Weekly Equity Idea Highlight - 2019 05 01
HIG, like many insurance companies, has had incredibly poor operating performance the past 10 years, because of their inability to make money on their investments due to low interest rates. Only recently, as the Fed and other central banks have started raising rates, have they been able to again start to show real profitability.However, even now, profitability is at the lower end of returns historically, which generally were north of the current 2019 project 12% levels. Yet at current valuations, which are at the low end of valuations before the financial crisis, the market is pricing in returns to decline going forward, not improve further as they are forecast to do. The market appears to still be scared by the last 10 years, without understanding how much of a fundamental outlier that period was.
On top of the fundamental tailwinds HIG has, they have a management team that is well aligned to continue to focus on secular improvement in their operations throughout future cycles, focusing on improving core ROE among other variables. Also, management is showing more confidence in their outlook than previously, as highlighted on the Q4 call, where management had renewed confidence on their reinvestment rate, managing cat losses, and the Aetna integration. Management also did not show concerns about declines in operations in the future that would justify current low valuations.
Considering market pessimism, secular headwinds for the company and industry, management's strong alignment to improve operations, and management's growing confidence about their outlook for the business, there appears to be equity upside for HIG going forward.
Hartford Financial Services Group is a holding company. Through its subsidiaries, the company provides property and casualty insurance, group benefits insurance and services, and mutual funds and exchange-traded products. The company has five segments: Commercial Lines, which provides automobile, property, general liability, and marine coverages; Personal Lines, which provides automobile and homeowners coverages; Property and Casualty Other Operations, which provides group life, group disability, and other products; and Hartford Funds, which provides mutual fund, exchange-traded products, and Talcott Resolution life and annuity separate accounts.
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- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
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- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
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