The Hartford Financial Services Group, Inc (HIG) The Henry Fund Stock Rating

The Henry Fund
Henry B. Tippie School of Management
Qian Wang [[email protected]]
April 16, 2016
The Hartford Financial Services Group, Inc (HIG)
Stock Rating
HOLD
Target Price
Henry Fund DCF
Henry Fund DDM
Relative Multiple P/E
Price Data
Current Price
52wk Range
Consensus 1yr Target
Key Statistics
Market Cap (B)
Shares Outstanding (M)
Institutional Ownership
Beta
Dividend Yield
Est. 5yr Growth
Price/Earnings (TTM)
Price/Earnings (FY1)
Price/Book (mrq)
Price/Tangible Book
Profitability
Operating Margin
Profit Margin
Return on Assets (TTM)
Return on Equity (TTM)
$48
Financial Services – Property & Casualty Insurance
Investment Thesis
In 2015, HIG increased its income by 110.8% YOY from $798 million to
$1,682 million and has been upgraded by all rating bureaus such as
Moody’s. HIG has been actively seeking growth opportunity both
organically and inorganically, such as launching a new energy practice
under its commercial lines and acquiring Maxum Specialty Insurance
Group (Maxum) in 2016. Currently HIG has a P/E ratio around 11.2,
which is lower than the Property and Casualty (P/C) Insurance industry
average. The overall operating environment is favorable for P/C insurers.
Thus we recommend to continue holding HIG.
Drivers of Thesis
 Growing auto and housing sales have been boosting policy sales in
2015, and they are continuing in 2016. We expect the personal lines
to grow at an annual rate of 2.43% in the following five years.
 HIG’s acquisition of Maxum and set-up of the new energy practice
under the commercial lines will strengthen HIG’s market share in
this area.
 The application of new technology drives efficiency, makes better
predictions, and optimizes underwriting standards. HIG can keep or
decrease its combined ratio before catastrophe before industry’s
average 92.6%.
Risks to Thesis
 The changing climate conditions make it more difficult to predict
incidence and severity of catastrophes, which leaves room for
uncertainty. The occurrence of severe catastrophes may largely
bring down HIG’s profit.
 Over the long-term, decreasing oil and gasoline price, slowing of the
global economy, and low interest rates may have negative impact
on the investment income.
Earnings Estimates
Year
EPS
growth
2013
$0.37
-305.6%
2014
$1.81
389.2%
2015
$4.05
123.8%
2016E
$3.83
-5.3%
2017E
$4.17
8.8%
2018E
$4.03
-3.4%
12 Month Performance
HIG
20%
0%
-5%
-10%
Source: Yahoo Finance
J
J
12.8%
9.1%
0.62%
9.2%
Financials
20
Source: Yahoo Finance & Factset
15
10
16.5
11.2
12.8 12.7
9.2
10.0 10.4
9.4
7.7
5
0
P/E
ROE
EV/EBITDA
The Hartford Financial Services Group, Inc
started as a fire insurance company in 1810.
Headquartered in Hartford, CT, now it mainly
provides property and casualty insurance,
group benefits, and mutual funds services. In
2015, the Hartford had $11.1 billion net
premiums written (NPW), which accounted
for 1.90% market share, and ranked the 12th
in the U.S by NPW.1
5%
M
P&C Insurance
$18.34
396.7
89.9%
1.048
1.82%
7.01%
11.2
10.8
0.95
0.97
S&P 500
10%
A
$46.09
$36.54 – 50.95
$49.80
Company Description
15%
-15%
HIG
$43.92
$39.06
$51.02
A
S
O
N
D
J
F
M
Important disclosures appear on the last page of this report.
EXECUTIVE SUMMARY
2015 was a strong year for HIG, which had a phenomenal
110.8% YOY net income increase from $798 million to
$1,682 million. Its P/C written premium increased 3% over
the prior year, comprised of 3% growth in Commercial
Lines and 4% in Personal Lines. The lower interest rate,
lower oil price, and improving job market have boosted
auto and housing sales, and there were less catastrophes
compared with that in previous two years. As oil price may
stay around $40 per barrel and Fed will increase the
interest rate, the auto and housing sales are expected to
grow at a relatively slower rate in the following two years.
Meanwhile, HIG has been selling off its annuity business
since its current CEO Chris Swift has been in position in
2014 and trying to focus its growth in P/C lines. Within the
past four months in 2016, HIG has already announced two
business plans to grow its commercial lines. The first one
is the acquisition of Maxum for $170 million in cash by
2016 Q3 with the aim to expand small enterprise segment.
The second one is that HIG hired Zurich’s former vice
president Ric Pena to lead the newly-created energy
practice to include power and utilities besides the existing
renewable energy. We believe these two plans will help
HIG’s commercial achieve an average 2% annual rate in the
following five years.
Besides organic/inorganic growth plans of its core
operations, HIG has a $4.375 billion authorization for
equity repurchases from 2014 through 2016. It announced
$1.3 billion repurchase plan in 2016, which we believe will
help to stabilize the stock price if not increase. Overall, HIG
is seeing positive growth in its core operation profit,
though there is uncertainty of devastative catastrophe
that will largely bring down HIG’s profit. Thus, we
recommend to continue holding HIG as we believe it is
outperforming its peers and the current operating
environment is favorable for P/C insurance industry.
COMPANY DESCRIPTION
HIG is a P/C insurance provider headquartered in Hartford,
Connecticut. It mainly provides commercial lines, personal
lines, group benefit, and workers’ compensation products.
It was recognized by J.D. power for delivering outstanding
services to customers, and also launched mobile app in Apr
2015 to keep the pace of new technologies. Meanwhile
HIG was trying hard to improve the underwriting of its two
largest lines – commercial and personal, thus to grow its
P/C business. By focusing on generating new business in
these profitable areas, HIG was able to expand overall
margins and improve the combined ratio. Currently HIG is
trading below its book value, with P/BV ratio at 0.95 and
P/TBV ratio at 0.97, while the industry average is 1.3 and
1.5 respectively.4 In 2015, HIG had $11,135 million net
written premiums (NWP) and ranked 12th in the US.
2015 REVENUE BY SEGMENT
Investment
17%
Mutual Funds
4%
Group
Benefits
17%
Other
6%
Commercial
Lines
35%
Personal Lines
21%
Source: HIG 10K
Commercial Lines
Accounting for more than 35% revenues in 2015, the
Commercial Lines is the largest driver for the profit of HIG
and it is growing strongly especially in recent two years. It
provides workers’ compensation, property, automobile,
marine, livestock, liability, and umbrella coverage
primarily throughout the U.S., along with a variety of
customized insurance products and risk management
services including professional liability, bond, surety, and
specialty casualty coverage. In small commercials, the
written premiums grew by 4% while the underlying
combined ratio stayed below 90. Construction and service
sectors are positives, but manufacturing, energy, and
commodities face headwinds. In middle market, there has
been a strong new business growth and profitability in
construction and marine.5 Workers’ compensation began
to improve in 2012. The underwriting results deteriorated
markedly in 2007 and 2010 and the extreme high
revenue% in below chart in 2008 was due to the negative
revenue from investment in that year. The growth rate in
commercial lines has been fluctuating in the past five years
within the range of -0.89% to 6.67%. We expect around 3%
growth rate in 2016, with the acquisition of Maxum and
the set-up of the new energy practice, which are discussed
in more details in the recent developments section.
Group Benefits
Commercial Line Revenue
$6,800
70%
$6,600
60%
$6,400
$6,200
50%
$6,000
40%
$5,800
$5,600
30%
$5,400
$5,200
20%
2006
2007
2008
2009
2010
2011
Revenue $
2012
2013
2014
2015
Total Revenue%
Source: HIG 10K. ($in millions)
Personal Lines
Contributed $185 million in core earnings, personal lines is
the 2nd largest contributor after commercial lines to HIG’s
revenue. It provides standard automobile, homeowners
and personal umbrella coverage to individuals, including a
special program designed exclusively for members of
AARP (American Association of Retired Persons). Since
summer 2015, there has been strong growth in personal
lines due to the boosting auto and housing sales. The
combined ratio raised 1.4 points to 92 though, due to
higher auto loss costs and non-weather loss in
homeowners. Due to the cheap oil and gasoline price,
which also leads to higher disposable income and more
miles driven, the stronger economy, and the improving job
market, U.S. car sales set record high in 2015, clearing a
peak last reached 15 years ago, while the sales have been
skewed toward higher light truck volumes.6 The growth
rate in personal lines has been fluctuating in the past five
years within the range of -5.07% to 3.99%. We expect
continuing positive growth in personal lines’ premiums
with an average annual rate of 2.43% in the following five
years.
Personal Line Revenue
$4,000
50.0%
$3,900
40.0%
$3,800
$3,700
30.0%
Group Benefits provides employers, associations and
financial institutions with group life, accident and disability
coverage, along with other products and services,
including voluntary benefits, and group retiree health.
Group Benefits after-tax core earnings margin, excluding
buyouts, increased to 5.2% from 4.3% in 2015. The
revenue from group benefits line keeps decreasing with a
rate range between -12.6% and 1.32%. As HIG focuses
more of its business development in commercial and
personal lines and we do not foresee any significant
business growth opportunity in this segment, we expect
5.9% decrease in this segment in 2016, which is the
average decreasing rate within last five years.
Mutual Funds
Mutual Funds offers investment products for retail and
retirement accounts and provides investment
management and administrative services such as product
design, implementation, and oversight. This business also
includes a portion of the run off of the mutual funds which
support the Company's variable annuity products. This is a
relatively small component of HIG’s total revenue, and in
the past 10 years, the growth rate has been as high as
28.19% or as low as -16.18%. We expect it to stay relatively
stable at an annual growth rate of 2.93% in the following
five years.
