Hartford Financial Services Group Inc. (HIG)
reported first-quarter 2012 operating earnings of $447.0 million or
91 cents per share, lagging the Zacks Consensus Estimate by a
couple of cents per share. Hartford’s operating earnings in the
reported quarter exclude the adjustments for DAC unlock benefit of
$192 million or 39 cents per share, net prior-year Property and
Casualty (P&C) loss and loss adjustment expense reserve
releases of $19 million or 4 cents per share and net current year
accident catastrophe loss of $46 million or 9 cents per share.
Operating earnings, excluding loss from discontinued operations,
amounted to $1 million and net realized loss of $515 million in the
reported quarter. Including the adjustments, Hartford’s net income
in the reported quarter was $96 million or 18 cents per share,
nosediving from $501 million or 99 cents per share in the
comparable quarter of 2011.
The decline in earnings was attributable to poor results across
most lines of business. While the net profits of the Commercial
Markets segment plunged sharply on a year-over-year basis, the
Runoff Operations and Corporate and Other segments reported larger
net losses. Wealth Management segment was the only saving grace and
reported improved income, while the Consumer Markets segment
remained flat year over year.
Segment Results
Commercial Markets: Commercial Markets
reported net income of $207 million in the reported quarter, down
from $334 million in the year-ago period.
P&C Commercial operating income witnessed an 8% decline to
$162 million from $177 million in the prior-year quarter, mainly
due to reduced underwriting results.
However, P&C Commercial written premiums edged up 3% to
$1.69 billion from $1.55 billion in the year-ago quarter,
reflecting higher pricing, strong retention and increased
exposures. The combined ratio, excluding catastrophes and
prior-year development, was 96.4% versus 95.3% in the prior-year
quarter. The increase was primarily due to lower profits from
workers’ compensation.
Group Benefits operating earnings in the first quarter of 2012
were $5 million, down 74% from $19 million in the first quarter of
2011, as a consequence of unfavorable long-term disability
results.
Group Benefits fully insured premiums declined 7% to $954
million from $1.03 billion in the comparable quarter of 2011, due
to increased competition and Hartford’s pricing initiatives.
Meanwhile, loss ratio increased to 83.0% from 79.3% in the year-ago
quarter, as a result of higher long-term disability claims
incidence and reduced terminations.
Consumer Markets: Hartford’s Consumer
Markets segment generated net income of $108 million in the
reported quarter, at par with the prior-year quarter.
Written premiums were $861 million, down 3% from $884 million in
the prior-year period, while combined ratio, excluding catastrophes
and prior-year development, was 88.8% as against 89.0% in the
year-ago period.
Wealth Management: Wealth Management
segment’s net income increased 16% from the prior-year level of
$194 million to $225 million in the quarter. At the end of the
reported quarter, Hartford’s assets under management were $207
billion, down 7% year over year, mainly due to net outflows and
account value decline in Individual Annuity and non-proprietary
mutual funds, partially offset by higher account values in
Retirement Plans and Individual Life.
Runoff Operations: Hartford
established the Runoff Operations segment in the fourth quarter of
2011 to include the P&C Other Operations and Life Other
Operations. The segment reported net loss of $378 million in the
quarter, compared with $49 million in the year-ago quarter. The
decline resulted primarily from losses on hedging activities
related to the international variable annuity business, arising
from poor equity capital market condition as well as yen
depreciation.
Corporate and Other: This segment’s
net loss was $96 million, increasing 12% from $86 million in the
year-ago quarter.
Financial Update
Hartford's total invested assets, excluding trading securities,
were $102.9 billion on March 31, 2012, compared with $97.4 billion
on March 31, 2011. Net investment income, excluding trading
securities, was $1.07 billion, reflecting a 3% year-over-year
decrease from $1.11 billion in the year-ago quarter.
Shareholders’ equity stood at $21.3 billion as of March 31,
2012, reflecting a 9% upside from $19.4 billion as of March 31,
2011. Book value per share improved to $43.25 as of March 31, 2012
from $38.50 as of March 31, 2011. Excluding accumulated other
comprehensive income (AOCI), Hartford’s book value increased to
$40.55 per share as of March 31, 2012 from $39.96 per share as of
March 31, 2011.
Business Update
On April 26, 2012, Hartford announced an agreement with
Houston-based Forethought to sell its Individual Annuity new
business facilities, including the product management, distribution
and marketing units, and all the Individual Annuity products it
currently sells. However, the company will retain its in-force
annuity book of business, which will be reported within the Runoff
Operations segment from the second quarter of 2012.
Hartford will also continue to sell new annuity products till
the completion of the divestiture, while Forethought will get
reinsurance on the newly-issued products to cover all the expenses
and risks on them. The terms of the contract were not divulged.
However, the company does not expect any significant impact on its
earnings due to the divestiture.
Share Repurchase Update
During the reported quarter, Hartford repurchased 2.6 million
shares at an average price of 16.58, totaling $42.3 million. As of
March 31, 2012, the company had $106.3 million remaining under its
current share repurchase authorization.
Additionally, on March 30, 2012, the company agreed to
repurchase warrants worth $300 million from Allianz SE. The
warrants can be used to purchase 69.4 million Hartford shares at an
average price of $25.23 per share.
Our Take
Hartford’s performance deteriorated in the reported quarter,
with most segments reporting net losses or declining income. Net
investment income also declined, reflecting poor market trends.
However, the Wealth Management segment showed substantial
improvement, probably a consequence of hiring Wellington Management
as the sole sub-adviser for the mutual funds business. Hartford has
been emphasizing on the mutual fund business as it traditionally
generates higher growth and return on equity for the company.
However, the company needs to hedge itself from market
fluctuations. It also needs to improve its operating performance,
particularly in the Commercial Markets.
Hartford’s competitor, American International Group
Inc. (AIG), is expected to release its first quarter
financial results after the market closes on May 3, 2012.
Another peer MetLife Inc. (MET) registered net
operating earnings of $1.46 billion or $1.37 per share compared
with $1.32 billion or $1.23 per share in the year-ago quarter. This
also compares favorably with the Zacks Consensus Estimate of $1.30
per share.
Hartford carries a Zacks #3 Rank, which translates into a
short-term Hold rating.
AMER INTL GRP (AIG): Free Stock Analysis Report
HARTFORD FIN SV (HIG): Free Stock Analysis Report
METLIFE INC (MET): Free Stock Analysis Report
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