The Hartford Financial Services Group, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

The Hartford Financial Services Group, Inc. (HIG) is a large insurance and financial services company, providing a broad range of property and casualty insurance, group benefits, and mutual funds, with a particular strength in commercial lines.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

The Hartford Financial Services Group (HIG) operates primarily in the insurance and financial services sectors, serving a diverse range of clients from small businesses to large corporations. It has a well-established brand and a long history.

  • Revenue Streams:
    • Commercial Lines: This is the largest segment, providing a range of coverages to businesses across various industries. This includes standard commercial lines (like business owners policies, workers’ comp, and commercial auto) and specialized lines (such as risk management, inland marine, and cyber risk). A big portion of revenue is from insuring commercial property, which is prone to large payouts in periods of extreme weather events and/or climate change.
      • A key feature of the Commercial Lines business is the focus on middle market and large global corporations. These clients usually have their own in-house insurance and claims capabilities.
      • The company plans to continue to expand its products and services, especially with respect to technological capabilities, and customer experience.
    • Group Benefits: Provides group life, short and long-term disability, accidental death and dismemberment, and other employee benefit plans to various companies, including large employers.
      • The Group Benefits segment operates in the US market and offers a blend of insurance benefits. A huge part of their overall strategy is to attract and retain large, multi-site employers.
    • Hartford Funds: This segment includes investments and products for individual and institutional clients. It includes a wide array of actively managed mutual funds, exchange-traded funds (ETFs), and alternative investments.
      • A substantial portion of profits for this segment come from management and other fees, and some from net investment income and realized investment gains.
    • Run-Off Operations: This segment consists of P&C and other long-term run-off operations which the company no longer wants.
  • Industry Trends:
  • The insurance industry is undergoing significant changes due to technological advancements (e.g., remote insurance claims), evolving customer expectations, shifts in regulatory oversight and evolving risks (e.g. cyber threats).
  • The current high inflation has caused an increased reliance on investment income as interest rates have risen, which impacts income and profits from long-term bond holdings.
  • Margins:
  • The company has mentioned in 2023 the intent to continue to grow earnings while sustaining appropriate expense control, which is needed to maintain adequate profitability. They are also working towards “reducing the volatility” in profits. * P&C Lines: The company has shown improved combined ratios and underwriting gains in the recent quarters, showing improvement in their pricing strategy and cost management. * Group Benefits: This sector has been hit hard by higher claims and medical care costs, leading to a decline in profitability. However, premium increases in the sector are expected to help with margins in the future.
  • Hartford Funds: The investment industry is very cyclical, which has caused lower AUM and revenues over the past few quarters. They have implemented measures in hopes of making the sector more stable by offering different types of products and maintaining high levels of customer service. * They plan to implement AI and Machine Learning in order to improve efficiency of operations, and reduce costs. * The company is experiencing a significant increase in operating cash flow because of a reduction in net working capital.
  • Competitive Landscape:
  • The insurance industry is highly competitive, and the major players in the insurance industry have developed strategies which often rely on economies of scale, pricing differentiation, and leveraging their vast distribution networks. The competition is especially high in personal lines.
  • The financial services side (asset management) is more competitive, with lots of active managers offering all sorts of products, as well as the increasing rise of passively managed ETFs and lower-cost offerings. A major goal of the company to increase brand trust so that new and existing clients will come to them for their investments.
  • The overall insurance and financial services industry is quite large and concentrated among a small group of players.
  • Differentiation:
    • The Hartford is focused on improving the quality of their product offerings while at the same time managing costs more effectively. They are implementing new technological capabilities in order to allow them to operate in a more efficient manner, and increase client satisfaction.
    • With over 200 years of history, The Hartford is a well-established, well-known brand name. The company hopes to take advantage of this to attract new customers, as well as retain existing ones.
    • Their focus on commercial lines, and a large variety of products means they serve a large variety of customers.
    • The company is also very focused on the social aspect of business, creating programs to make sure they are a “good corporate citizen”.
  • Controversies and Problems
    • The company has been facing increasing volatility in profitability, as earnings have swung wildly.
    • They have noted that investment performance can have an outsized impact on profits, and changes in interest rates can affect future cash flows.
    • They have been working towards improving their predictive ability, to have a better understanding of where profits will come from, so they have less volatile profits in the future.
    • The company is facing the same problems as the rest of the insurance industry, regarding elevated claims as a result of inflationary pressures and changing climate.
    • They have been trying to implement their value creation framework to find ways to improve and generate above average ROIC, especially in the personal lines division, which is experiencing the most issues.