Investment
Since 2008, HIG has been selling its trading equity
securities, leading fixed maturities to being the first place
in its investment portfolio. In 2015, HIG invested more
than 80% in fixed maturities. With the decreasing oil price
affecting energy companies’ profit, the energy-related
investment has been a headache on any company’s
balance sheet. HIG proactively reduced its holdings of
energy-related securities by $1.2 billion to $2.5 billion in
2015, which also led to higher exposure to BB and above
bonds than B and below as many energy companies had
been downgraded.9
$3,600
20.0%
$3,500
$3,400
10.0%
2006
2007
2008
2009
2010
Revenue $
2011
2012
2013
2014
2015
Total Revenue%
Source: HIG 10K. ($in millions)
Page 3
Investment Amount $
$200,000
Talcott Resolution
$150,000
$100,000
$50,000
54%
60% 62% 65% 64% 78% 82%
53% 48% 57%
2006
2007
$-
2008
2009
2010
2011
2012
2013
2014
Fixed maturities
Equity securities, AFS
Mortgage loans
Policy loans
LP and other alternatives
Other investments
Short-term investments
Equity securities, trading
2015
Source: HIG 10K ($in millions)
The declining investment income in trading equity
securities resulted primarily from declines in market
performance of the underlying investment funds
supporting the Japanese variable annuity product. Net
investment
income
decreased by 3.4% to $3,154
million compared to the prior year and a 50% shrink since
it bounced back to $7,205 million in 2009, which was
primarily due to a decrease in income from fixed
maturities as a result of a decline in asset levels, primarily
in Talcott Resolution and lower income from repurchase
agreements.10 The overall investment yield has been
steady at 4% after it peaked at 8% in 2007, and we expect
it to stay at 4%.
Investment Income & Yield
$6,000
20.0%
$4,000
10.0%
$2,000
$$(2,000)
0.0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
$(4,000)
$(6,000)
-10.0%
-20.0%
$(8,000)
-30.0%
$(10,000)
$(12,000)
-40.0%
Total securities AFS and other
Equity securities, trading
Total securities AFS and other
Equity securities, trading
Source: HIG 10K ($in millions)
Talcott Resolution is comprised of runoff business from
the Company's individual annuity, institutional, and
private-placement life insurance businesses. The
Company's individual annuity business consists of variable,
fixed, and payout annuity products. In addition, Talcott
Resolution includes the retained yen denominated fixed
payout annuity liabilities, as well as the Company's
discontinued operations from the Hartford Life Insurance
K.K. (HLIKK) in Japan prior to its sale in 2014. Talcott
Resolution after-tax income from continuing operations
was $370, down from $414 in 2015.
Catastrophe Losses
In 2015 the catastrophe losses of HIG totaled $332 million,
compared to $341 million in 2014, both before tax.
Catastrophe losses for both years were primarily due to
winter storms and wind and hail events across the country.
The incidence and severity of catastrophes are inherently
unpredictable7. Some scientists believe that in recent
years, changing climate conditions have added to the
unpredictability and frequency of natural disasters. These
uncertainties bring a lot of risk. The geographic
distribution of its business subjects HIG to catastrophe
exposure for events occurring in a number of areas,
including, but not limited to, hurricanes in Florida, the Gulf
Coast, the Northeast and the Atlantic coast regions of the
United States, tornadoes in the Midwest and Southeast,
earthquakes in California and the New Madrid region of
the United States, and the spread of disease11. In recent
three years, the catastrophe losses have been decreased
by more than 50%. The main catastrophe in 2011 and 2012
were Hurricane Irene, Tropical Storm Lee, and Storm
Sandy. Below chart shows in recent three years, the
catastrophe losses dropped more than 50%, mostly due to
less tornadoes and winter storms. In 2015Q3, HIG missed
its revenue by $0.12 per share due to a 10% decline in net
investment and higher catastrophe losses (two large
California wildfires).2 It led to almost 25% drop in its stock
Page 4
price between Oct 2015 and Jan 2016. The total benefits
and losses expense as percentage of earned premiums
decreased from 96.76% in 2012 to 79.36% in 2015. We
expect it to stay around 80% in the following five years.
2015
2014
HIG has been investing in market-leading back-office
support, such as policy administration system, claims
system, and predictive analytics. The integrating data and
analytics in the underwriting and claims process can
improve efficiency and customer/partner experience. The
P/C, Group Benefits, and Mutual Funds are generating
ROEs much higher than the Talcott Resolution. HIG is
expecting to continue to run-off of Talcott organically.
2013
2012
2011
$-
$100
$200
Wind and Hail
$300
$400
Winter storms
$500
$600
Tornadoes
$700
$800
Other
Source: HIG 10K. ($in millions)
RECENT DEVELOPMENTS
2015 HIG Development
2015 was a strong year for HIG, which had a phenomenal
110.8% YOY net income increase from $798 million to
$1,682 million. There are three main contributors. First,
there was a $560 million decrease in the loss from
discontinued operations on the sale of the Japan variable
annuity business in 2014. Second, there was a 3% increase
in total earned premiums. Third, there was a $36 million
federal income tax benefit lowering the effective tax rate
from 20.60% to 15.42% YOY.3
Historically HIG primarily operates in the east coast.
However, since Q4 2014, it hired 24 new middle market
underwriters with expansion into Midwest and Western
US.
Source: HIG 101 Mar 2016 Report
Source: HIG 101 Mar 2016 Report
Shifting to pure P/C Insurer
The sale of its Japan variable annuity business and the
continued runoff of the Talcott Resolution annuity
business indicated that HIG has successfully narrowed its
focus on P/C insurance, which enabled it to excel. In 2012,
HIG announced that it would divest its individual life and
variable annuities business to focus on core business. In
2014, HIG sold HLIKK to ORIX Life Insurance Corporation,
which is a financial services group headquartered in
Minato, Japan, for $895 million. It brought HIG
approximately $860 million capital benefit including the
net sales proceeds. Besides the sale of HLIKK and Talcott,
HIG also sold its Retirement plans and Individual Life
Insurance business in Jan 2013 and its UK variable annuity
business – the Hartford Life International Limited (HLIL) in
Dec 2013 to Berkshire Hathaway for approximately $285
Page 5
The second one is that HIG hired Zurich’s former vice
president Ric Pena, who has more than 25 years of related
underwriting, sales, and national leadership experience, to
lead the newly-created energy practice to include power
and utilities besides the existing renewable energy under
commercial lines. With this new segment, HIG is aiming to
offer better tailored risk management solutions to energy
companies and increase its commercial line revenues.
Though currently energy industry is in its downturn and oil
price may remain low in the following two years, we
expect this new practice will bring positive growth for HIG
in the long-term and it also shows the management of HIG
are focusing on developing strategies to continue growing
its P/C lines.
Premium in billion U.S. dollars
The first one is the acquisition of Maxum for $170 million
in cash by 2016 Q3 with the aim to expand small enterprise
segment. Maxum is a Georgia-based provider of
commercial insurance and it will operate as a separate unit
under HIG’s small commercial business. With only 12
years’ history, Maxum already has $114.6 million statutory
surplus. This acquisition, said by HIG’s president Doug
Elliot, “will accelerate HIG’s efforts to build upon its
market-leading position in small commercial by expanding
its product offerings and capabilities”.
policies, such as the separation of flood insurance and
terrorism insurance.
600
500
424.2
428.2
442.4
461.9
2009
2010
2011
2012
482.5
501.1
515.5
2013
2014*
2015*
400
300
200
100
0
Source: Statista (in $billions)
The profitability of P/C insurance shows strong cyclicality.
When the economy is good and companies have enough
capital, they will usually lower the price to write more
policies in order to get the market share and capital for
investment. The price war will eventually lower the
industry’s profit margin, thus companies have to raise
rates to stay profitable. Historically, the ROE of the P/C
insurance industry peaked very 8-10 years. Below chart
shows the historical ROE of P/C insurance industry. It
suggests next ROE peak will be in 2016-2017.
ROE of US P/C Insurance Industry
25%
1977:19.0%
1987:17.3%
20%
1997:11.6%
15%
9 Years
2006:12.7%
2013
9.8%
2015E:
8.8%
10%
5%
0%
2014
8.2%
1975: 2.4%
1984: 1.8%
1992: 4.5%
2001: -1.2%
-5%
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15E
million cash, which helped HIG lower its expenses and free
up more capital. 12 HIG’s existing CEO Chris Swift has been
in position since 2014, but has no significant business
initiatives besides the stock repurchase plan. Finally, in
March and April this year, HIG announced two business
plans, which we believe will help grow the commercial
lines.
Source: Insurance Information Institute
INDUSTRY TRENDS
The U.S. insurance industry’s net premiums written
totaled $1.1 trillion in 2014, with premiums recorded by
life/health (L/H) insurers accounting for 56 percent and
premiums by P/C insurers accounting for 44 percent,
according to SNL Financial.16 The P/C insurance industry is
a well-developed industry with generally standardized
policy and regulations. However, along with some
regulation changes, there also have been some changes to
Terrorism Insurance
While last year started with uncertainty around terrorism
insurance, the passage of the federal Terrorism Risk
Insurance Program Reauthorization Act of 2015 (TRIPRA)
brought greater certainty to organizations that depend on
such coverage. Insurers continue to closely monitor
aggregate exposures for central business districts in major
cities. Some companies are turning to standalone
terrorism insurance marketplace, which can be more
Page 6
competitive than TRIPRA coverage18. Without this
backstop in place, many high-profile properties would not
be insurable in the commercial marketplace. However,
workers' compensation is also deeply impacted, as there
are large amounts of people working in highly
concentrated areas19.
insurance industry, which will eventually pull down the
margin for all players.
Low Investment Yield
Investment performance is a key driver of profitability.
Depressed yields will necessarily influence underwriting &
pricing. Due to persistent low interest rates, investment
income fell in 2012, 2013, and 2014, and is still below the
2007 pre-crisis peak. The FED has raised interest rate in
Dec, 2015, which helped improve the investment income
last year.
