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The Hartford Financial Services Group, Inc.Mitchell CameronBA 301 Final Term PaperSection 001 11/23/14Table of ContentsExecutive Summary…………………………………………………………………………….. 3 Situation Analysis…………………………………………………………….………………… 5Problem Analysis & Description……………………………………………………………….. 8Solutions, Evaluation & Recommendation…………………………........................................ 10Implementation Plan………………………………………………………………………….. 13Success Metrics………………………………………………………………………………. 13Bibliography………………………………………………………………………………….. 14Executive SummaryThe Hartford Financial Services Group, Inc. (The Hartford) is an investment and insurance company headquartered in Hartford, Connecticut. They provide clients with a variety of products and services to meet customer insurance needs. Founded in 1810, The Hartford has been in business for nearly 205 years, and has been publicly owned for almost 20 years.While both annual revenue and gross profits of The Hartford have remained competitive with its competitors, The Hartford’s net income is well below industry standards. The Hartford’s Japanese subsidiary Hartford Life Insurance K.K. was producing life insurance products from 2000-2009 under the yen currency denomination. These contracts were then reinsured by a different subsidiary of The Hartford, which used the US dollar currency denomination based on market rates. Due to an unstable Japanese market and volatile currency, The Harford chose to discontinue issuing new contracts and remained in operations managing older contracts. The volatility of currency exchange between the US dollar and Japanese yen has begun to eradicate all previous income and incur new losses for the parent company.The Hartford has several options to consider on how to solve the problem. Neither the subsidiary nor the parent company is able to control the foreign market exchange rates, thus they must consider their position in the market. Their options are to either hold on to the subsidiary entirely and wait till market conditions change, sell a majority stake in the company to keep minimal exposure to the market, or lastly, to sell the entire division and become completely free of currency risk from that subsidiary. The results from the weighted criteria decision matrix indicate that selling majority ownership of The Hartford Life K.K. will be the most beneficial solution to The Hartford. By selling majority ownership of the subsidiary, capital will from the sale can then be used for either paying down debt or investing activities that yield a higher return. All future returns will be an indicator for measure of success for following this recommendation along with ensuring that cost benefit analysis estimates are in alignment with actual financials..Situation AnalysisThe Hartford Financial Services Group, Inc. (The Hartford) is an investment and insurance company headquartered in Hartford, Connecticut. The company offers many different products and services including but not limited to: auto and home insurance, small to midsize business insurance, employee benefits, and mutual funds. The Hartford was founded in 1810 in Hartford, Connecticut as a fire insurance company. By 1913 The Hartford added new coverage that included accident, auto, personal damage and business insurance. In 1959 the company acquired The Columbian National Life Insurance Company, effectively expanding The Hartford into the life insurance sector. The Hartford was acquired eleven years later in 1970 by ITT Corporation in what was considered the largest corporate takeover, at $1.4 billion, at that time. In 1984 The Hartford won the contract to insure auto and homeowners of AARP members, and that contract is still effective to this day. In 1995 ITT Corporation decided to release some subsidiaries and on December 20th, 1995 The Hartford went public as an independent entity on the NYSE under the symbol HIG.The Hartford went public in December of 1995 on the New York Stock Exchange for approximately $25 per share under the symbol HIG. Since then, the stock has peaked at $103 per share in May of 2007, just before the financial collapse of 2008. During the collapse of the financial market, HIG stock dropped 95% to historical low of $3.62 per share in March of 2009. The Hartford was able to stay afloat and not go under. According to Yahoo Finance as of November 20, 2014, the common stock of The Hartford (HIG) now trades at a 52-week range of $31.96 – $38.24 resulting in roughly a 275% gain in share price since March of 2009. HIG currently pays a dividend of .18 cents per share of common stock. This is the highest level of paid dividends since the financial crisis, during which they paid out .05 cents per share. The increase in dividends is an indicator of how the earnings being returned to stockholders are improving, since the financial crisis.