Hartford Lags; Doubles Dividend - Analyst Blog

Hartford Financial Services Group Inc. (HIG) reported its fourth-quarter adjusted core earnings of $451.0 million or 91 cents per share, lagging the Zacks Consensus Estimate of 96 cents. Additionally, Hartford was way behind the adjusted core earnings of $527 million or $1.12 per share reported in the fourth quarter 2009.

The results were adversely impacted by the drop in profits in both the commercial and consumer sides of the property and casualty insurance business, impacted by catastrophe losses and more positive releases of reserves in prior periods, as well as lower capital gains.

Hartford's adjusted core earnings in the fourth quarter 2010 exclude the DAC unlock benefit of $48 million or 10 cents a share and a benefit from net prior-year reserve development in property and casualty (P&C) Commercial, Consumer markets and the Corporate and Other segment of $27 million or 5 cents a share. The prior-year quarter excluded the DAC unlock benefit of $78 million or 19 cents a share and a benefit from net prior-year reserve development of $84 million or 20 cents a share.

The adjusted earnings also excluded the net realized capital gains or losses, net of tax and DAC. Including these one-time items, Hartford reported a net income of $619 million or $1.24 per share as opposed to a net income of $557 million or $1.19 per share. In fiscal 2010, net income was $1.68 billion or $2.49 per share as against a net loss of $887 million or $2.93 per share in fiscal 2009.

The upside was attributable to better investment results, strong growth in assets under management and Hartford's impressive book value during the quarter.

Segment Results

Commercial Markets: Commercial Markets reported a net income of $253 million in the reported quarter, down 45.0% year over year from $460 million in the year-ago period.

P&C Commercial net income plummeted 49% year over year to $213 million, on the back of lower positive net prior year reserve development and lower net realized capital gains, increased catastrophes, and current year reserve strengthening related to the first nine months of 2010, partially offset by higher net investment income.

P&C Commercial combined ratio, excluding catastrophes and prior year development, was 95.0%, including 3.0 basis points of current accident year reserve strengthening related to the first nine months of 2010.

Likewise, Group Benefits net income declined 11% year over year to $40 million in the reported quarter, primarily due to a 3% reduction in fully insured premium and an increase in long-term disability loss costs, partially offset by a $44 million improvement in net realized capital gains.

Consumer Markets: Hartford's Consumer Markets net income was $30 million in the quarter, down 65% from $85 million in the prior-year quarter, primarily attributable to higher current accident year catastrophe losses and lower net realized capital gains.

Written premiums were $896 million, down 6% year over year from $953 million in the prior-year period, reflecting the company's rate and underwriting actions to increase profitability and the move towards a more preferred customer demographic.

Combined ratio was 96.8%, excluding catastrophes and prior-year development, as compared to 96.7% in the prior-year period.

Wealth Management: Wealth Management net income was $375 million in the quarter, up from $116 million in the prior-year quarter, driven by a significant improvement in net realized capital gains/losses.

Investments and Balance Sheet

Hartford's total invested assets, excluding trading securities, were $98.2 billion as of December 31, 2010, compared with $93.2 billion as of December 31, 2009. Net investment income, excluding trading securities, was $1.1 billion, pre-tax, in the fourth quarter of 2010, a 5% increase over the prior-year period.

Net unrealized loss on investments was $600 million as of December 31, 2010, compared with a loss of $5.0 billion as of December 31, 2009 and a net unrealized gain of $1.2 billion as of September 30, 2010. The deterioration was driven by lower security valuations due to rising interest rates, partially offset by modest spread tightening.

At the end of the reported quarter, Hartford's assets under management were $309.3 billion, compared with $295.3 billion at the end of December 31, 2009. This increase reflected equity market appreciation and positive flows in non-annuity businesses, particularly in Retirement Plans.

Book value improved to $44.44 per share as of December 31, 2010 from $38.92 as of December 31, 2009. Excluding AOCI, Hartford's book value declined to $46.70 per share as of December 31, 2010 from $47.56 as of December 31, 2009.

Hartford received funds from the federal bailout program at the height of the financial crisis and subsequently bought back preferred stock worth $3.4 billion issued to the Treasury as part of the program.

During the quarter, Hartford also sold two non-core businesses, Canadian mutual funds and Specialty Risk Services, LLC (SRS). In October, Hartford agreed to dispose its mutual funds business Hartford Investments Canada Corp, known as Hartford Investments, to CI Financial Corp. for approximately C$1.75 billion in assets. The deal was completed in December.

Later in December, Hartford sold its wholly owned subsidiary SRS to Sedgwick Claims Management Services, Inc. (Sedgwick CMS) for $278 million in cash, as part of the restructuring process. The deal is expected to close in the first quarter of 2011, and Hartford expects to recognize an after-tax gain of $150 million.

Dividend Update

Hartford doubled its dividend for the first time since the recession, and declared a quarterly dividend of 10 cents per share. The dividend is payable on April 1 to shareholders of record as of March 1.

It was the first time the company raised its dividend since it slashed its quarterly payout in two consecutive quarters from 53 cents to 32 cents and then to a nickel in late 2008.

Comparison with Competitors

Hartford's rival Lincoln Financial Corporation (LNC) also reported on the same day, with fourth quarter adjusted profits from continuing operations of 92 cents per share, exceeding the Zacks Consensus Estimate of 88 cents. Lincoln reported a profit of 90 cents in the year-ago quarter.

Other competitors, PartnerRe Ltd. (PRE) and Allstate Corporation (ALL), are expected to report their fourth quarter results on February 7 and February 9, respectively.

Guidance

Hartford currently expects 2011 core earnings per share to be within the $3.70−$3.90 range and diluted weighted average common shares of 503 million for 2011.

Our Recommendation

Hartford is in the process of reinventing itself, which carries opportunity as well as execution risk. Further, Hartford is expected to improve its ROE much above 9%−10% over the next few years.

We believe that with the repayment of the government bailout amount last year, Hartford is focused on lowering the risk exposure of its capital, a positive that could increase operational efficiencies by enabling allocation of capital for share repurchases and dividend payments.

Currently, Hartford carries a Zacks #3 Rank, which translates into a short-term Hold recommendation, indicating no clear directional pressure on the stock over the near term.

 
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