Arising Competition
ACE acquired Chubb in July 2014 for $28.3 billion, which
was the biggest ever deal for the insurance industry8.
Allianz, Berkshire Hathaway, AXA, and Travelers also
expressed interest back then, which means there may still
be potential M&A activities in P/C insurance industry in
following years. M&A activity in 2015 reached its highest
level since 1998. Globally, across all sectors, M&A activity
exceeded $200B14. Below chart shows the M&A deal value
in recent 20 years. 1998 witnessed the largest M&A
activities with $55,825 million deals. The M&A activity is
up sharply in 2015.
Total Investment Income of US P/C Insurance Industry
$60
$54.6
$52.3
$51.2
$49.5
$50
$49.2
$47.1 $47.6
$40 $38.9
$38.7
$48.0 $47.3
$46.2 $46.5
$39.6
$37.1 $36.7
M&A Activities in US P/C Insurance Industry
$30
$60,000
02
03
04
05
06
07
08
09
10
11
12
13
14
120
$32,000
80
$12,458
$6,723
$4,397
40
$4,651
$6,419
$16,294
60
$3,507
$9,264
$425
$486
$1,249
$13,615
$20,353
$19,118
$8,059
$5,100
$11,534
$30,000
$20,000
100
$35,221
$40,032
$30,873
$40,000
$0
20
0
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E
Source: Insurance Information Institute ($in millions)
Companies like HIG, which is trading below its book value,
will definitely be attractive to investors. As currently we
are in an increasing interest rate cycle and financial
services companies have been steadily recovering from
the financial crisis, P/C insurers may have to lower their
price to get more cash flow so as to increase the
investment portfolio and invest the proceeds at higher
rates and they also have enough capital to do so. Thus, we
are expecting an intense pricing competition in the P/C
Number of transactions
Transaction values
01
Source: Insurance Information Institute ($in billions)
$50,000
$10,000
00
140
$55,825
New Technology
New technology is shaping many industries as well as the
P/C insurance industry. The big data analytics helps
companies to build more precise forecasting models and
underwriting standards, thus improve the combined ratio
(before catastrophe). As smart phones, tablets, computers
are more and more popular, more customers like
purchasing their insurance through on-line channel.
According to a research conducted by PwC, cyber
insurance premiums written could more than triple to $7.5
billion by 2020, thus on-line customer experience becomes
more important and it is easier for customers to compare
prices and policies. To keep in trend, HIG launched its
mobile app in Apr 2015.
Page 7
15E
positive net income at $1,400 million on average. Due to
the strict regulations and well-developed structure, the
insurance policies among different companies are quite
similar. Besides price, companies usually compete in
services. HIG has been recognized for claims excellence in
2015.17
Estimated Cyber Insurance Premiums Written
$7.5
$8
$7
$6
$5
$4
$3
$2
$1.5
$2.0
$1
$0
2014
2015E
2020F
Source: PWC; Insurance Information Institute ($in billions)
The development of “Sharing Economy”, such as UBER,
AirBnB, and Task Rabbit, also has big impact of the P/C
insurance industry. The insurance gaps in lines such as
auto and home require new insurance solutions.
Auto insurance is the largest P/C line. 2015 witnessed a
record high auto sales in recent 15 years, and we are
expecting the auto sales to continue boosting in following
two years due to the pent-up demand and favorable
economy environment15. However, if Fed is going to
increase the interest rate in the following two years, it will
slow down the auto sales increasing rate, as the financing
cost for customers will increase. more and more vehicles
are with fully autonomous models and new technologies
are improving the safety of driving, and eventually we may
realize “hands-free”. By then, there may be new liability
question and challenges for P/C insurers to solve.
Source: National Association of Insurance Commissioners
Peer Comparisons
MARKETS AND COMPETITION
There are 2,583 P/C insurance companies in 2014 in the
US. P/C insurance consists primarily of auto, home, and
commercial insurance. The top 25 companies by NWP
accounted for 64.55% market share. HIG ranked the 12th
on this list, a similar position as Chubb and CNA. The
competition is fierce in this industry. Thus companies
often have to lower their price to attract more premiums
to investment for a higher return. Taking more than 10%
of the market share, which almost equaled the total
market share of companies in the second and the third
place, State Farm has been the No.1 auto insurer in the US
since 1942. It is not a public company and its surplus
belongs to policyholders. State Farm is a typical example
of lowering price to attract more customers. In recent
three years, the average underwriting loss of State Farm is
$2,200 million, and the investment income led to a
Allstate is the largest publicly traded P/C insurer in the US.
In 2011, it acquired two insurance businesses - Esurance, a
well-known brand in the US private vehicle insurance
market, and Answer Financial, an independent personal
insurance company that gives Allstate a stronger position
with self-directed customers who want a choice between
insurance carriers. During the past five years, its revenue
increased at an annualized rate of 2.7% to $30.1 billion. Its
profitability increased sharply as net income margin grew
from 1.5% of revenue in 2011 to an estimated 8.1% in
2015.20
Liberty Mutual is the third largest public traded P/C insurer
in the US. It has a more international presence as it has a
stake in, or owns, local insurance companies in Argentina,
Page 8
Brazil, Chile, China, Columbia, India, Poland, Portugal,
Singapore, Spain, Thailand, Turkey, Venezuela and
Vietnam. In 2014, the company's international market is
anticipated to account for 28.5% of its total revenue.
During the past five years, its revenue increased at an
annualized rate of 3.8% to $28.3 billion.
In the recent two years, the combined ratio of HIG
improved significantly and dropped below industry’s in
2015, which is mostly due to better predictions, optimized
underwriting criteria, and less catastrophe. Overall HIG
shows positive growth and it is relatively undervalued
compared with its peers.
HIG may still have market share and revenue growth gaps
compared with the larger insurers. However, in the most
recent one year, HIG’s stock returns largely outperformed
its main competitors and S&P 500. The CNA Insurance has
similar market share and P/BV ratios as HIG. However, its
stock return was down by almost 40% in February 2016.
S&P500
20%
HIG
C-N-A
Allstate
Chubb
10%
Source: Factset
0%
In 2015, HIG had a 9.25% ROE, similar to Allstate and
Chubb. Though CNA is similar to HIG in terms of market
share, HIG outperformed CNA regarding its profitability
and operating effectiveness.
-10%
-20%
-30%
Source: Yahoo Finance
-40%
A
M
J
J
A
S
O
N
D
J
F
ROE in 2015
M
Due to the blurry definition of debt and lack of capital
expenditures and depreciation, price to book ratio is a
good indicator when evaluating financial services industry.
In 2015 Q3, the price to book ratio of the P/C insurance
industry is 0.90. Compared with previous three quarters’
average ratio of 0.98, it indicates that the P/C insurance
industry overall may be underpriced. Meanwhile,
companies such as Allstate, Hartford, and LOEWS also had
a below 1 price to book ratio in 2015Q3.15
12
10.61
9.25
10
9.65
3.9
8
6
4
2
0
HIG
CNA
Allstate
Chubb
Source: Bloomberg
Chubb is outstanding in operating margin.
Opearting Margin in 2015
18.94
20
15
12.71
10.02
7.74
10
5
0
HIG
Source: Factset
Source: Bloomberg
Page 9
CNA
Allstate
Chubb
Though HIG only had half of Allstate’s or Chubb’s market
share, its net income in 2015 only lagged Allstate’s by 25%.
Net Income in 2015
2834
3000
2500
2000
help boost both auto sales and housing sales at least in the
following two years. The disposable income has a
compound growth rate at 1.5% between 2011-2016 and is
forecasted to be 1.9% between 2016 and 2021 by IBIS
World. Good job market is essential to higher disposable
income, which will lead to higher auto and home sales.
2055
1682
US Per Capita Disposable Income
1500
1000
479
500
0
HIG
CNA
Allstate
Chubb
Source: Bloomberg
ECONOMIC OUTLOOK
Interest rates will affect HIG’s both investment income and
policy premium. With the increase in the fed funds rate,
the 1-yr T-Bill and the 10-yr T-Bond yields are expected to
increase over the next three years and reached a full
normalization of interest rates around 2019. Theoretically
the increasing interest rate will benefit HIG with
potentially higher investment yield. Historically, however,
HIG’s investment yield has remained around 4% despite
the macro economy. Regarding the policy premium, the
increasing interest rate will also increase the cost for
people who buy a house/car or lease a car through
financing options. Thus we may see a decreasing auto and
homeowners’ insurance market as a result of the
increasing interest rate. Overall, the increasing interest
rate is not favorable for HIG, unless its investment income
can catch up.
Source: IBIS World
Oil price dropped below $30 per barrel for the first time
since 2001, and it boosted the auto sales and miles driven
during 2015. With the sanction on Iran has been lifted, it is
foreseen that there will be a supply surplus. OPEC
countries discussed the possibility of freeze production
from now until Oct 2016 in Doha on April 17th, 2016,
however they have not reached an agreement, which may
not come true in the near future either. We forecast the
oil price will remain below $60 per barrel in the following
two years. Because the cost of oil per barrel for shale oil
producers is $40. Currently, most shale oil producers
reduce production or even went bankruptcy because the
price could not cover their cost. Once the oil price arises
above $40, shale oil producers will join the game again.
With higher supply, the oil price is likely to drop again until
it reaches the equilibrium.
Source: Insurance Information Institute
The US unemployment rate has continued to decline with
the Dec 2015 rate being reported at 5.0%, and the
disposable income has been increasing since 2013. It will
Page 10
• The application of new technology drives efficiency,
makes better predictions, and optimizes underwriting
standards. HIG can keep or decrease its combined ratio
before catastrophe before industry’s average 92.6%.
INVESTMENT POSITIVES
• Boosting auto sales, especially in new vehicles, are bring
higher unit written premium and policy volume to the auto
insurance line.
