John Paulson’s Paulson & Co. owned 31 million shares of The Hartford Financial Services Grup Inc (NYSE:HIG) at the end of June. Paulson had previously taken a large position in the company and then urged Hartford to sell a number of its insurance operations, leaving the property and casualty insurance business to remain as the company’s primary focus. Hartford has since given Paulson quite a bit of what he wanted: it had sold its broker-dealer business, an annuities business, its retirement plans business, and now its individual life insurance business. So far this year the stock is up 26% as the market expects that this strategic move will increase shareholder value.
In the second quarter of 2012 The Hartford Financial Services Grup Inc took a large loss on extinguishment of debt, which pulled its net income negative. The company reported that its net income, after adjusting for this adjustment, was up strongly from the second quarter of 2011. Book value per diluted share had also risen over the course of the year by 14%. With a market capitalization of $9 billion, Hartford trades at a forward P/E multiple of 6. This seems cheap to us, and with the company selling off non-core assets it should in theory become better able to concentrate on property and casualty insurance and improve operations. Investors should be aware that The Hartford Financial Services Grup Inc is highly sensitive to the broader market with a beta of 2.
We’ve already mentioned Paulson’s large investment in Hartford. Even after selling some shares during the second quarter, it was one of the five largest positions in its 13F portfolio (find more of Paulson’s large positions). Ric Dillon’s Diamond Hill Capital increased its stake by nearly 50% to a total of nearly 11 million shares; this followed up on a large increase in its holdings during the first quarter (see more stock picks from Diamond Hill Capital). Billionaire Ken Griffin’s Citadel Investment Group reported a position of about 2 million shares at the end of June.
To construct a peer group for Hartford, we would select property and casualty insurance companies such as The Travelers Companies, Inc. (NYSE:TRV), The Chubb Corporation (NYSE:CB), ACE Limited (NYSE:ACE), and Cna Financial Corp (NYSE:CNA) given Hartford’s divestitures. Cna is about the same size as Hartford, with a market cap of $7.7 billion, while the other three insurers cluster between $20 and $27 billion. All four comparable companies trade at a forward earnings premium compared to Hartford, and in some cases this premium is quite substantial: Chubb’s forward P/E is 13, and the other three companies cluster between multiples of 10 and 11. Interestingly, all four of these companies carry considerably lower betas- Cna’s is the highest, at 1.2 We wonder if the market has not yet appropriately priced in the effects of Hartford’s strategic focus- perhaps over time it will adjust to the same earnings multiples as these other companies, and perhaps its stock price will start varying by less in comparison to broader indices. Travelers and Chubb are seeing about flat business versus a year ago according to their quarterly reports. ACE saw a decline in both its revenue and earnings in the second quarter compared to Q2 2011, while Cna grew its revenues by 2% and its earnings by 34%. So Hartford generally matches up well with its peer group as far as recent performance as well.
With a lower forward P/E, Hartford looks intriguing in terms of its value compared to that of its peers. Its business is doing well and we like that the company is focusing on its core business. It particularly looks attractive relative to larger property and casualty insurance companies, and we think that investors could look more closely at the stock.