.29.
   2. Changing the discount rate to 10.38% (-1.69%) the EBO valuation equals $96.88. Therefore, we
       should expect to earn 10.38% annual return if the EBO expectations are realized.
   3. Changing the growth rate to 21.75% (+11.66%), the EBO valuation equals $96.80.
   4. Changing the industry ROE to 15.71% (+3.67%) the EBO valuation equals $96.82.




                                                                                                                                                                                4
II. Relative Valuation
Comparables
                                                                           Mean FY2
                                                                        Earnings Estimate    Forward    Mean LT       PEG       P/B      ROE        Value
    Ticker    Name                           Mkt Cap    Current Price   (next fiscal year)    P/E      Growth Rate             (MRQ)     5 yr ave   Ratio      P/S
1   AIG       AIG                             174,070       66.91             6.91             9.68      12.65%       0.77      1.71     13.02%      0.13      1.54
2   MET       MetLife Inc.                    47,640        63.29             5.92            10.69      10.61%       1.01      1.41     9.95%       0.14      0.99
3   TRV       Travelers Companies, Inc.       35,940        53.19             5.63             9.45      10.13%       0.93      1.39     11.92%      0.12      1.42
4   ALL       Allstate Corp.                  37,950        61.33             6.80             9.02       8.81%       1.02      1.75     14.37%      0.12      1.05


    HIG       Hartford                        31,000        96.82             10.26            9.44      10.09%       0.94      1.66     12.24%      0.14      1.16


              Implied Price based on:                                                         P/E                     PEG       P/B                 Value      P/S
1   AIG       AIG                                                                            $99.35                  $79.24    $99.74               $93.76    $128.54
2   MET       MetLife Inc.                                                                   $109.69                 $104.31   $82.24               $101.17   $82.63
3   TRV       Travelers Companies, Inc.                                                      $96.93                  $96.55    $81.07               $83.25    $118.52
4   ALL       Allstate Corp.                                                                 $92.54                  $105.98   $102.07              $86.94    $87.64


              High                                                                           $109.69                 $105.98   $102.07              $101.17   $128.54
              Low                                                                             $92.54                 $79.24    $81.07               $83.25    $82.63
              Median                                                                          $98.14                 $100.43   $90.99               $90.35    $103.08




Indicator                                                                        Interpretation
P/E                                       Bullish- Hartford has the second lowest P/E ratio, which means that it is undervalued,
                                          has a higher risk, or is low growth.
PEG (P/E/G)                               Neutral- Hartford has a PEG ratio between its four competitors which may mean it is
                                          fairly valued.
P/B                                       Neutral- The P/B ratio for Hartford is currently between its four competitors means
                                          that it is fairly valued given the ROE and risk.
Value (P/B/ROE)                           Bearish- Hartford is tied for the highest value ratio this means that they are currently
                                          overvalued or have a lower risk.
P/S                                       Neutral- Hartford’s P/S ratio at 1.16 is currently between its four major competitors
                                          this could mean it is fairly valued, average profit margins, or suitable risk for the stock.
Summary                                   Relative valuation suggests that Hartford’s stock is fairly valued compared to its
                                          competitors. With one Bullish and one Bearish indicator the valuation is inconclusive.




                                                                                                                                                                        5
III. Technical Analysis




                          6
Indicator                                                Interpretation
Bollinger Bands   Neutral- The share price is currently above its moving average and is not close to a
                  band indicating that the stock is not expected to change in the near future. The bands
                  are also constricting, which indicates that the stock price is becoming less volatile and
                  may be near its correct price.
Stochastics       Neutral- 88.15%>68.85% (%k>%d) which is a bullish sign. However, %k is over 80%
                  which could mean it is overpriced.
Moving Averages   Bullish- The moving averages are increasing and the gap is also increasing which are
                  both Bullish signs. The current price is trading above the long and short-term moving
                  average. These indicators suggest that the stock will increase in price.
MACD              Neutral- the MACD and Signal line are both resting at zero giving us inconclusive
                  evidence. MACD appears to be holding steady around zero.
Regression        Bullish- The regression line is increasing and the price is currently below the trend line
                  indicating that the price will increase to meet the trend line.
PriceROC          Neutral- The price is above zero meaning its value is more today than 100 days ago.
                  However, the slope is currently decreasing which means the price has negative
                  momentum.