Source: EIA
The construction sector is critical to the economy and the
P/C insurance industry. There is an increasing trend in both
private residential and private non-residential
construction. The new construction peaked at $912 billion
in 2006. In 2015, the new construction hit $828 billion, up
by 65.4% since 2010 and only 9.1% away from the record
in 200613. Job growth, low inventories of existing homes,
still-low mortgage rates and demographics should
continue to stimulate new home construction for several
more years.
$1,000
$900
$800
$500
Non Residential
Residential
$200
$100
• More housing units are being sold and occupied, which
dictates a strengthening market in 2016 and will bring
more NWP to the homeowners’ insurance line.
INVESTMENT NEGATIVES
• The incidence and severity of catastrophes are difficult
to predict. With the changing climate conditions, the
unpredictability and frequency of natural disasters could
adversely affect P/C insurance industry’s operations,
financial conditions, and liquidity.
• The global economy is fluctuating and negative interest
rates could hurt the investment income. The rising
competition forcing companies to lower price could
eventually bring down the premiums margin.
$700
$600
$400
$300
• More housing units are being sold and occupied, which
dictates a strengthening market in 2016 and will bring
more NWP to the homeowners’ insurance line.
VALUATION
$0
03
04
05
06
07
08
09
10
11
12
13
14
15*
Source: US Department of Commerce; Insurance Information Institute
(in $billions)
CATALYSTS FOR GROWTH
• Increasing auto and housing sales, especially in new
vehicle sales and leasing, are bringing higher unit written
premium and policy volume to the auto insurance line. As
long as interest rate will not increase significantly and job
market stays optimistic, we expect steady growth of
personal lines in the following two years.
• HIG has been focusing on developing its commercial
lines. We expect Maxum and the new energy practice will
fit in HIG’s operations well and start generating more
revenues.
We used a Discounted Cash Flow (DCF), Dividend Discount
Model (DDM), and Relative Price to Earnings (P/E) analysis
to value HIG. The DCF and DDM models computed stock
prices of $43.92 and $39.06. For the relative P/E, P/BV, and
P/TBV analysis we calculated a price based on peers, which
are $51.02, $57.66, and $62.21 respectively. We believe
the true value of Hartford stock is in between at $40 and
$48.
The most important assumptions for the valuation model
are revenue growth rates, investment amount and yield,
losses and expenses, and dividend payout ratio.
Beta was from Bloomberg average 5-year weekly data,
which is 1.048. In 2015, HIG’s beta was less than 1. The
market risk premium used was the Henry Fund consensus
Page 11
for 2016 (5.00%), resulting in a cost of equity equal to
7.94%.
Commercial lines are expected to grow at around 3% in
2016 benefiting from the acquisition of Maxum and set-up
of the new energy practice. Personal lines are expected to
grow at around 2.4% benefiting from the increasing sales
of auto and houses. Mutual Funds grew more quickly in
recent two years and are expected to continue growing.
We used the most recent two years’ average growth rate
to forecast, and for the rest lines, we used five-year
average.
Though investment yield fluctuated with the financial crisis
and low interest rates among different investment assets,
the overall investment yield has been steady around 4%.
Investment amount decreased almost 50% due to the sale
of Japanese business. Investment amount growth rate was
forecasted according to each investment assets using
recent two years or five years’ trend.
Losses and expenses were calculated as percentage of
premiums written, which is expected to stay around 80%
as HIG has been improving its underwriting criteria.
Dividend payout ratio was assumed the same as that in
2015, which is around 19.26%.
KEYS TO MONITOR
As we are expecting an increasing contribution from
personal lines as a result of boosting auto and housing
sales, we should keep monitor these two markets’ trends
and also whether HIG’s personal line written premiums
increase along with the market. Another metric to pay
attention to is loss cost. With low oil price, not only the
auto sales increase, but also the average miles driven,
which could potentially increase the accident rate, thus
the claims.
For investment income, as HIG still hold energy-related
securities, we should pay to attention to any significant
drop in investment yield. It is also very sensitive to interest
rate change. A decline in interest rates reduces the returns
available on new investments, thereby negatively
impacting the Company’s net investment income.
Conversely, rising interest rates reduce the market value
of existing investments in investment grade bonds.
REFERENCES
1. National Association of Insurance Commissioners.
http://www.naic.org/documents/web_market_share_
160301_2015_property_lob.pdf
2. Seeking Alpha.
http://seekingalpha.com/symbol/HIG/news
3. HIG 10K.
4. Factset.
5. HIG 2015Q4 results earnings call.
6. The Wall Street Journal “U.S. Car Sales Set Record in
2015”.
7. HIG 10K.
8. Market Realist.
http://marketrealist.com/2015/07/ace-chubb-usinsurance-industrys-biggest-ever-acquisition/
9. HIG 2015Q4 results earnings call.
10. HIG 10K.
11. HIG 10K.
12. Zacks.
http://www.zacks.com/stock/news/138886/hartfordfinancial-vends-hlikk-enhances-core-operations
13. US Department of Commerce.
http://www.census.gov/construction/c30/c30index.h
tml
14. Insurance Information Institution, Outlook for P/C
insurance industry.
http://www.iii.org/presentation/overview-andoutlook-for-the-global-commercial-p-c-insuranceindustry-trends-challenges-disruptors-andopportunities-022316
15. The Wall Street Journal, “U.S. Car Sales Set Record in
2015” by Spector, Bennett, and Stoll, Jan 5, 2016
16. Insurance Information Institution.
http://www.iii.org/fact-statistic/industry-overview
17. HIG website.
18. Marsh, Looking Ahead P/C Insurance 2016.
https://www.marsh.com/us/insights/risk-incontext/looking-ahead-property-insurance-marketrisk-trends-2016.html
19. Insurance Thought Leadership, Terrorism Insurance.
http://insurancethoughtleadership.com/tag/terroris
m-risk-insurance-program-reauthorization-act/
20. IBIS World.
IMPORTANT DISCLAIMER
Henry Fund reports are created by student enrolled in the
Applied Securities Management (Henry Fund) program at
Page 12
the University of Iowa’s Tippie School of Management.
These reports are intended to provide potential employers
and other interested parties an example of the analytical
skills, investment knowledge, and communication abilities
of Henry Fund students. Henry Fund analysts are not
registered investment advisors, brokers or officially
licensed financial professionals. The investment opinion
contained in this report does not represent an offer or
solicitation to buy or sell any of the aforementioned
securities. Unless otherwise noted, facts and figures
included in this report are from publicly available sources.
This report is not a complete compilation of data, and its
accuracy is not guaranteed. From time to time, the
University of Iowa, its faculty, staff, students, or the Henry
Fund may hold a financial interest in the companies
mentioned in this report.
Page 13
The Hartford Financial Services Group, Inc.
Income Statement (in millions)
Fiscal Years Ending Dec. 31
Revenues
Earned Premiums
Fee income
Net investment income
Net realized capital gains
Other revenues
Total revenues
Benefits, losses, and expenses
Benefits, losses, and loss adjustment expenses
Amortization of deferred policy acquisition costs and PV of future profits
Insurance operating costs and other expenses
Loss on extinguishment of debt
Goodwill impairement
Other expense
Interest expense
Total benefits, losses, and expenses
Income from continuing operations before income tax
Income tax expense
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income
Preferred stock dividends
Net income available to common shareholders
Ending Basic # Shares Outstanding (in thousands)
Basic EPS
Dividends per Share
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
13,231
2,105
3,264
1,798
275
20,673
13,336
1,996
3,154
16
112
18,614
13,577
1,839
3,030
(156)
87
18,377
13,770
1,762
3,077
0
234
18,843
13,803
1,758
3,047
0
235
18,842
13,867
1,756
3,091
0
236
18,950
13,975
1,756
3,085
0
238
19,054
14,106
1,759
3,085
0
240
19,190
11,048
1,794
4,176
213
1,574
0
397
19,202
1,471
246
1,225
(1,049)
176
10
166
10,805
1,729
4,028
0
(23)
0
376
16,915
1,699
350
1,349
(551)
798
0
798
10,775
1,502
3,772
21
(28)
0
357
16,399
1,978
305
1,673
9
1,682
0
1,682
11,043
1,654
3,992
0
0
0
331
17,020
1,823
281
1,542
0
1,542
0
1,542
11,011
1,593
3,918
0
0
0
335
16,857
1,985
306
1,679
0
1,679
0
1,679
11,092
1,633
3,979
0
0
0
327
17,030
1,919
296
1,623
0
1,623
0
1,623
11,163
1,629
3,988
0
0
0
334
17,115
1,939
299
1,640
0
1,640
0
1,640
11,275
1,653
4,036
0
0
0
337
17,301
1,889
291
1,598
0
1,598
0
1,598
453,290 424,416 401,821 402,243 402,681 403,119 403,556 403,992
0.37
1.81
4.05
3.83
4.17
4.03
4.06
3.95
0.50
0.66
0.78
0.78
0.80
0.80
0.80
0.80
The Hartford Financial Services Group, Inc.
