Markets
HIG

3 Reasons Hartford Financial's Stock Could Rise

Source: Hartford.

The Hartford Financial Services Group is a well-performing insurance company that continues to trade at a material discount to book value even though the business presented respectable business results over the last couple of years.

Strong underlying earnings trends and cyclical tailwinds in commercial insurance pricing could also justify a materially higher market valuation for this insurance business in 2014 and beyond.

Insurance companies are out of favor

Investors always seem to prefer one sector over others depending on where they believe the largest earnings momentum is going to happen.

However, this approach to investing, also called sector rotation, may not necessarily be successful, because it requires investors to be superior market timers. I don't think many investors can efficiently switch between sectors and ride temporary waves of momentum on a consistent basis.

Instead, why not buy quality insurance companies such as Hartford Financial at a sizable discount to book value?

Earnings trends

Hartford Financial's earnings trends are very encouraging, and its results are largely driven by a well-performing property and casualty unit.All major product lines (property and casualty, group benefits and mutual funds) reported strong core earnings growth over the last 12 months.

Source: Hartford Financial Investor Presentation August 2014. Figures are on an LTM basis.

Hartford's core earnings also jumped a whopping 26% to $1.4 billion from 2012 to 2013, and further momentum in 2014, driven by a strong commercial property and casualty business, could justify much higher share prices indeed.

Strong property and casualty business

Hartford Financial's value largely depends on its commercial property & casualty business, which accounts for roughly 50% of Hartford's core earnings.

Source: Hartford Financial Investor Presentation August 2014.

The commercial P&C segment is doing particularly well for Hartford, and all metrics are moving in the right direction.

Hartford Financial's commercial unit raked in about $6.3 billion in written premiums in the last 12 months, and the company should well be able to exceed such volumes in 2014.

In addition, Hartford Financial's commercial P&C core earnings have materially improved to $882 million in the second quarter of 2014 (based on a "last 12 months" basis), compared to just $389 million in 2011.

Its combined ratio has also continually improved over the last couple of years, and its trend is encouraging: In 2011, Hartford Financial's commercial P&C combined ratio, a metric to gauge the underlying profitability of its policy writing, stood at 97.3 compared against only 91.2 in the second quarter of 2014 (again measured on an LTM basis).

I expect continued strong performance in Hartford Financial's commercial property and casualty business. A stronger growing U.S. economy should support higher insurance volumes as well as provide tailwinds for commercial pricing, both of which should fuel Hartford's core earnings growth for the remainder of the year.

Steep discount to book value

The third reason Hartford Financial's shares have the potential to rise relates to Hartford's apparent undervaluation as measured by its deep discount to book value.

Hartford Financial currently trades at an about 20% discount to book value. However, with a stronger performance in its core commercial property and casualty business going forward, Hartford Financial makes an extremely attractive value proposition.

Good value will not remain hidden for long. Ultimately, I expect property and casualty companies to trade at a sizable premium to book value in a cyclical economic upswing.

The Foolish bottom line

Hartford Financial has a lot of potential to increase its valuation. Its core P&C business reported strong increases in core earnings over the last couple of years, and its combined ratio development also looks promising.

In addition, Hartford Financial makes a great value proposition because of its sizable discount to intrinsic value.

How to get even more income during retirement

Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

The article 3 Reasons Hartford Financial's Stock Could Rise originally appeared on Fool.com.

Kingkarn Amjaroen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

HIG

Other Topics

Stocks

Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More