Hartford Financial's Opportunity: Baby Boomers' Social Security Shortfall and Life & Health Insurance
A recent survey by Hartford Financial ( HIG ) shows that Social Security is becoming an increasingly important source of retirement income for Americans. Hartford Financial competes with insurance companies like AIG ( AIG ), MetLife ( MET ) and Prudential ( PRU ) selling a variety of health, life and property and casualty insurance as well as investment products like annuities.
In the survey, 39% of the respondents cited Social Security as their most important source of retirement income, up from 27% in 2006. However, 75% of the Americans consider themselves rather than the government as being most responsible for their income upon retirement and 85% of the respondents think that Social Security alone won't be enough to maintain their standard of living upon retirement.
The lack of confidence among baby boomers about the adequacy of Social Security stems from the weak economic environment, high unemployment and an uncertain future. The current scenario is particularly helpful for financial companies like Hartford Financial (also called The Hartford) whose retirement plans and annuities help customers to create more certainty for their financial future. We have a price estimate of $25.93 for Hartford Financial.
Retirement Plans and Annuities
Hartford Financial provides a variety of retirement plans and annuities including fixed and variable annuities to supplement retirement income for the customers. Retirement plans and annuities account for 18% of the our price estimate. Hartford's premiums from retirement plans and annuities in the US declined significantly during 2008-09 due to the global economic fallout which resulted decline in sales and increase in policy surrenders. However, we expect the market for retirement plans and annuities to show healthy growth over the next couple of years and Hartford's premiums from retirement plans and annuities to grow to $3.8 billion by 2017 from its current level of around $2.7 billion.
There could be a 6% upside to our price estimate for Hartford Financial if its premiums from retirement plans and annuities increase to about $5 billion supported by rapidly increasing market for retirement plans and annuities and the company's strong distribution network in the US which enables it to reach more customers than its competitors.
Life and Health Insurance
Older people tend to have better life and health insurance coverage than the younger population. According to the US Census Bureau, in 2008 nearly 2% of the population over the age of 65 did not have health insurance coverage compared to the almost 29% of the population between 18 and 24 years of age. The retiring baby boomers are going to significantly increase the population over the age of 65 in coming years which would translate to a marked increase in the US life insurance market.
We conservatively estimate that individual life insurance premium market in the US will touch $92 billion in 2017 from its current level of about $75 billion. However, the individual life insurance premium market in the US may even go up to $120 billion by 2017 as the average face amount of the insurance policies is constantly increasing because of the increase in average life expectancy of the US citizens.
This would result in 3 to 4% increase in $25.93 Trefis price estimate for Hartford Financial.