Hartford Financial Services Group Inc. (HIG) reported its second-quarter adjusted earnings of $460.0 million or 92 cents per share, surpassing the Zacks Consensus Estimate of 73 cents. The improved showing in Hartford was attributable to higher profits despite market volatility and higher-than-expected catastrophes.
The upside was also attributable to strong profitability in Hartford’s life and P&C businesses. Also, growth in assets under management and book value were impressive during the quarter.
Hartford’s adjusted earnings exclude DAC unlock charge of $168 million or 34 cents, current accident year P&C catastrophe losses of $87 million or 18 cents, net asbestos reserve strengthening charge of $110 million or 22 cents, net prior year reserve releases in P&C ongoing operations of $97 million or 19 cents, goodwill impairment charge of $100 million or 20 cents, and net realized capital losses, after-tax and DAC of $16 million or 3 cents per share.
Including these one-time items, Hartford reported a net income of $76.0 million or 14 cents per share as opposed to a net loss of $15 million or 6 cents.
Segment Results
Life operations reported a net income of $88 million in the reported quarter, compared to $176 million in the year-ago period. The current quarter of 2010 net income included a DAC unlock charge of $230 million, after-tax, compared with a DAC unlock benefit of $360 million, after-tax, in the prior-year quarter.
Core earnings in the quarter were $131 million, as opposed to $493 million in the prior year quarter. The results includes an after-tax DAC unlock charge of $168 million, compared with an after-tax benefit of $358 million. Excluding the impact of DAC unlocks, core earnings climbed 121% over the prior-year period.
Net income from Property-Casualty operations was $188 million, including net realized capital gain of $26 million (after-tax). This compares favorably with a net income of $173 million, including a net realized capital loss of $41 million (after-tax) a year ago.
Core earnings for the reported quarter came in at $161 million, down 24.1% from $212 million in the year-ago quarter.
The current accident year combined ratio for ongoing operations of Hartford , excluding catastrophes, deteriorated to 93.5% from 90.4% in the prior-year quarter. Including prior year development and catastrophes, the combined ratio came in at 96.8%, up from 93.7% in the prior-year quarter.
Hartford’s total invested assets excluding trading securities were $97.9 billion as of June 30, 2010, compared to $90.5 billion as of June 30, 2009. Pre-tax net investment income, excluding trading securities was up 13.0% over the prior-year quarter, driven by a $179 million improvement in returns on limited partnerships and other alternative investments.
Pre-tax net unrealized losses on investments were $1.5 billion as of June 30, 2010, compared to $3.2 billion as of March 31, 2010. The improvement was primarily driven by improved security valuations due to declining interest rates, which more than offset the spreads that widened across virtually all fixed maturity asset classes of Hartford.
At the end of first quarter, Hartford ’s assets under management were $308.9 billion, up 2.6% from $301.2 billion at the end of prior-year quarter. Book value improved to $41.29 per share at June 30, 2010 from $32.20 at June 30, 2009. Excluding AOCI, book value declined to $44.39 per share at June 30, 2010 from $52.44 at June 30, 2009.
Comparison with Competitors
Hartford’s rival, The Allstate Corporation (ALL) reported its second quarter results along with Hartford and posted earnings of 81 cents per share, substantially better than the Zacks Consensus Estimate of 70 cents. This also compares favorably with 55 cents in the year-ago period.
Another competitor, PartnerRe Ltd. (PRE) also reported on the same day with second quarter profits from continuing operations of $1.92 per share, well ahead of the Zacks Consensus Estimate of $1.75. PartnerRe reported a profit of $3.12 in the year-ago quarter.
Other competitors of Hartford such as American International Group, Inc. (AIG) will report its second quarter earnings on August 6, 2010.
Guidance
Hartford currently expects 2010 core earnings per diluted share to be within $2.10-$2.30. The range is significantly lower than its previous guidance range of $2.70 to $3.00.
This guidance assumes the following:
Dividend Update
On July 22, the board of Hartford declared a quarterly dividend of 5 cents per share. The dividend will be paid on October 1, 2010, to shareholders of record as on September 1, 2010. The board also declared a dividend of $18.125 on each share of the Series F Preferred Stock (equivalent to $0.4531 per depository share) payable on October 1, 2010 to shareholders of record at the close of business on September 15, 2010.
Our Recommendation
Though the Hartford’s results for the quarter were better than expected, we remain concerned with its exposure to variable annuities and its capital levels. We also suspect that Hartford will continue to incur losses on its investment portfolio. It is difficult to anticipate significant expansion of the multiples at this point in time due to the challenging environment, as we expect Hartford to face higher losses in the investment portfolio in the coming quarters. However, we believe earnings will gain momentum once the markets rebound to its historical highs.
Currently, Hartford carries a Zacks #3 Rank, which translates into a short-term Hold recommendation, indicating no clear directional pressure on the shares over the near term.
