Hartford Beats, Swings To Net Gain

Hartford Financial Services’ (HIG: 22.34 0.00 0.00%) fourth quarter core earnings came in at $1.51 per share, substantially ahead of the Zacks Consensus Estimate of $1.40. This also compares favorably with the core loss of 72 cents in the year-ago quarter.

The upside was primarily attributable to stability in Hartford’s life and property and casualty businesses. Also, Hartford ended the year with a strong capital position. Despite the overall market conditions remaining timid, Hartford delivered strong underwriting results. During the reported quarter, rising stock markets helped strengthen investment income in the company’s life insurance business.
 
Including investment gains and losses, Hartford reported a net income of $557 million or $1.19 per share, compared to a loss of $806 million or $2.71 in the year-ago quarter. Hartford’s net income for the reported quarter was its first quarterly profit since mid-2008.
 
Estimate Revisions Trend
 
Over the last 30 days, nine out of the 19 analysts covering the stock increased estimates for full year 2010, while one moved in the opposite direction. Currently, the Zacks Consensus Estimate for 2010 is core earnings of $3.94 per share, which would be a substantial improvement over full-year 2009 core earnings of $1.85. In 2008, Hartford had earned $2.74 per share.
 
The maximum number of estimate revisions for 2010 in the upward direction indicates a significant likelihood of upward pressure on the performance of the stock in the upcoming quarters. As a result, the stock retains its Zacks # 1 Rank, which translates into a short-term ‘Strong Buy’ rating. However, considering the current fundamentals of Hartford, we maintain a long-term “Neutral” recommendation on the stock.
 
With respect to earnings surprises, the stock has fluctuated substantially over the last four quarters prior to the reported quarter, with two positive and two negative surprises. However, the average remained negative at 19%. This implies that Hartford has fallen short of the Zacks Consensus Estimate by 19% over that period.
 
The current Zacks Consensus Estimates for the first quarter and full-year 2010 are earnings per share of $1.00 and $3.94, respectively. The upside potential of the estimates for the first quarter and full-year 2010, essentially a proxy for future earnings surprises, currently stands at 7% and 5%, respectively.
 
Quarter in Detail

Life operations reported a net income of $118 million in the fourth quarter of 2009, compared to a net loss of $807 million in the year-ago period. Core earnings for the reported quarter were $385 million, compared to core losses of $261 million in the prior year period.

Net income from Property and Casualty operations was $508 million, including the effect of a $128 million after-tax net realized capital gain. This compares favorably with a net income of $291 million (including the effect of a $162 million net realized capital loss) a year ago.

The current accident year combined ratio for ongoing operations, excluding catastrophes, deteriorated to 92.6% from 85.3% in the prior-year quarter. Core earnings for this segment came in at $378 million, compared to $452 million in the prior-year quarter. Hartford’s total investments excluding trading securities were $93.2 billion as of Dec 31, 2009, compared to $89.3 billion as of Dec 31, 2008.

Pre-tax net investment income, excluding trading securities was $1.0 billion. This was up 29.0% from the prior-year period. Pre-tax net unrealized losses on investments were $5.0 billion as of Dec 31, 2009, compared to $13.2 billion as of Dec 31, 2009. The improvement was driven by significant spread tightening across virtually all fixed maturity asset classes.

At the end of fourth quarter 2009, Hartford’s assets under management were $380.8 billion, compared to $345.5 billion at the end of the prior-year quarter. Book value improved to $38.92 per share at Dec 31, 2009 from $28.53 at Dec 31, 2008. Excluding AOCI, book value declined to $47.56 per share at Dec 31, 2009 from $51.69 at Dec 31, 2008.

2010 Guidance

Concurrent with the fourth quarter results, Hartford provided guidance for its 2010 earnings. Hartford currently expects 2010 core earnings to be between $3.70 and $4.00 per share. Though the results for the quarter were substantially better than expected, we remain concerned with Hartford’s exposure to variable annuities and its capital levels. We also suspect that the company will continue to incur losses on its investment portfolio.