                                                                                                           7
IV. Earnings Analysis
                                           Earnings Surprises
                       12/2006       09/2006            06/2006         03/2006            12/2005
                       (Last qtr)  (2 qtrs prior)     (3 qtrs prior)  (4 qtrs prior)     (5 qtrs prior)
Estimate                 2.27           2.27               1.71            2.10               1.80
Actual                   2.37           2.30               1.83            2.56               1.63
Difference               0.10           0.03               0.12            0.46              -0.17
                                      Mean Earnings Estimates
                  03/2007 This    06/2007: Next        2007 This       2008: Next         LT Growth
                     Quarter          Quarter          Fiscal Year     Fiscal Year           Rate
Earnings              2.36              2.38               9.63           10.26              10.09
# Estimates            14                13                 19              19                  9
                           Earnings Per Share Estimates Revisions Summary
                                              Last Week                         Last 4 Weeks
                                    Revised Up       Revised Down      Revised Up       Revised Down
Quarter ending 03/07                      0                  0               0                  1
Quarter ending 06/07                      0                  0               0                  0
Year ending 12/07                         0                  0               0                  1
Year ending 12/08                         0                  0               1                  0

Earnings have steadily beaten or met analysts’ estimates for the past four quarters. The one time they did not
beat the estimate was five quarters ago when they missed the estimate by 17 cents. However, the following
quarter they beat the estimate by 46 cents.

Hartford’s earning estimate for the current quarter is $2.36, which is lower than the last quarter’s actual
earnings. Its estimated earnings, increases by 63 cents between 2007 and 2008 a 9.39% increase.

Its earnings estimate revisions over the past week have been neutral with no new revisions. Over the past
four weeks there has been mixed signals, with one upward revision and two downward revisions, this is a
slightly bearish indicator.




                                                                                                              8
V. Analysts’ Recommendations
                       Current                1 Month Ago           2 Months Ago           1 Year Ago
Buy                       7                        7                      7                     6
Outperform                6                        6                      6                     6
Hold                      8                        9                      9                    11
Underperform              0                        0                      0                     0
Sell                      0                        0                      0                     0
No Opinion                0                        0                      0                     0
Mean Rating             2.05                     2.09                   2.09                  2.22

Analysts mean recommendation has improved over the current month because there is one less analyst, who
gave Hartford a hold recommendation. Compared to one year ago the mean rating dropped from a 2.22 to a
2.05 a slightly bullish indicator. Over the past year there have been two less analysts, who recommended a
hold, and one analyst moving from a hold to a buy.




                                                                                                         9
VI. Institutional Ownership
                                    # of Holders      % Beg. Holders         Shares             % Shares
Shares Outstanding                                                         541,880,342          100.00%
Total Positions                         675              112.88%           317,000,000           58.50%

New Positions                           119               19.90%            14,434,051            2.66%
Soldout Positions                       42                 7.02%            -6,033,242           -1.11%
Buyers                                  398               66.56%            46,368,868            8.56%
Sellers                                 239               39.97%           -35,494,540           -6.55%
Beg. Total Inst. Positions              598              100.00%           306,125,672           56.49%

# Net Buyers/3 Mo. Net Chg.              77               12.88%            10,874,328           2.01%

There were 77 new institutional investors in the company, indicating a 12.88% increase. Along with the
increase in new institutional investors there was an increase of 2.01% of shares held. These are bullish
indicators signaling that institutional investors feel Hartford is undervalued.




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