Hartford Financial Posts Weak Q2 Earnings on Higher Expense

Zacks

Hartford Financial Services Group Inc. (HIG) reported second-quarter 2014 operating earnings per share of 31 cents that missed the Zacks Consensus Estimate by 54.4%. Earnings also declined 34% from the year-ago quarter.

An increase in prior year loss and loss adjustment expense reserve development (PYD) for asbestos and environmental (A&E) mainly dragged the results. However, these factors were partially offset by an increase in core earnings from the Property & Casualty (P&C) Commercial, Group Benefits and Mutual Funds businesses, along with a lower share count.

Including loss from discontinued operation, net realized capital losses and post-tax deferred acquisition costs, restructuring and other expenses and an unlock benefit totaling 69 cents, Hartford Financial reported a net loss of $1.00 per share, wider than the year-ago loss of 39 cents per share.

Total revenue of Hartford Financial came in at $4.6 billion, down 2.5% year over year. However, the figure breezed past the Zacks Consensus Estimate of $2.8 billion.

Segment Results

Property & Casualty (P&C): This segment of Hartford Financial generated core earnings of $40 million, down 71% year over year, mainly due to an increase in A&E PYD in the P&C Other segment and a decline in net investment income. P&C reported net income of $25 million in the reported quarter, declining 82% from $136 million in the year-ago period.

P&C written premiums increased 3% from the year-ago quarter to $2.6 billion on the back of growth in both P&C Commercial Market and Consumer Markets. However, combined ratio deteriorated to 108.6 from 105.4 in the year-ago quarter. Combined ratio, excluding catastrophes and prior-year development (PYD), improved to 90.9 from 91.8 in the prior-year quarter, owing to better underwriting results in P&C Commercial.

Investment income was $292 million, down 14% year over year, while underwriting loss narrowed to $216 million from $132 million. This segment reported catastrophe loss of $196 million in the reported quarter, wider than $186 million in the year-ago quarter. Catastrophe losses were also higher than the company’s guided figure of $185 million.

Group Benefits: This segment of Hartford Financial generated core earnings of $52 million in the reported quarter, up 41% year over year owing to improved results in the group life business. Net income came in at $55 million, decreasing from $61 million in the prior-year quarter due to a decline in net realized capital gains.

Group Benefits’ fully insured premiums declined 7% to $761 million as per expectations, on account of lower premiums from the planned reduction of the Financial Institutions block of business (scheduled to culminate by 2014-end). Meanwhile, loss ratio deteriorated 160 basis points year over year to 77.3%, mainly due to business mix changes and a decline in long-term disability claim recoveries.

Mutual Funds: Core earnings at Hartford Financial’s Mutual Funds segment increased 5% year over year to $21 million. Net income in the quarter also increased 5% year over year to $21 million. Growth in revenues from increased average assets under management (AUM) mainly led to the upside in earnings. Total AUM came in at $98.9 billion as of Jun 30, 2014, up 10% from $89.5 billion as of Jun 30, 2013. Improvement in Mutual Fund assets mainly contributed to the improvement. However, this was partly offset by a decline in Annuity assets, reflecting the divestiture of its Variable Annuity (VA) business.

Talcott Resolution: Core earnings at Talcott Resolution came in at $101 million, down 2% year over year. This detrioration was due to a decline in the U.S. VA fee income, limited partnerships and reduced other alternative investment income. The segment reported net loss of $504 million, wider than the year-ago loss of $332 million.

Corporate: Hartford Financial’s Corporate segment recorded core loss of $70 million, wider than the year-ago quarter’s loss of $69 million. Higher loss in the quarter resulted from an increase in operating expenses, partially mitigated by lower interest expenses that stemmed from debt repayments in 2013 and 2014. The segment’s net loss was reported at $64 million, narrower than $75 million in the year-ago quarter.

Financial Update

Hartford Financial's total invested assets, excluding trading securities, were $76.2 billion as on Jun 30, 2014, compared with $78.7 billion as on Dec 31, 2013. This decline stemmed from the sale of the Japan annuity business. Net investment income of Hartford Financial was $768 million in the reported quarter, down 9% year over year due to a decrease in income from LPs, lower invested assets and a decline in income from repurchase agreements.
Hartford Financial’s shareholder equity came in at $19.4 billion as of Jun 30, 2014, up 3% from $18.9 billion as of Dec 31, 2013. Book value per share increased to $41.70 as of Jun 30, 2014, from $39.14 as of Dec 31, 2013.

Excluding accumulated other comprehensive income (AOCI), Hartford Financial’s book value decreased slightly to $39.21 as of Jun 30, 2014 from $39.30 per share as of Dec 31, 2013.

Securities Update

During the quarter, Hartford Financial spent $351 million to repurchase 10.2 million shares, bringing the total repurchase to 19 million for $651 million year-to-date.

Capital Management Plans for 2014–15

Hartford Financial raised its 2014–15 capital management plans by $1.275 billion, bringing the total to $3.931 billion. Earlier, the company had chalked out a $2.656 billion plan for 2014–15. This $1.275 billion increase comprises a $775 million increase in the previous $2 billion share repurchase authorization (announced in Feb 2014), making it $2.775 billion. Out of this, the company has implemented a $525 million share repurchase program, which will close by the end of 2014. The remaining $500 million of the $1.275 billion will be utilized for debt repayment. The increase in the capital plan was attributable to the sale of the Japan annuity business.

Additionally, Hartford Financial’s board of directors declared a quarterly cash dividend of 18 cents per share, reflecting a 20% rise from the previous dividend paid on Jul 1, 2014. This increased dividend is payable on Oct 1, 2014 to shareholders of record at the close of business on Sep 2, 2014.

Our Take

Hartford Financial failed to meet our earnings estimate and declined year over year as well, due to higher loss and loss adjustment expenses. The top line also decreased year over year but managed to surpass the Zacks Consensus Estimate.

Hartford Financial is focused on capital deployment strategies. It has been particularly enthusiastic regarding share repurchases that led to a decline in share count and partially mitigated the negatives in the quarter. Additionally, Hartford Financial made an upward revision of its capital management plans for 2014–15, thanks to closure of the sale of the Japan annuity company, Hartford Life Insurance K.K. (HLIKK) to one of the subsidiaries of ORIX Corporation (IX). Moreover, the recent dividend hike represents another endeavor of Hartford Financial to boost shareholders’ returns. We expect such capital deployment activities of the company to raise investors’ confidence in the stock.

Zacks Rank

Hartford Financial currently carries a Zacks Rank #3 (Hold). Among stocks in the insurance space, CNO Financial Group, Inc. (CNO) missed the Zacks Consensus Estimate in the second quarter while Prudential Financial, Inc. (PRU) is slated to report second-quarter 2014 results shortly. Both the stocks have a Zacks Rank #2 (Buy) and are worth considering.

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