We have upgraded our recommendation on Hartford Financial Services Group Inc. (HIG) to Neutral from Underperform prompted by its initiatives to increase operational and financial efficiency. Nevertheless, we are a bit concerned about the lower 2011 earning guidance provided by the company on December 8, 2011.
Hartford has been selling off its non-core businesses in order to focus on its core businesses, thereby improving the operating performance in the long run. During the past three months, Hartford announced an agreement to sell its subsidiary Hartford Life Private Placement to Philadelphia Financial Group Inc. and completed the sale of Federal Trust Corporation, to CenterState Banks, Inc. (CSFL) and Trumbull Services LLC to ExlService Holdings, Inc. (EXLS).
Additionally, Harford realizes the need to improve its financial efficiencies and risk management functions. For this, the company signed a multi-year agreement with Accenture Plc. (ACN), whereby the latter will provide management and technology consultancy services along with finance and accounting business process outsourcing services.
On the flip side, management expects to report a decline in both AARP direct and agency businesses in 2011 earnings release, which will contribute to the expected decline in the year’s written premium. Management also expects the statutory surplus in Life operations to continue declining through 2012. This is also reflected in management’s expectation of a single-digit growth rate in 2012.
Additionally, the net investment income of Hartford varies significantly with changes in market conditions, thereby largely impacting the company’s net income. With the ongoing weak market conditions, the poor investment results are expected to continue in 2012 and beyond. Moreover, low interest rates since the mid-2010 coupled with the poor economic scenario have prompted management to declare that the achievement of the previously announced ROE target of 11% will be delayed beyond the earlier goal of 2012-end.
The Zacks Consensus Estimate for Hartford’s fourth-quarter 2011 earnings is currently 61 cents per share, down about 42% from the year-ago quarter. Moreover, for 2011, the Zacks Consensus Estimate stands at $1.86 per share, down about 44% from 2010.
Currently, Hartford carries a Zacks #3 Rank, implying a short-term ‘Hold’ rating.
ACCENTURE PLC (ACN): Free Stock Analysis Report
EXLSERVICE HLDG (EXLS): Free Stock Analysis Report
HARTFORD FIN SV (HIG): Free Stock Analysis Report
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