“We help our customers create a secure and prosperous future by anticipating their needs and providing superior financial solutions” this is The Hartford’s mission statement directly from the company website. The Hartford also displays their values on their website, and these values are broken down into several parts. The values are customer focus, financial discipline, integrity, teamwork, and winning spirit, with emphasis on corporate social responsibility, diversity, inclusion, and ethics. The Hartford’s focus on corporate social responsibility impacts the community around them by partnering with community and local organizations to set goals, and develop programs to accomplish those goals. The company is also about caring for the environment, and being environmentally conscious. In 2012 Newsweek Magazine ranked The Hartford as number 14 on its list of green companies, the highest in the financial services industry. The Hartford wants their organization to be a place where people with different backgrounds can succeed. Because corporate equality is such a major ethical focus point they were also named one of the best places to work for lesbian, gay, bisexual and transgender (LGBT) equality by the Human Rights Campaign Foundation.The Hartford Financial Services Group, Inc. is one of the largest insurance companies and a leading provider in both property and casualty insurance. They have a strong market position which allows them to charge a higher premium resulting in higher margins. They are the eleventh largest property and casualty insurance company in the United States with market share of two percent of all direct premiums being earned. The Hartford falls third to only two major competitors, Liberty Mutual and The Travelers Companies, in the worker’s compensation sector. This high market share allows The Hartford to do three things that ultimately affect their bottom line, enhance their brand awareness, make entry into new markets with less complications, and charge a higher premium on the products they sell. They use multiple business channels such as, independent agents, brokers, and an internal sales force, through which to distribute and maintain its products and limit business risk.While many of The Hartford’s competitors are diverse in several foreign markets, The Hartford remains concentrated in the United States market. According to the Hartford Financial Services Group SWOT Analysis?(2013) “In Fiscal Year 2012, the group generated 82.6% of its revenue out of total revenue from the US. Overdependence on one geographic region makes Hartford susceptible to changes associated with the economic and political situation of the country”. This causes companies to become reliant on the economy within which they operate, in this case The United States of America. The opportunity cost for this strategy also means that The Hartford loses potential revenues from emerging markets such as China, India, and Latin America.Overall, the entire property-casualty insurance sector is struggling due to the slowing of premium increases, and the uptick of weather-related and other property losses. “Meanwhile, The Hartford Financial Services Group Inc. had the largest percentage drop in consolidated revenue.” (Hofmann, 2014). Disasters such as September 11, 2001 greatly impacted the property and casualty sector. Insurance companies ended up paying out millions in gross losses. These types of events, though rare, have the ability to greatly impact the value of an Insurance carrier. Natural disasters also need to be taken into account. In 2012 Hurricane Sandy caused $65 billion in damages and caused 73 fatalities. These claims can cause insurance companies to report negative year end earning statements due to contractual agreement payouts. Since the financial crisis of 2008 regulations have become stricter and this adds expenses to companies that must comply with these regulations due to restructuring. Taxation is widely believed to be changing in the near future for life insurance companies and companies that sell those products. If these tax changes become implemented it could impact pricing, distribution and production strategies, and overall effect the insurance company’s bottom line.With profits leveling off in recent years, insurance companies are looking for new ways to cut costs in distribution. One way to cut these cost are to fade out independent agents and have the carriers interact more directly with customers. Technology is opening up new possibilities in the way customers and consumers purchase their products. Many of these insurance carriers are focusing on online applications to obtaining and maintaining clients. These online applications effectively reduce commission and labor costs for carriers, resulting in lower overall expenses on the income statement. As expenses decrease insurance carriers will compete more heavily for new business causing premiums to proportionately decrease as well. Problem Analysis & DescriptionTo do a in depth financial analysis of a major corporation, such as The Hartford, it is a good idea to compare results with a close competitor. Traveler’s Companies is a direct competitor for earned premiums for property and casualty insurance. On the Fortune 500 list The Hartford is listed at 113 on the list and the