Cash Flow Statement (in millions)
Fiscal Years Ending Dec. 31
Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Amortization of deferred policy acquisition costs and present value of future profits
Additions to deferred policy acquisition costs and present value of future profits
Change in
Reserve for future policy benefits, unpaid losses and loss adjustment expenses and unearned premiums
Reinsurance recoverables
Receivables
Payables and accruals
Accrued and deferred income taxes
Net realized capital losses
Net (increase) decrease in equity securities, held for trading
Net receipts (disbursements) from investment contracts credited to policyholder funds —
International variable annuities associated with equity securities, held for trading
Goodwill impairment
Depreciation and amortization
Other, net
Net cash provided by operating activities
2013
2014
176
798
2015
1,682
2,701
(1,330)
1,729
(1,364)
1,502
(1,390)
(308)
(561)
(409)
497
(526)
(1,149)
9,188
226
(22)
(122)
(937)
328
141
3,993
305
146
183
(704)
363
156
0
(9,189)
1,574
189
384
1,237
(3,993)
(23)
276
856
1,886
0
(28)
373
168
2,756
40,588
274
468
368
25,710
354
646
490
26,127
1,319
792
624
Investing Activities
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available‐for‐sale, including short‐term investments
Equity securities, available‐for‐sale, fair value
Mortgage loans
Partnerships
Payments for the purchase of:
Fixed maturities, available‐for‐sale, including short‐term investments
Equity securities, available‐for‐sale
Mortgage loans
Partnerships
Change in policy loans, net
Change in payables for collateral under securities lending, net
Derivative receipts (payments)
Change in all other securities, net
Purchase price adjustment of business acquired
Sale of subsidiary, net of cash transferred
Additions to property and equipment, net
Net cash used for investing activities
(35,596) (22,914)
(212)
(683)
(718)
(604)
(353)
(312)
(5)
(11)
0
0
(2,208)
10
388
(1,832)
0
0
815
963
(64)
(121)
3,745
1,696
(27,995)
(1,454)
(870)
(620)
(30)
0
(173)
3,072
0
0
(307)
485
Financing Activities
Deposits and other additions to investment and universal life‐type contracts
Withdrawals and other deductions from investment and universal life‐type contracts
Net transfers from (to) separate accounts related to investment and universal life‐type contracts
Issuance of shares from equity unit contracts
Issuance of long‐term debt
Repayment/maturity of long‐term debt and on capital lease obligations
Change in short‐term debt
Issuance of convertible preferred shares
Issuance of warrants
Proceeds from issuance of consumer notes
Repayments of consumer notes
Proceeds from issuances of shares under incentive and stock compensation plans, and excess tax benefit
Treasury stock acquired
Return of shares under incentive and stock compensation plans to treasury stock
Redemption of preferred stock issued to the U.S. Treasury
Net proceeds from issuance of common shares under public offering
Net proceeds from issuance of common shares under discretionary equity issuance plan
Changes in bank deposits and payments on bank advances
Net increase (decrease) in securities loaned or sold under agreements to repurchase
Dividends paid
Net cash used for financing activities
5,942
5,289
(25,034) (21,870)
16,978
14,366
0
0
533
0
(1,338)
(200)
0
0
0
0
(33)
0
0
0
(77)
(13)
20
30
(600) (1,796)
0
0
0
0
0
0
0
0
0
0
(1,988)
0
(223)
(282)
(5,820) (4,476)
4,718
(17,085)
11,046
0
0
(773)
0
0
0
0
(33)
42
(1,250)
0
0
0
0
0
507
(316)
(3,144)
Foreign Exchange Rate Effect on Cash
Net Change in Cash
Beginning Cash
Ending Cash
(155)
(993)
2,421
1,428
(135)
(1,029)
1,428
399
(48)
49
399
448
The Hartford Financial Services Group, Inc.
Cash Flow Statement (in millions)
Fiscal Years Ending Dec. 31
Operating Activities
Net income (loss)
Deferred policy acquisition costs
Change in
Reserve for future policy benefits, unpaid losses and loss adjustment expenses
Unearned premiums
Reinsurance recoverables
Receivables
Deferred income taxes, net
Net (increase) decrease in equity securities, held for trading
Other policyholder funds & benefits payable
Other policyholder funds & benefits payable ‐ int'l VA's
Goodwill impairment
Other, net
Net cash provided by operating activities
2016E
2017E
2018E
2019E
2020E
1,542
(4)
1,679
2
1,623
(1)
1,640
0
1,598
(0)
(293)
(139)
135
53
549
0
431
0
0
(565)
1,711
53
5
(67)
(8)
(252)
0
(216)
0
0
282
1,479
68
21
34
10
(193)
0
108
0
0
(141)
1,529
5
10
(17)
(3)
148
0
(54)
0
0
71
1,800
(8)
5
8
(11)
(11)
0
27
0
0
(35)
1,573
Investing Activities
Change in Fixed maturities
Change in Equity securities, AFS
Change in Mortgage loans
Change in policy loans
Change in Partnerships and other alternative investments
Change in other investments
Change in short‐term investments
Additions to property and equipment, net
Net cash used for investing activities
(87)
152
(219)
8
(7)
(208)
(1,520)
36
(1,845)
43
(10)
(23)
(4)
(70)
104
760
18
819
(22)
(18)
169
2
13
(52)
(380)
12
(276)
11
(26)
(20)
(1)
21
26
190
(6)
194
(5)
5
(32)
1
5
(13)
(95)
(17)
(152)
Financing Activities
Net transfers from (to) separate accounts related to investment and universal life‐type contracts
Issuance of preferred stock
Total Debt
Treasury stock acquired
Common Stock + APIC
Dividends paid
Net cash used for financing activities
0
0
375
(1,300)
284
(314)
(955)
0
0
(188)
(636)
284
(323)
(863)
0
0
94
(720)
284
(324)
(666)
0
0
(47)
(814)
284
(324)
(901)
0
0
23
(921)
284
(324)
(938)
Foreign Exchange Rate Effect on Cash
Net Change in Cash
Beginning Cash
Ending Cash
0
(1,088)
448
(640)
0
1,435
(640)
794
0
587
794
1,382
0
1,093
1,382
2,475
0
483
2,475
2,958
The Hartford Financial Services Group, Inc.
Balance Sheet (in millions)
Fiscal Years Ending Dec. 31
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
Assets
Cash
Fixed Maturities
Equity securities, AFS
Mortgage loans
Policy loans
Limited partnerships and other alternative investments
Other investments
Short‐term investments
Equity securities, trading
Premiums receivable and agents' balances, net
Reinsurance recoverables, net
Deferred policy acquisition costs
Deferred income taxes, net
Goodwill
Property and equipment, net
Other assets
Separate account assets
Total Assets
1,428
63,201
868
5,598
1,420
3,040
521
4,008
19,745
3,465
23,330
2,161
3,840
498
877
2,998
140,886
277,884
399
59,872
1,047
5,556
1,431
2,942
536
4,883
11
3,429
22,920
1,823
2,897
498
831
1,236
134,702
245,013
448
59,699
1,121
5,624
1,447
2,874
120
1,843
0
3,537
23,189
1,816
3,206
498
974
1,829
120,123
228,348
(640)
59,786
969
5,843
1,439
2,881
328
3,363
0
3,484
23,055
1,820
2,657
498
938
2,221
127,413
236,052
794
59,742
979
5,866
1,443
2,950
224
2,603
0
3,491
23,122
1,818
2,908
498
919
2,025
123,768
233,152
1,382
59,764
997
5,698
1,441
2,937
276
2,983
0
3,481
23,088
1,819
3,102
498
908
2,123
125,590
236,086
2,475
59,753
1,023
5,717
1,442
2,917
250
2,793
0
3,484
23,105
1,818
2,954
498
914
2,074
124,679
235,896
2,958
59,758
1,018
5,750
1,442
2,912
263
2,888
0
3,496
23,097
1,818
2,965
498
931
2,098
125,135
237,025
Liabilities & Shareholders' Equity
Reserve for future policy benefits and unpaid losses and loss adjustment losses
Other policyholder funds & benefits payable
Other policyholder funds & benefits payable ‐ int'l VA's
Unearned premiums
total debt
other liabilities
Separate account liabilities
Total Liabilities
41,373
39,029
19,734
5,225
6,544
6,188
140,886
258,979
41,444
32,532
0
5,255
6,109
6,251
134,702
226,293
41,572
31,670
0
5,385
5,359
6,597
120,123
210,706
41,279
32,101
0
5,246
5,734
6,424
127,413
218,197
41,332
31,886
0
5,251
5,547
6,511
123,768
214,294
41,400
31,993
0
5,273
5,640
6,467
125,590
216,364
41,406
31,939
0
5,282
5,593
6,489
124,679
215,388
41,398
31,966
0
5,287
5,617
6,478
125,135
215,881
Preferred Stock
Common Stock + APIC
Retained Earnings
Accumulated other comprehensive income (loss), net of tax
Treasury Stock
Total Shareholders' Equity
Total Liabilities & Shareholders' Equity
0
9,899 10,683 (79)
(1,598)
18,905
277,884
0
9,128 11,191 928 (2,527)
18,720
245,013
0
8,978 12,550 (329)
(3,557)
17,642
228,348
0
9,262 13,778 (329)
(4,857)
17,855
236,052
0
9,546 15,134 (329)
(5,493)
18,858
233,152
0
9,831 16,434 (329)
(6,213)
19,722
236,086
0
10,115 17,750 (329)
(7,027)
20,508
235,896
0
10,399 19,023 (329)
(7,948)
21,144
237,025
The Hartford Financial Services Group, Inc.
