Hartford Financial Services Group Inc. (HIG) reported second-quarter core earnings of $12.0 million or 2 cents per share, beating the Zacks Consensus Estimate by 1 cent. However, Hartford was way behind core earnings of $193 million or 38 cents per share reported in the second quarter of 2010.
The prior-year quarter earnings include the DAC unlock charge of $168 million, benefit from net prior-year reserve development of $97 million, catastrophe loss of $87 million, net asbestos reserve increase of $110 million and Federal Trust Bank-related goodwill impairment charge of $100 million.
Hartford’s core earnings in the reported quarter include the DAC unlock charge of $21 million, prior-year reserve increase of $206 million, catastrophe loss of $290 million, capitalized loss write-off of $73 million related to a discontinued software project and a tax benefit of $52 million.
The decline in earnings was attributable to poor operating results across most lines of business. While the Commercial Markets and Wealth Management segments reported net profits, the net profit of the Commercial Markets segment reduced by almost 50% from the year-ago quarter. Additionally, all the other segments reported net losses.
Net income came in at $24 million or 3 cents per share, sinking sharply from $76 million or 14 cents per share in the comparable quarter of 2010.
Segment Results
Commercial Markets: Commercial Markets reported a net income of $162 million in the reported quarter, down from $318 million in the year-ago period.
P&C Commercial net income declined to $121 million, as it includes $166 million of catastrophe loss, which surged sharply from $83 million in the year-ago quarter. The reported quarter also included $31 million for prior year reserve strengthening, as against a reserve release of $139 million in the prior-year quarter.
However, P&C Commercial written premiums increased 8% to $1.50 billion from $1.39 billion in the year-ago quarter. Combined ratio, excluding catastrophes and prior year development, was 92.8%, down from 93.6% in the prior-year quarter.
Group Benefits net income declined to $41 million from $48 million in the comparable quarter of 2010, primarily due to lower investment income and net realized gains, while premiums and other considerations were $1.1 billion, at par with the year-ago quarter.
Consumer Markets: Hartford’s Consumer Markets segment generated a net loss of $174 million in the quarter, up from $13 million in the prior-year quarter. The reported quarter’s loss includes catastrophe loss of $281 million pre-tax, compared to $146 million in the second quarter of 2010. Additionally, the reported quarter’s loss also includes $73 million related to the write-off of capitalized costs associated with a discontinued software project.
Written premiums were $969 million, down from $1.03 billion in the prior-year period, while combined ratio was 91.6%, excluding catastrophes and prior-year development, as compared to 93.2% in the prior-year period.
Wealth Management: Wealth Management segment’s net income, including a $52 million tax benefit, was $351 million, showing a substantial increase from $26 million in the prior-year quarter.
Corporate and Other: The Corporate and Other segment’s net loss was $315 million, up from $255 million in the year-ago quarter. The reported quarter loss includes an after-tax reserve charge of $189 million and a $74 million charge related to discontinued operations. The year-ago loss includes $110 million related to reserve increase and $101 million related to Federal Trust Corporation goodwill impairment.
Financial Update
Hartford's total invested assets, excluding trading securities, were $99.8 billion on June 30, 2011, compared with $97.9 billion on June 20, 2010. Net investment income, excluding trading securities, was $1.1 billion, pre-tax, showing a 4% year over year decrease.
Net unrealized gain on investments on June 30, 2011 improved to $819 million compared to a net unrealized loss of $161 million on March 31, 2011. At the end of the reported quarter, Hartford’s assets under management were $309.6 billion, ascending 11% year over year.
Book value per share improved to $43.11 as on June 30, 2011 from $38.16 as on June 30, 2010. Excluding AOCI, Hartford’s book value increased to $43.26 as on June 30, 2011 from $40.95 as on June 30, 2010.
Stock Update
On August 3, 2011, Hartford announced a share repurchase program authorizing the repurchase of shares worth $500 million. The repurchase program is expected to be completed by early 2012.
Dividend Update
On July 27, 2011, Hartford declared a quarterly dividend of 10 cents per share, payable on October 3, 2011 to shareholders of record as on September 1, 2011. The company also declared a dividend of $18.125 per share on the Series F Preferred Stock, payable on October 3, 2011 to shareholders of record as on September 15, 2011.
On July 1, 2011, Hartford paid a quarterly dividend of 10 cents per share to shareholders of record as on June 1, 2011 and $18.125 per Series F Preferred Stock to shareholders of record as on June 15, 2011.
Guidance
Consistent with Hartford’s previously announced guidance practices, it did not update the annual earnings per share guidance provided in early February. However, the company increased the key driver guidance for full year written premiums to the range of 5-8%.
Our Take
Hartford’s performance deteriorated in the reported quarter, with most segments reporting net losses or declining income. Abnormally high catastrophe losses also played a role in the dismal performance. The net investment income declined, reflecting poor market trends. While the catastrophe losses cannot be controlled, the company needs to hedge itself from market fluctuations. It also needs to improve its operating performance, particularly in the Consumer Markets segment.
Hartford’s competitor, American International Group Inc. (AIG), is expected to announce second-quarter earnings after the market closes on August 4, 2011. Another rival MetLife Inc. (MET) reported second quarter operating earnings per share of $1.24, surpassing the Zacks Consensus Estimate of $1.11 per share.
Hartford carries a Zacks #4 Rank, which translates into a short-term Sell rating.
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