04/27/19 ONLINE ORIGINAL: HARTFORD FINANCIAL: A BACKDOOR PLAY FOR INVESTORS?

Return to main story

HARTFORD FINANCIAL: A BACKDOOR PLAY FOR INVESTORS?

Looking for a less risky way than wing-walking to get in on merger mania in the financial services industry? What if you could invest in a company that stands to benefit from the formation of trillion dollar banks, even if it isn't snapped up by one of the acquirers. Of course, it would also be nice to find a company that might also be acquired, giving its share price a nice boost some day.
If that's what you're up for, you might consider Hartford Financial Services Group (HIG). As a full-line insurer, it's in the segment of the financial services sector that may have the most room left to run. That's because the consolidation wave hasn't really hit the insurance industry full force, and those stocks haven't risen as much over the past three years as have the shares of banks, brokerages, and investment managers.
Hartford stands out among insurers because it's already the leader in distributing insurance products -- mostly annuities -- through banks. That gives the company a leg up in servicing the vast client base of the trillion dollar bank of the future. "As these banks get bigger and stronger, it gives us more access to more customers," says Ramani Ayer, Hartford's chairman.
'RAMPING UP.' Hartford Financial Services Group, through its Hartford Life (HLI) subsidiary, now distributes about 40% of its annuities through 21 of the top 25 banks, including Chase Manhattan, Wells Fargo, Wachovia, NationsBank, BankAmerica, and First Union. Hartford also pioneered the business of distributing property/casualty insurance through banks. "We're just ramping up now and starting to get into this channel," says Ayer, "and we're the leaders."
Of course, both present and future mergers could disrupt some of these alliances. One of today's acquirers could decide to purchase its own insurance company. Or a new merged entity might terminate its agreement with Hartford in favor of another carrier. But, analysts, say Hartford is much more likely to benefit from the head start it has in working with banks.
"Given that it already has these relationships, that can only increase the likelihood that it'll continue to form further deals with banks," says Cathy Seifert, an insurance analyst with Standard & Poor's Equity Research Group. HIG is her top pick among multiline insurers, partly because it is distributing products through banks. Moreover, with its strong brand name, "if a bank had to choose one insurance company with products it would like to distribute, Hartford would be high up on the list," says Jay Cohen, an analyst with Merrill Lynch.
Even if Hartford loses some big bank customers, it stands to gain relationships with lots of smaller banks as more of them seek to distribute insurance products. "Smaller banks that may not have the financial clout to merge or purchase an insurance company could turn to Hartford to provide products," says Stephen B. Musser, an analyst with A.G. Edwards.
THE BUYOUT ANGLE. Of course, if the new trillion dollar banks want to purchase an insurer, Hartford could be a candidate for that, too. One reason: It has been more successful marketing products directly to consumers than have many insurers. Hartford has had a direct marketing program with the American Association of Retired Persons since 1984, and back then it started creating call centers that it now uses to service bank-related customers. "Just the fact that they have that makes them more attractive to banks," says Musser. "A company wouldn't have to go and build that."
Analysts are still divided on whether banks will want to buy insurers, however. Distributing insurance products is more profitable than underwriting them, says Seifert. So banks may well find it easier to form an alliance with Hartford than to acquire it. Current regulations prohibit banks from selling insurance, and although those rules are expected to change, it would be less trouble to simply form an alliance, Seifert says. Also, points out Cohen, Hartford's brand name is so established, that a bank looking to acquire an insurer to convert to its own brand name might well choose a lesser-known insurer.
Generally, analysts say, takeover speculation shouldn't push investors into buying a stock. Merger activity aside, Hartford is well managed, has a good reputation, and should be able to increase its market share. Analysts expect its earnings to grow by 12% a year, which is quite good for the insurance industry. "It has the potential to produce double-digit operating earnings growth, it is well positioned in one of the fastest growing areas of the life insurance business, and it has done a good job of expanding distribution, building its franchise value, and getting economies of scale," sums up Seifert.
A BARGAIN? Some analysts are concerned that competition in Hartford's large commercial property/casualty business will hurt earnings. Property/casualty lines accounted for $433 million of Hartford's $749 million in 1997 core earnings, with commercial business accounting for the bulk of premium income. Hartford hasn't reduced its pricing to fend off rivals, which may prove wise in the long term but is causing it to lose premium dollars now, says Musser.
Such concerns are keeping the stock price attractive. Hartford is trading at only about 16 times analysts' 1998 earnings estimates, even though it has already risen about 21% this year. That's well ahead of the S&P 500's 14% gain, but below the 23% rise in money-center banks, 26% rise in investment managers, and 34% rise in consumer finance firms. Seifert says Hartford's current multiple of 13 times her estimate for 1999 earnings is reasonable. If Hartford can build on its current banking relationships to partner with the trillion dollar bank of the future, the current price could even prove quite a bargain.
By Amey Stone, Associate Editor, Business Week Online; with Susan Jackson in Connecticut

Return to main story