AMER INTL GRP (AIG): Free Stock Analysis Report
ALLSTATE CORP (ALL): Free Stock Analysis Report
HARTFORD FIN SV (HIG): Free Stock Analysis Report
PARTNERRE LTD (PRE): Free Stock Analysis Report
Zacks Investment Research
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Hartford’s adjusted earnings exclude DAC unlock charge of $168 million or 34 cents, current accident year P&C catastrophe losses of $87 million or 18 cents, net asbestos reserve strengthening charge of $110 million or 22 cents, net prior year reserve releases in P&C ongoing operations of $97 million or 19 cents, goodwill impairment charge of $100 million or 20 cents, and net realized capital losses, after-tax and DAC of $16 million or 3 cents per share.
Including these one-time items, Hartford reported a net income of $76.0 million or 14 cents per share as opposed to a net loss of $15 million or 6 cents.
Segment Results
Life operations reported a net income of $88 million in the reported quarter, compared to $176 million in the year-ago period. The current quarter of 2010 net income included a DAC unlock charge of $230 million, after-tax, compared with a DAC unlock benefit of $360 million, after-tax, in the prior-year quarter.
Core earnings in the quarter were $131 million, as opposed to $493 million in the prior year quarter. The results includes an after-tax DAC unlock charge of $168 million, compared with an after-tax benefit of $358 million. Excluding the impact of DAC unlocks, core earnings climbed 121% over the prior-year period.
Net income from Property-Casualty operations was $188 million, including net realized capital gain of $26 million (after-tax). This compares favorably with a net income of $173 million, including a net realized capital loss of $41 million (after-tax) a year ago.
Core earnings for the reported quarter came in at $161 million, down 24.1% from $212 million in the year-ago quarter.
The current accident year combined ratio for ongoing operations of Hartford , excluding catastrophes, deteriorated to 93.5% from 90.4% in the prior-year quarter. Including prior year development and catastrophes, the combined ratio came in at 96.8%, up from 93.7% in the prior-year quarter.
Hartford’s total invested assets excluding trading securities were $97.9 billion as of June 30, 2010, compared to $90.5 billion as of June 30, 2009. Pre-tax net investment income, excluding trading securities was up 13.0% over the prior-year quarter, driven by a $179 million improvement in returns on limited partnerships and other alternative investments.
Pre-tax net unrealized losses on investments were $1.5 billion as of June 30, 2010, compared to $3.2 billion as of March 31, 2010. The improvement was primarily driven by improved security valuations due to declining interest rates, which more than offset the spreads that widened across virtually all fixed maturity asset classes of Hartford.
At the end of first quarter, Hartford ’s assets under management were $308.9 billion, up 2.6% from $301.2 billion at the end of prior-year quarter. Book value improved to $41.29 per share at June 30, 2010 from $32.20 at June 30, 2009. Excluding AOCI, book value declined to $44.39 per share at June 30, 2010 from $52.44 at June 30, 2009.
Comparison with Competitors
Hartford’s rival, The Allstate Corporation (ALL) reported its second quarter results along with Hartford and posted earnings of 81 cents per share, substantially better than the Zacks Consensus Estimate of 70 cents. This also compares favorably with 55 cents in the year-ago period.
Another competitor, PartnerRe Ltd. (PRE) also reported on the same day with second quarter profits from continuing operations of $1.92 per share, well ahead of the Zacks Consensus Estimate of $1.75. PartnerRe reported a profit of $3.12 in the year-ago quarter.
Other competitors of Hartford such as American International Group, Inc. (AIG) will report its second quarter earnings on August 6, 2010.
Guidance
Hartford currently expects 2010 core earnings per diluted share to be within $2.10-$2.30. The range is significantly lower than its previous guidance range of $2.70 to $3.00.
This guidance assumes the following:
- U.S. equity markets produce an annualized return of 9.0% (including 7.2% stock appreciation and 1.8% dividends) from the S&P 500 level of 1,102 on July 30, 2010
- A pre-tax underwriting loss of $206 million from other operations in property and casualty
- A property and casualty catastrophe ratio of 4.75% to 5.25%
- An annualized yield on limited partnerships and other alternative investments of 0% for the remaining two quarters of 2010
- Diluted weighted average shares of common stock outstanding of approximately 481 million for 2010
Dividend Update
On July 22, the board of Hartford declared a quarterly dividend of 5 cents per share. The dividend will be paid on October 1, 2010, to shareholders of record as on September 1, 2010. The board also declared a dividend of $18.125 on each share of the Series F Preferred Stock (equivalent to $0.4531 per depository share) payable on October 1, 2010 to shareholders of record at the close of business on September 15, 2010.
Our Recommendation
Though the Hartford’s results for the quarter were better than expected, we remain concerned with its exposure to variable annuities and its capital levels. We also suspect that Hartford will continue to incur losses on its investment portfolio. It is difficult to anticipate significant expansion of the multiples at this point in time due to the challenging environment, as we expect Hartford to face higher losses in the investment portfolio in the coming quarters. However, we believe earnings will gain momentum once the markets rebound to its historical highs.
Currently, Hartford carries a Zacks #3 Rank, which translates into a short-term Hold recommendation, indicating no clear directional pressure on the shares over the near term.
AMER INTL GRP (AIG): Free Stock Analysis Report
ALLSTATE CORP (ALL): Free Stock Analysis Report
HARTFORD FIN SV (HIG): Free Stock Analysis Report
PARTNERRE LTD (PRE): Free Stock Analysis Report
Zacks Investment Research
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