Hartford Financial Services Group Inc. (HIG) reported its first-quarter adjusted core earnings of $494.0 million or 97 cents per share, modestly beating the Zacks Consensus Estimate of 95 cents. Additionally, Hartford was way behind the adjusted core earnings of $408 million or 86 cents per share reported in the first quarter of 2010.
Hartford’s adjusted core earnings in the first quarter 2011 exclude the DAC unlock benefit of $61 million or 12 cents a share and a benefit from net prior-year reserve development in property and casualty (P&C) segment of $33 million or 7 cents a share.
The prior-year quarter excluded the DAC unlock benefit of $79 million or 18 cents a share, a benefit from net prior-year reserve development of $57 million or 13 cents a share and a $1.03 per diluted share charge related to the company’s repurchase of the CPP preferred shares.
The upside was attributable to strong financial and operating results across all lines of business. In addition, Hartford’s performance reflected strong retentions, improved renewal written pricing and continued economic exposure increases. Strong sales in retirement plans, mutual funds and life insurance businesses also contributed to the upside.
Segment Results
Commercial Markets: Commercial Markets reported a net income of $338 million in the reported quarter, up 32.0% year over year from $257 million in the year-ago period.
P&C Commercial net income surged 59% year over year to $327 million, as it includes the $150 million after-tax gain from the completion of the sale of Specialty Risk Services, LLC (SRS) in December 2010 to Sedgwick Claims Management Services, Inc. (Sedgwick CMS) for $278 million in cash, as part of the restructuring process. The reported quarter also included a net $4 million in after-tax prior year reserve releases, as against $53 million in the prior-year quarter.
P&C Commercial combined ratio, excluding catastrophes and prior year development, was 94.9%, up 2.2 points from the prior- year period, primarily driven by non-catastrophe property losses from winter storm activity.
However, Group Benefits net income plummeted drastically by 78% year over year to $11 million in the reported quarter, primarily due to a 2% reduction in fully insured premium and an increase in long-term disability loss costs.
Consumer Markets: Hartford’s Consumer Markets net income was $110 million in the quarter, up 96% from $56 million in the prior-year quarter. The first quarter of 2011 included net prior year reserve releases of $32 million after-tax, primarily driven by lower auto liability severity, compared to net prior year reserve releases in the first quarter of 2010 of $5 million after-tax.
Written premiums were $884 million, down 6% year over year from $943 million in the prior-year period, reflecting the company's rate and underwriting actions to improve profitability as well as increased competition in the market-place.
Combined ratio was 88.7%, excluding catastrophes and prior-year development, as compared to 91.1% in the prior-year period.
Wealth Management: Wealth Management net income was $128 million in the quarter, up from $124 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 $97.4 billion as of March 31, 2011, compared with $98.2 billion as of December 31, 2010. Net investment income, excluding trading securities, was $1.1 billion, pre-tax, in the first quarter of 2011, a 5% increase over the prior-year period.
Net unrealized loss on investments improved at the end of March 31, 2011 with $161 million as compared with $600 million as of December 31, 2010, due to tightening of credit spreads, more than offset by the impact of higher interest rates.
At the end of the reported quarter, Hartford’s assets under management were $314.7 billion, compared with $301.7 billion at the end of March 31, 2010. This increase reflected equity market appreciation and positive flows in non-proprietary mutual funds and retirement plans.
Book value improved to $45.93 per share as of March 31, 2011 from $38.94 as of March 31, 2010. Excluding AOCI, Hartford’s book value also increased to $47.65 per share as of March 31, 2011 from $44.29 as of March 31, 2010.
Dividend Update
During the quarter, Hartford paid a quarterly dividend of 10 cents per share on April 1 to shareholders of record as of March 1.
Comparison with Competitors
Hartford’s rival Lincoln Financial Corporation (LNC) reported its first quarter results on April 28 with operating earnings of $1.08 per share, exceeding the Zacks Consensus Estimate of 92 cents. Lincoln reported a profit of 83 cents in the year-ago quarter.
Other competitors, PartnerRe Ltd. (PRE) reported on the same day – an operating loss of $10.82 per share, as compared to the Zacks Consensus Estimate of $7.68 loss per share and 60 cents loss per share in the prior-year quarter.
Guidance
Consistent with Hartford’s previously announced guidance practices, it will not update the annual earnings per share guidance provided in early February.
Therefore, Hartford reiterates the 2011 core earnings per share to be within the $3.70-$3.90 range and diluted weighted average common shares at 503 million for 2011.
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.
HARTFORD FIN SV (HIG): Free Stock Analysis Report
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