Traveler’s Companies immediately follows at rank 114. Comparing The Hartford’s stock (HIG) and The Traveler’s Companies stock (TRV) on the Market Watch website purposes some interesting comparisons. HIG has a market capitalization of $15.88 Billion while TRV nearly doubles the market capitalization at $31.71 Billion. The higher market capitalization of TRV means that the total value of all outstanding shares of stock is higher than that of HIG. TRV also provides a higher dividend of .55 cents per share, than HIG which only provides a .18 cent per share dividend. The higher dividend of TRV is more likely to appeal to investors than the one of HIG, this is important to note because it makes the TRV stock more appealing to potential investors and provides the competitor more capital for operation activities. The Hartford and Travelers both have fairly similar ending total revenues for years 2011, 2012, and 2013 (Graph G-1). From this we can conclude that both companies are generating revenues in line with one another. Next compare the gross profits of both companies. The gross profits are essentially the annual total revenue that each company earns, minus any costs required to obtain those revenues, also referred to as cost of revenue. Both Travelers and The Hartford have similar gross profits (Graph G-2), which is an indicator that both companies have a similar cost of revenue, though Travelers is marginally outperforming The Hartford. The area that The Hartford is underperforming in compared to its competitors is the net income. The net income of The Hartford is substantially lower than that of its competitor, Travelers companies.Now that a negative impacting symptom has been discovered, we need to dive deeper into The Hartford’s financials to discover the underlying problem. In 2012 The Hartford presented a net loss of $38 million (Table T-1), while the Travelers Companies presented a net income of $3.6 billion. This substantial difference of net income is due to a combination of negative subsidiary performance, and both short and long term investments. When looking at the subsidiaries of The Hartford, I came across a Japanese subsidiary called The Hartford Life K.K. This subsidiary was bought in 2000 and conducted operations of providing individual life insurance in Japan until 2009. The purchase of The Hartford Life K.K. was used by the company to enter the Japanese market and build assets under the yen currency denomination. These contracts where then reinsured by The Hartford’s US Life Subsidiary under the US dollar denomination. This was a way for the company to hedge the currency market, because they expected the Japanese yen to strengthen compared against the US dollar. Assets that are denominated with a stronger currency have more value associated with that asset due to the value of the underlying currency. When the financial crisis came, the Japanese government decided to artificially weaken the Japanese yen to encourage growth in their market through extensive quantitative easing. The impact of this doing by the Japanese government actually made this subsidiary begin to lose money because as the yen decreased in value and the dollar by comparison strengthened. As the yen decreased so did the value of the subsidiary, these unrealized losses must be accounted for under generally accepted accounting principles, thus causing a decrease in net income during the 2012 fiscal year.Solutions, Evaluation & RecommendationThe Hartford now has a few possible solutions to help recover their net income that has been partially depressed by their wholly-owned subsidiary, The Hartford Life K.K. The first possible solution would be to not take any action at all and maintain entire ownership of the subsidiary, creating an opportunity cost of alternative investing activities. The second solution would be to sell a majority position of the subsidiary to a different company as to maintain a much smaller position in the currency hedge. Lastly The Hartford could sell the subsidiary in entirety to another company and eliminate all associated currency risk.In evaluating which solution is right for The Hartford, the value of time and its effect on assets needs to be considered because it creates opportunity costs. If choosing to hold on to the subsidiary as a speculation of hedging the currency market, it may never return in value, and the capital tied up within the asset is then an opportunity cost for alternative investing activities. If selling the subsidiary in entirety, the opportunity cost then becomes losing the position in the currency markets and exposure to foreign markets. They also do not want to be reporting losses of net income in their financial statements but it’s apparent that the company wants to take on some risk in foreign markets, and use their currency as a hedge.Criteria?WeightHold Position?Sell Majority Position?Sell Entire Position?Exposure to Foreign Markets0.25140.820.4Hedging Yen vs Dollar0.483.262.431.2Capital for alternative investments0.420.872.893.6??1.0?5?6?5.2By creating a weighted criteria decision matrix, as