Financial Analysis

The Hartford’s financial performance has exhibited significant volatility over recent years. The primary drivers of their earnings are net premiums, net investment income, and investment results.

  • Income Statement:
    • Revenue: Total revenues have seen growth over the past few years as a result of increases in net written premiums and net investment income. However, growth has slowed in recent quarters due to reduced investment performance. In 2023, total revenues were $22.7 Billion which is an increase of 5% YoY.
      • The company attributes the growth in earned premiums to growth in small commercial, global specialty and personal lines.
    • Profitability: The company has shown some improvement in the combined ratio of its P&C segment, which demonstrates its ability to manage insurance claims and costs more effectively. Core earnings margins have recently been volatile. Net income for the company increased from $1.7B in 2021 to $2.3B in 2022, before declining to $1.67B in 2023. They have mentioned that this is mostly due to the lower ROIC from 2023.
      • The cost of claims and benefits has increased considerably over the past couple of years.
    • Expenses: The company has been focused on controlling costs and expenses while still focusing on growth.
    • The amortization of deferred policy acquisition costs is a huge cost, and can affect profitability greatly.
  • Balance Sheet:
    • Assets: The company holds about $188B in assets.
      • A significant portion of that, around $40B is held in fixed maturities.
    • Liabilities: Debt, reinsurance recoverables and reserves represent a large portion of the company’s liabilities.
      • Total liabilities as of Dec 31, 2023 is $79.1B
    • Equity: Total equity at the end of 2023 was $30.1B, which gives them reasonable levels of solvency.
  • Cash Flows: The company is experiencing a substantial increase in cash from operations because of a shift in net working capital.

Moat Rating: 3 / 5

The Hartford has a moderate economic moat driven by a few key factors, which is why it is a 3/5.

  • Brand Recognition: The Hartford has a well-established brand, with over 200 years of experience. This is especially apparent in the P&C lines where the company has been able to build trust, especially with larger corporations.
    • This brand recognition helps with keeping existing clients and also for securing new ones.
  • Switching Costs: While not as strong as other types of businesses, some of their insurance products have switching costs.
    • This is due to things like claims history, and relationships between client, agent, and insurer.
    • This tends to make companies less likely to switch between providers.
  • Economies of Scale: The large amount of investment and reserves for insurance claims, as well as technology and infrastructure, mean that the big companies have a big advantage over smaller ones, due to economies of scale.
    • They also benefit in price negotiations due to their size.

Moat Risks and Business Resilience:

  • High exposure to economic activity: The insurance business is strongly tied to economic activity. High inflation, increased interest rates, and any slowdown to economic growth will disproportionately affect the financial sector, especially insurance.
  • Impact of Market Volatility: Market conditions can affect the company’s investment returns which can have a substantial effect on the profitability and solvency of the company.
    • The recent decline in investment income highlights this risk.
  • Claims volatility: High severity weather, catastrophic events and the potential for a large spike in claims will negatively affect profitability of the company.
  • Regulatory Risks: Changes in regulations, particularly in emerging markets can greatly affect the profitability and growth outlook for the company. A large portion of the company revenue is derived from regulated insurance premiums.
    • Also, changes in regulation around the world can cause the tax implications to be quite volatile.
  • Cyber Risks: Increasing cyber risks and cyber related attacks have been more prevalent in the financial industry, and can create financial liabilities that may not be insured.
  • Intangible Assets: A lack of innovation in their offerings as well as a weakening of their brand image will erode their moat in the long run.

Given their diversification in terms of business segments, as well as geography, their size, and focus on long term returns, the company is quite well positioned to respond to these risks. They have also implemented comprehensive and detailed risk management strategies.

Understandability Rating: 3 / 5

The business is moderately complex. The basic principles of insurance are easy to grasp. However, the complexity arises due to the sheer range of products offered, as well as the need to have a complete understanding of the financial statements and accounting principles. The regulatory landscape that the company operates in is also quite complex and hard to understand. Their financial statements are long and complicated.

Balance Sheet Health Rating: 4 / 5

The company’s balance sheet is in reasonably good health. The company has considerable assets and low levels of debt compared to peers, even when you consider the significant amount of long-term liabilities. They are currently focused on reducing debt and increasing their profitability in their respective business lines.