Income Statement
Fiscal Years Ending Dec. 31
Revenues
Earned Premiums
Fee income
Net investment income
Net realized capital gains
Other revenues
Total revenues
Benefits, losses, and expenses
Benefits, losses, and loss adjustment expenses
Amortization of deferred policy acquisition costs and PV of future profits
Insurance operating costs and other expenses
Loss on extinguishment of debt
Goodwill imparement
Other expense
Interest expense
Total benefits, losses, and expenses
Income from continuing operations before income tax
Income tax expense
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income
Preferred stock dividends
Net income available to common shareholders
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
4.43%
0.71%
1.09%
0.60%
0.09%
6.93%
4.80%
0.72%
1.14%
0.01%
0.04%
6.70%
5.54%
0.75%
1.24%
‐0.06%
0.04%
7.50%
6.03%
0.77%
1.35%
0.00%
0.10%
8.25%
5.85%
0.74%
1.29%
0.00%
0.10%
7.98%
5.95%
0.75%
1.33%
0.00%
0.10%
8.13%
5.92%
0.74%
1.31%
0.00%
0.10%
8.07%
5.98%
0.75%
1.31%
0.00%
0.10%
8.13%
83.50%
13.56%
31.56%
0.07%
0.53%
0.00%
0.13%
6.43%
0.49%
0.08%
0.41%
‐0.35%
0.06%
0.00%
0.06%
81.02%
12.96%
30.20%
0.00%
‐0.01%
0.00%
0.14%
6.09%
0.61%
0.13%
0.49%
‐0.20%
0.29%
0.00%
0.29%
79.36%
11.06%
27.78%
0.01%
‐0.01%
0.00%
0.15%
6.69%
0.81%
0.12%
0.68%
0.00%
0.69%
0.00%
0.69%
80.19%
12.01%
28.99%
0.01%
0.00%
0.00%
0.14%
7.45%
0.80%
0.12%
0.68%
0.00%
0.68%
0.00%
0.68%
79.78%
11.54%
28.39%
0.01%
0.00%
0.00%
0.14%
7.14%
0.84%
0.13%
0.71%
0.00%
0.71%
0.00%
0.71%
79.98%
11.78%
28.69%
0.01%
0.00%
0.00%
0.14%
7.30%
0.82%
0.13%
0.70%
0.00%
0.70%
0.00%
0.70%
79.88%
11.66%
28.54%
0.01%
0.00%
0.00%
0.14%
7.25%
0.82%
0.13%
0.69%
0.00%
0.69%
0.00%
0.69%
79.93%
11.72%
28.61%
0.01%
0.00%
0.00%
0.14%
7.33%
0.80%
0.12%
0.68%
0.00%
0.68%
0.00%
0.68%
The Hartford Financial Services Group, Inc.
Balance Sheet (in millions)
Fiscal Years Ending Dec. 31
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
Assets
Cash
Fixed Maturities
Equity securities, AFS
Mortgage loans
Policy loans
Limited partnerships and other alternative investments
Other investments
Short‐term investments
Equity securities, trading
Premiums receivable and agents' balances, net
Reinsurance recoverables, net
Deferred policy acquisition costs
Deferred income taxes, net
Goodwill
Property and equipment, net
Other assets
Separate account assets
Total Assets
0.51%
22.74%
0.31%
2.01%
0.51%
1.09%
0.19%
1.44%
7.11%
1.25%
8.40%
0.78%
1.38%
0.18%
0.32%
1.08%
50.70%
100.00%
0.16%
24.44%
0.43%
2.27%
0.58%
1.20%
0.22%
1.99%
0.00%
1.40%
9.35%
0.74%
1.18%
0.20%
0.34%
0.50%
54.98%
100.00%
0.20%
26.14%
0.49%
2.46%
0.63%
1.26%
0.05%
0.81%
0.00%
1.55%
10.16%
0.80%
1.40%
0.22%
0.43%
0.80%
52.61%
100.00%
‐0.27%
25.33%
0.41%
2.48%
0.61%
1.22%
0.14%
1.42%
0.00%
1.48%
9.77%
0.77%
1.13%
0.21%
0.40%
0.94%
53.98%
100.00%
0.34%
25.62%
0.42%
2.52%
0.62%
1.27%
0.10%
1.12%
0.00%
1.50%
9.92%
0.78%
1.25%
0.21%
0.39%
0.87%
53.08%
100.00%
0.59%
25.31%
0.42%
2.41%
0.61%
1.24%
0.12%
1.26%
0.00%
1.47%
9.78%
0.77%
1.31%
0.21%
0.38%
0.90%
53.20%
100.00%
1.05%
25.33%
0.43%
2.42%
0.61%
1.24%
0.11%
1.18%
0.00%
1.48%
9.79%
0.77%
1.25%
0.21%
0.39%
0.88%
52.85%
100.00%
1.25%
25.21%
0.43%
2.43%
0.61%
1.23%
0.11%
1.22%
0.00%
1.47%
9.74%
0.77%
1.25%
0.21%
0.39%
0.89%
52.79%
100.00%
Liabilities & Shareholders' Equity
Reserve for future policy benefits and unpaid losses
Other policyholder funds & benefits payable
Other policyholder funds & benefits payable ‐ int'l VA's
Unearned premiums
total debt
other liabilities
Separate account liabilities
Total Liabilities
14.89%
14.05%
7.10%
1.88%
2.35%
2.23%
50.70%
93.20%
16.92%
13.28%
0.00%
2.14%
2.49%
2.55%
54.98%
92.36%
18.21%
13.87%
0.00%
2.36%
2.35%
2.89%
52.61%
92.27%
17.49%
13.60%
0.00%
2.22%
2.43%
2.72%
53.98%
92.44%
17.73%
13.68%
0.00%
2.25%
2.38%
2.79%
53.08%
91.91%
17.54%
13.55%
0.00%
2.23%
2.39%
2.74%
53.20%
91.65%
17.55%
13.54%
0.00%
2.24%
2.37%
2.75%
52.85%
91.31%
17.47%
13.49%
0.00%
2.23%
2.37%
2.73%
52.79%
91.08%
0.00%
3.56%
3.84%
‐0.03%
‐0.58%
6.80%
100.00%
0.00%
3.73%
4.57%
0.38%
‐1.03%
7.64%
100.00%
0.00%
3.93%
5.50%
‐0.14%
‐1.56%
7.73%
100.00%
0.00%
3.92%
5.84%
‐0.14%
‐2.06%
7.56%
100.00%
0.00%
4.09%
6.49%
‐0.14%
‐2.36%
8.09%
100.00%
0.00%
4.16%
6.96%
‐0.14%
‐2.63%
8.35%
100.00%
0.00%
4.29%
7.52%
‐0.14%
‐2.98%
8.69%
100.00%
0.00%
4.39%
8.03%
‐0.14%
‐3.35%
8.92%
100.00%
Preferred Stock
Common Stock + APIC
Retained Earnings
Accumulated other comprehensive income (loss), net of tax
Treasury Stock
Total Shareholders' Equity
Total Liabilities & Shareholders' Equity
The Hartford Financial Services Group, Inc.
Revenue Decomposition
Fiscal Years Ending Dec. 31
Earned premiums, fees, and other considerations
Commercial Lines
Workers’ compensation
Property
Automobile
Package business
Liability
Bond
Professional liability
Total Commercial Lines
2,975
521
579
1,139
566
201
222
6,203
2,971
559
591
1,163
582
210
213
6,289
3,051
637
614
1,203
567
218
221
6,511
3,129
653
630
1,234
582
224
227
6,678
3,184
665
641
1,255
592
228
231
6,795
3,240
676
652
1,277
602
231
235
6,914
3,296
688
663
1,300
613
236
239
7,035
3,354
700
675
1,323
623
240
243
7,158
Personal Lines
Automobile
Homeowners
Total Personal Lines
2,522
1,138
3,660
2,613
1,193
3,806
2,671
1,202
3,873
2,748
1,237
3,984
2,811
1,265
4,077
2,877
1,295
4,171
2,943
1,325
4,268
3,012
1,355
4,367
Group Benefits
Group disability
Group life
Other
Total Group Benefits
1,452
1,717
161
3,330
1,450
1,478
167
3,095
1,479
1,477
180
3,136
1,392
1,390
169
2,951
1,302
1,300
158
2,760
1,222
1,220
149
2,590
1,162
1,161
141
2,465
1,111
1,110
135
2,356
520
148
668
586
137
723
607
116
723
632
121
753
645
123
768
665
127
792
682
130
812
701
134
835
1
1,463
11
0
15,336
1
1,407
11
0
15,332
Mutual Funds
Mutual Fund
Talcott
Total Mutual Funds
Property & Casualty Other Operations
Talcott Resolution
Corporate
Individual Annuity/Life/Retirement Plans/Other operations
Total earned premiums, fees, and other considerations
Fixed maturities
Equity securities, AFS
Mortgage loans
Policy loans
Limited partnerships and other alternative investments
Other investments
Investment expenses
Total securities AFS and other
Equity securities, trading
Total net investment income
Net realized capital gains
Other revenues
Total Revenues
Key Growth Rate
Total Commercial Lines
Total Personal Lines
Total Group Benefits
Total Mutual Funds
Total Other considerations
Total earned premiums, fees, and other considerations
Total net investment income
Other revenue
Total Revenues
Yield %
Fixed maturities
Equity securities, AFS
Mortgage loans
Policy loans
Limited partnerships and other alternative investments
Other investments
Short‐term investments
Total securities AFS and other
Equity securities, trading
Total investment
Investment Amount $
Fixed maturities
Equity securities, AFS
Mortgage loans
Policy loans
Limited partnerships and other alternative investments
Other investments
Short‐term investments
Total securities AFS and other
Equity securities, trading
Total net investment amount
2013
2,552
30
260
83
287
167
(115)
3,264
0
3,264
2014
2015
2016E
2017E
2018E
2019E
2020E
32
26
22
18
15
12
1133
1133
1133
1133
1133
1133
8
7
5
5
4
3
0
0
0
0
0
0
15,416 15,532 15,560 15,623 15,731 15,864
2,420
2,409
2,390
2,378
2,402
2,399
2,396
38
25
33
33
32
33
31
265
267
281
281
271
273
275
80
82
85
84
83
83
83
294
227
250
251
262
257
249
179
138
141
110
151
148
169
(122)
(118)
(105)
(89)
(109)
(107)
(118)
3,154
3,030 3,077 3,047 3,091 3,085 3,085
0
0
0
0
0
0
0
3,154 3,030 3,077 3,047 3,091 3,085 3,085
1,798
275
20,673
2.08%
16
(156)
0
112 87 234
18,614
18,377 18,843
0.84%
1.70%
‐0.89%
0.66%
‐12.60%
6.71%
‐48.66%
‐10.86%
‐20.91%
6.59%
‐6.40%
1.39%
3.99%
‐7.06%
8.23%
‐3.80%
‐0.03%
‐3.37%
‐59.27%
‐9.96%
3.53%
1.76%
1.32%
0.00%
‐17.34%
0.55%
‐3.93%
‐22.32%
‐1.27%
2.57%
2.87%
‐5.90%
4.12%
‐17.34%
0.75%
1.55%
169.26%
2.54%
1.75%
2.32%
‐6.47%
2.06%
‐17.34%
0.18%
‐0.96%
0.23%
0.00%
1.75%
2.32%
‐6.14%
3.09%
‐17.34%
0.40%
1.42%
0.47%
0.57%
1.75%
2.32%
‐4.85%
2.57%
‐17.34%
0.69%
‐0.19%
0.78%
0.55%
1.75%
2.32%
‐4.41%
2.83%
‐17.34%
0.85%
0.01%
0.93%
0.71%
4.0%
3.5%
4.6%
5.8%
9.4%
32.1%
‐2.9%
4.1%
0.0%
3.3%
4.0%
3.6%
4.8%
5.6%
10.0%
33.4%
‐2.5%
4.1%
0.0%
4.1%
4.0%
2.2%
4.7%
5.7%
7.9%
115.0%
‐6.4%
4.2%
4.0%
3.5%
4.8%
5.9%
8.7%
43.1%
‐3.1%
4.1%
4.0%
3.4%
4.8%
5.8%
8.5%
49.2%
‐3.4%
4.1%
4.0%
3.2%
4.8%
5.8%
8.9%
54.5%
‐3.7%
4.2%
4.0%
3.2%
4.8%
5.7%
8.8%
59.0%
‐3.8%
4.2%
4.0%
3.1%
4.8%
5.8%
8.6%
64.2%
‐4.1%
4.2%
4.2%
4.1%
4.1%
4.2%
4.2%
4.2%
63,201
868
5,598
1,420
3,040
521
4,008
78,656
19,745
98,401
59,872
1,047
5,556
1,431
2,942
536
4,883
76,267
11
76,278
59,699
1,121
5,624
1,447
2,874
120
1,843
72,728
0
72,728
59,786
969
5,843
1,439
2,881
328
3,363
74,609
0
74,609
0
235
18,842
59,742
979
5,866
1,443
2,950
224
2,603
73,808
0
73,808
0
236
18,950
59,764
997
5,698
1,441
2,937
276
2,983
74,096
0
74,096
0
238
19,054
59,753
1,023
5,717
1,442
2,917
250
2,793
73,895
0
73,895
0
240
19,190
59,758
1,018
5,750
1,442
2,912
263
2,888
74,030
0
74,030
The Hartford Financial Services Group, Inc.