shown above, we can see the three factors that are influencing our possible solutions. Exposure to foreign markets does not incur as much weight on our decision, which then raises the weight for the other two factors, hedging the US dollar with the Japanese yen, and having capital available for alternative investments. After assigning a rank of how affected each solution is by the various criteria we can conclude that selling the majority position is the favorable solution. A cross benefit analysis will provide us with an analysis of whether or not our chosen solution will yield a net benefit. Cost Benefit Analysis (in millions)Tangible benefitsCosts25% of Ordinary loss492.5Cost of sale 4.925Total Costs497.425BenefitsSale of 75%1,478Revenue from reinvested capital117.7Total Benefits1595.7The information provided in the cross benefit analysis shown above, was obtained from the 2012 financial release found on the company website. This cost benefit analysis assumes that the majority position being sold is 75%, the remaining 25% position in The Hartford Life K.K. would then yield a quarter of the net losses. We then need to factor in the cost of selling that 75% stake. To get the benefits we simply estimated 75% of liquidation value could be sold, and then reinvested with annual benefit from fixed income securities. As indicated in the weighted average criteria index and reinforced by the cost benefit analysis, my recommendation is to sell a majority share of the unprofitable subsidiary, The Hartford Life K.K. The Hartford can maintain a much smaller percentage of exposure to both foreign markets and currency risk, while freeing up a portion of capital to be used in better preforming assets. As the yen begins to return to historical levels, The Hartford can then consider a enlarging their exposure. In doing this, the risk is then reduced by being spread because it creates less foreign market exposure and currency risk, and the capital is used in alternative assets.Implementation PlanTo implement this plan, The Hartford should sell a controlling portion of the subsidiary, The Hartford Life K.K. The first step is to value the portion of the subsidiary being sold. After valuing the position, The Hartford then needs to find a buyer such as a private equity company that would be interested in speculating the yen in the currency market. With the money from the sale of ownership, The Hartford will then reinvest into fixed income securities that will provide positive cash flow for investing activities. By reinvesting into fixed income securities such as treasury bonds, they will be able to recoup some of the losses from speculation of the yen.Success MetricsAfter the subsidiary, The Hartford Life K.K., has been sold The Hartford needs to track the success of the recommendation. An indicator of positive results would be a reduction in future net losses or possible increases to future net income. Each quarter when SEC quarterly financial earning reports are prepared, the position in the yen market should again be analyzed. If failure to see improvement in net income due to more quantitative easing from the Japanese government. Selling the remaining position will eliminate all further losses from this asset. It is important to also compare estimates and actual financials in the cost benefit analysis to ensure that a net benefit is still being provided.Bibliography“2013 Form 10-K.” The Hartford Corporate Website. 25 February 2014. The Hartford Financial Services Group, Inc. Web. 17 Oct. 2014. <;“HLIKK FY12 Financial Results, March 31, 2013” The Hartford Corporate Website. 24 May 2013. The Hartford Financial Services Group, Inc. Web. 17 Oct. 2014. <;"The Hartford Financial Services Group, Inc. SWOT Analysis.” Hartford Financial Services Group SWOT Analysis?(2014): 1-7.Business Source Premier. EBSCO. PSU Library. Web. 13 Oct. 2014."Insurance Industry Leaders See A Yes, A No And An Appetite For Regulation Ahead."?Insurance Advocate?125.2 (2014): 38.Business Source Premier. EBSCO. PSU Library Web. 15 Oct. 2014."The Travelers Companies, Inc. SWOT Analysis."?St. Paul Travelers Companies, Inc. SWOT Analysis?(2013): 1-8.?Business Source Premier. EBSCO. PSU Library. Web. 15 Oct. 2014.Hofmann, Mark A. "Insurers See Slide In Profits." Business Insurance 48.18 (2014): 0016. Business Source Premier. EBSCO. PSU Library. Web. 15 Oct. 2014.McDonald, Ian and, Lyneka Little. “Hartford Settles Fraud Charges."?Wall Street Journal, Eastern Edition. May 11 2006.?Business Source Premier.?EBSCO. PSU Library. Web. 15 Oct. 2014.Scism, Leslie and Tess Stynes. "Storm-Related Claims Rain on Insurers’ Parade."?Wall Street Journal - Eastern Edition?31 July 2014: C3.?Business Source Premier. EBSCO, PSU Library. Web. 15 Oct. 2014.Tracer, Zachary. “Hartford Profit Falls 81% on Hedging Losses as Yen Weakens.” Bloomberg. May 2, 2012. Web. November 5, 2014. < , Zachary. “Hartford Posts Loss as CEO McGee Hedges Annuities.” Bloomberg. 29 April 2013. Web. November 5, 2014. < G-1Graph G-2Graph G-3Table T-1 ................
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