Value Driver Estimation (in millions)
Fiscal Years Ending Dec. 31
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
13,231
2,105
1,794
11,048
381
2,875
3,264
(1,049)
2,073
5,963
397
246
557
0
0
10
0
547
13,336
1,996
1,729
10,805
71
2,869
3,154
(551)
128
4,005
376
350
869
0
0
0
0
869
13,577
1,839
1,502
10,775
128
3,267
3,030
9
(69)
3,765
357
305
1,810
0
0
0
0
1,810
13,770
1,762
1,654
11,043
(293)
2,543
3,077
0
234
3,992
331
281
1,250
0
0
0
0
1,250
13,803
1,758
1,593
11,011
53
3,009
3,047
0
235
3,918
335
306
1,732
0
0
0
0
1,732
13,867
1,756
1,633
11,092
68
2,966
3,091
0
236
3,979
327
296
1,691
0
0
0
0
1,691
13,975
1,756
1,629
11,163
5
2,944
3,085
0
238
3,988
334
299
1,645
0
0
0
0
1,645
14,106
1,759
1,653
11,275
(8)
2,929
3,085
0
240
4,036
337
291
1,590
0
0
0
0
1,590
Increase in Accounts Payable
+ Increase in Debt
+ Increase in Other Liabilities
+ Increase in Preferred Stock
Sources of Cash
(12,138)
(582)
(4,748)
(556)
(18,024)
(26,231)
(435)
(6,091)
0
(32,757)
(862)
(750)
(14,103)
0
(15,715)
431
375
6,978
0
7,784
(216)
(188)
(3,553)
0
(3,956)
108
94
1,800
0
2,002
Increase in Investments and Cash
+ Increase in Accounts Receivable
+ Increase in Fixed Assets
+ Increase in Deferred Acquisition Costs
+ Increase in Other Assets
+ Increase in Unearned Premium Reserve and Other Provisions
Uses of Cash
(36,842)
(77)
(100)
(3,564)
19,954
0
(20,629)
(23,152)
(36)
(46)
(338)
(9,299)
0
(32,871)
(3,501)
108
143
(7)
(13,408)
1
(16,664)
793
(53)
(36)
4
6,997
2
7,706
634
8
(18)
(2)
(3,522)
3
(2,897)
Cash from Operations
+ Sources of Cash
‐ Uses of Cash
FCFE Formal
547
(18,024)
(20,629)
3,152
869
(32,757)
(32,871)
983
1,810
(15,715)
(16,664)
2,759
1,250
7,784
7,706
1,328
557 22,447 2.48%
869 18,905 4.60%
1,810 18,720 9.67%
Net Income
+ ∆ in Total Liabilities
‐ ∆ in Total Assets
FCFE Simple
557
(17,087)
(20,629)
4,099
869
(32,686)
(32,871)
1,054
Total Shareholders Equity (Beginning)
Return on Equity
Cost of Equity
Equity EP
22,447
2.48%
7.94%
(1,225)
18,905
4.60%
7.94%
(632)
Net Premium Income
+ Fee Income
‐ Amortization of deferred policy acquisition costs and PV of future profits
‐ Benefits, losses, and loss adjustment expenses
+ Increase in Insurance Liabilities & Reserves
Net Insurance Income
+ Net investment income
+ Income from discountinued operations, net of tax
+ Other revenues
‐ Other expense
‐ Interest expense
‐ Income tax expense
Net Income
+ Capital Gains
+ Extraordinary Items
‐ Preferred Dividends
‐ Minority Interest
Cash from Operations
Net Income
Total Shareholders Equity (Beginning)
Return on Equity
(54)
(47)
(880)
0
(981)
27
23
450
0
501
875
(10)
(12)
1
2,080
4
2,938
893
3
6
(0)
(1,091)
5
(184)
618
11
17
0
483
6
1,135
1,732
(3,956)
(2,897)
673
1,691
2,002
2,938
755
1,645
(981)
(184)
849
1,590
501
1,135
955
1,250 17,642 7.08%
1,732 17,855 9.70%
1,691 18,858 8.97%
1,645 19,722 8.34%
1,590 20,508 7.75%
1,810
(15,587)
(16,665)
2,888
1,250
7,491
7,704
1,037
1,732
(3,904)
(2,900)
728
1,691
2,070
2,934
827
1,645
(975)
(189)
860
1,590
493
1,129
953
18,720
9.67%
7.94%
324
17,642
7.08%
7.94%
(151)
17,855
9.70%
7.94%
314
18,858
8.97%
7.94%
194
19,722
8.34%
7.94%
80
20,508
7.75%
7.94%
(38)
The Hartford Financial Services Group, Inc.
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth
CV ROE
Cost of Equity
Beta
Risk‐Free Rate
Equity Risk Premium
3.00%
7.75%
7.94%
1.048
2.70%
5.00%
Fiscal Years Ending Dec. 31
2016E
2017E
2018E
2019E
2020E
1,328 673 755 849 1.08 1,232 1.16 579 1.25 604 1.35 630 955 19,729 1.35 DCF Model
FCFE
Terminal Value
Discount Factor
Discounted FCFE
Discounted Terminal Value
Present Value of Equity DCF
‐ ESOP
Net Value
Shares Outstanding
Value per Share
EP Model
Equity Economic Profit
Terminal Value
Discount Factor
Discounted Equity EP
Discounted Terminal Value
Present Value of Equity EP
Beg. Total Stockholders' Equity
Equity Value
‐ ESOP
Net Value
Shares Outstanding
Value per Share
14,635
17,680
34
17,646
401,821
$ 43.92
(151)
314
194
80
1.08
(140)
1.16
271
1.25
155
1.35
59
(38)
(779)
1.35
(578)
(234)
18,720
18,486
34
18,452
401,821
$ 45.92
The Hartford Financial Services Group, Inc.
Relative Valuation Models
Ticker
ALL
TRV
PGR
AIG
CNA
XL
IPCC
ACGL
Y
Company
The Allstate Corporation
The Travelers Companies
Progressive Corporation
American International Group
CNA Financial Corporation
XL Group Plc
Infinity P&C Corp.
Arch Capital Group Ltd.
Alleghany Corporation
HIG
The Hartford Financial Services Group, Inc.
Implied Value:
Relative P/E (EPS16)
Relative P/E (EPS17)
P/BV
P/TBV
Price
$64.32
$108.46
$32.11
$51.09
$28.97
$34.38
$76.99
$67.94
$466.04
$42.83
EPS
2016E
$5.45 $9.73 $1.98 $4.85 $3.04 $3.12 $4.70 $4.12 $28.00 $3.83 $4.04 $ 51.02 $ 50.72
$ 57.66
$ 62.21
EPS
2017E
$6.26 $9.96 $2.12 $5.89 $3.30 $3.94 $5.18 $4.29 $28.65 Average
P/E 16
11.8
11.1
16.2
10.5
9.5
11.0
16.4
16.5
16.6
13.3
P/E 17
10.3
10.9
15.1
8.7
8.8
8.7
14.9
15.8
16.3
12.2
P/BV
1.29
1.42
2.55
0.83
0.81
0.85
1.33
1.45
0.98
1.28
P/TBV
1.39
1.69
2.92
0.84
0.82
1.01
1.50
1.48
1.03
1.41
$4.17 11.2
$4.43 10.6
10.3
9.7
0.95
0.97
The Hartford Financial Services Group, Inc.
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31
Key Assumptions
CV growth
CV ROE
Cost of Equity
Beta
Risk‐Free Rate
Equity Risk Premium
CV P/E Multiple
CV EPS
Dividend Discount Model
Dividends per Share
Terminal Value
Discount Factor
Discounted Values
Present Value DDM
2016E
2017E
3.00%
7.75%
7.94%
1.048
2.70%
5.00%
3.50%
7.27%
11.34%
2018E
2019E
2020E
12.41
$ 3.95
0.78
1.08
0.72
$ 39.06
0.80
1.16
0.69
0.80
1.25
0.64
0.80
1.35
0.60
49.07
1.35
36.40
The Hartford Financial Services Group, Inc.
Key Management Ratios
Fiscal Years Ending Dec. 31
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
Liquidity Ratios
Current Assets
Current Liabilities
Current Ratio
40,093 20,234 17,014 17,667 18,352 19,195 20,101 20,725
105,361 79,231 78,627 78,627 78,469 78,666 78,627 78,652
38.05%
25.54%
21.64%
22.47%
23.39%
24.40%
25.57%
26.35%
Current Assets
Current Liabilities
Quick Ratio
24,638 3,839 3,985 2,843 4,286 4,863 5,959 6,453
105,361 79,231 78,627 78,627 78,469 78,666 78,627 78,652
23.38%
4.85%
5.07%
3.62%
5.46%
6.18%
7.58%
8.21%
Cash & Cash Equivalents
Current Liabilities
Cash Ratio
1,428 399 448 (640) 794 1,382 2,475 2,958
105,361 79,231 78,627 78,627 78,469 78,666 78,627 78,652
1.36%
0.50%
0.57%
‐0.81%
1.01%
1.76%
3.15%
3.76%
Activity or Asset‐Management Ratios
Expenses
Earned Premiums
Expense Ratio
4,176
15,336
27.23%
4,028
15,332
26.27%
3,772
15,416
24.47%
3,992
15,532
25.70%
3,918
15,560
25.18%
3,979
15,623
25.47%
3,988
15,731
25.35%
4,036
15,864
25.44%
3,264
98,401
3.32%
3,154
76,278
4.13%
3,030
72,728
4.17%
3,077
74,609
4.12%
3,047
73,808
4.13%
3,091
74,096
4.17%
3,085
73,895
4.17%
3,085
74,030
4.17%
Net Income
Average Total Assets
Return on Assets
176
288,199
0.06%
798
261,449
0.31%
1,682
236,681
0.71%
1,542
232,200
0.66%
1,679
234,602
0.72%
1,623
234,619
0.69%
1,640
235,991
0.69%
1,598
236,461
0.68%
Financial Leverage Ratios
Total Debt
Total Assets
Debt Ratio
6,544
277,884
2.35%
6,109
245,013
2.49%
5,359
228,348
2.35%
5,734
236,052
2.43%
5,547
233,152
2.38%
5,640
236,086
2.39%
5,593
235,896
2.37%
5,617
237,025
2.37%
Total Liabilities
Shareholder's Equity
Debt‐to‐Equity Ratio
6,544
18,905
34.62%
6,109
18,720
32.63%
5,359
17,642
30.38%
5,734
17,855
32.12%
5,547
18,858
29.41%
5,640
19,722
28.60%
5,593
20,508
27.27%
5,617
21,144
26.56%
15,224
15,336
99.27%
14,833
15,332
96.75%
14,547
15,416
94.36%
15,035
15,532
96.80%
14,930
15,560
95.95%
15,070
15,623
96.46%
15,152
15,731
96.32%
15,311
15,864
96.51%
Net Income
Revenue
Return on Revenue
176
20,673
0.85%
798
18,614
4.29%
1,682
18,377
9.15%
1,542
18,843
8.18%
1,679
18,842
8.91%
1,623
18,950
8.57%
1,640
19,054
8.61%
1,598
19,190
8.32%
Net Income
Beginning TSE
Return on Equity
176
22,447
0.78%
798
18,905
4.22%
1,682
18,720
8.99%
1,542
17,642
8.74%
1,679
17,855
9.41%
1,623
18,858
8.61%
1,640
19,722
8.32%
1,598
20,508
7.79%
0.50
0.37
135.14%
0.66
1.81
36.46%
0.78
4.05
19.26%
0.78
3.83
20.35%
0.80
4.17
19.26%
0.80
4.03
19.94%
0.80
4.06
19.76%
0.80
3.95
20.31%
Net Investment Income
Total Investments
Return on Investments
Profitability Ratios
Incurred Losses and Expenses
Earned Premiums
Combined Ratio
Payout Policy Ratios
Dividends per Common Share
Earnings per Share
Dividend Payout Ratio
The Hartford Financial Services Group, Inc.
Sensitivity Analysis
CV Return on Equity
Impact on Equity DCF Value $ 43.92
5.00%
6.5%
45.14
7.0%
40.49
7.5%
36.88
Cost of Equity
7.9%
34.30
8.5%
31.62
9.0%
29.64
9.5%
27.97
6.00%
52.55
46.95
42.60
39.49
36.26
33.89
31.88
7.00%
56.89
50.73
45.94
42.53
38.97
36.36
34.15
7.75%
58.90
52.47
47.47
43.92
40.20
37.48
35.17
8.00%
59.39
52.90
47.85
44.25
40.50
37.75
35.42
8.50%
60.16
53.56
48.43
44.77
40.97
38.17
35.80
9.00%
60.69
54.02
48.83
45.13
41.28
38.45
36.05
Beta
Impact on Equity DCF Value $ 43.92 0.90 0.95 1.00 1.05 1.10 1.15 1.20
4.7%
53.28
50.69
48.39
46.39
44.44
42.74
41.19
4.8%
52.25
49.73
47.48
45.53
43.62
41.96
40.45
4.9%
51.27
48.81
46.61
44.70
42.84
41.22
39.74
Equity Risk Premium
5.0%
50.33
47.93
45.78
43.92
42.09
40.51
39.06
5.1%
49.43
47.08
44.98
43.16
41.38
39.82
38.41
5.2%
48.57
46.27
44.21
42.43
40.69
39.17
37.78
5.3%
47.74
45.49
43.48
41.74
40.03
38.54
37.18
Commercial Lines Growth Rate in 2016
Impact on Equity DCF Value $ 43.92
1.00%
1.50%
2.00%
1.5%
45.16
44.95
44.74
2.0%
44.95
44.74
44.53
2.5%
44.74
44.53
44.32
Personal Lines Growth Rate in 2016
2.9%
44.58
44.37
44.16
3.5%
44.30
44.09
43.88
4.0%
44.08
43.87
43.66
4.5%
43.86
43.65
43.44
Benefits and Losses Expense Rate
Impact on Equity DCF Value $ 43.92
70.00%
72.00%
20.0%
85.37
81.48
24.0%
77.50
73.43
27.0%
71.36
67.15
Operating Expense Rate
29.0%
67.17
62.84
32.0%
60.61
56.09
33.0%
58.37
53.78
35.0%
53.78
49.06
CV Return on Equity
Impact on Equity DDM Value $ 39.06
5.00%
6.5%
40.01
7.0%
35.36
7.5%
31.74
Cost of Equity
7.9%
29.17
8.5%
26.49
9.0%
24.51
9.5%
22.85
6.00%
47.51
41.91
37.56
34.46
31.24
28.86
26.86
2.57%
44.50
44.29
44.08
43.92
43.64
43.42
43.19
3.00%
44.32
44.11
43.89
43.73
43.46
43.23
43.01
3.50%
44.10
43.89
43.68
43.52
43.24
43.02
42.79
4.00%
43.89
43.68
43.46
43.30
43.02
42.80
42.57
77.00%
71.36
62.82
56.09
51.45
44.35
41.98
37.31
80.19%
64.59
55.66
48.61
43.92
36.86
34.45
29.49
85.00%
53.78
44.35
37.31
32.49
24.81
22.14
16.58
88.00%
46.70
37.31
29.97
24.84
16.58
13.68
7.60
90.00%
41.98
32.47
24.81
19.42
10.69
7.60
1.08
7.00%
51.95
45.80
41.01
37.60
34.04
31.43
29.22
7.75%
54.03
47.61
42.61
39.06
35.35
32.62
30.32
8.00%
54.54
48.05
43.01
39.41
35.67
32.92
30.59
8.50%
55.36
48.77
43.64
39.98
36.18
33.38
31.01
9.00%
55.94
49.27
44.08
40.39
36.54
33.71
31.31
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol
Current Stock Price
Risk Free Rate
Current Dividend Yield
Annualized St. Dev. of Stock Returns
Range of
Outstanding Options
Range 1
Total
Number
Average
of Shares
Exercise
in thousands
Price
2,351
30.34
2,351 $ 30.34
HIG
$42.83
2.70%
1.82%
21.96% 2015 Yahoo
21.37%
Average
B‐S
Value
Remaining
Option of Options
Life (yrs)
Price
Granted
5.20 $ 14.56 $ 34,224
5.20 $ 17.84 $ 34,224
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): Average Time to Maturity (years):
Expected Annual Number of Options Exercised:
2,351
5.20
452
Current Average Strike Price:
Cost of Equity:
Current Stock Price:
$ 30.34
7.94%
$42.83
Increase in Shares Outstanding:
Average Strike Price:
Increase in Common Stock Account:
2016E
2017E
2018E
2019E
2020E
452
452
452
452
452
$ 30.34 $ 30.34 $ 30.34 $ 30.34 $ 30.34
13,717 13,717 13,717 13,717 13,717
Change in Treasury Stock
Expected Price of Repurchased Shares:
Number of Shares Repurchased:
1,300
636
720
814
921
$42.83 $ 46.23 $ 49.90 $ 53.86 $ 58.14
30 14 14 15 16
Shares Outstanding (beginning of the year)
Plus: Shares Issued Through ESOP
Less: Shares Repurchased in Treasury
Shares Outstanding (end of the year)
401,821
402,243
402,681
403,119
403,556
452
452
452
452
452
30 14 14 15 16
402,243
402,681
403,119
403,556
403,992