Hartford Maintained at Neutral

Zacks

Hartford Financial Services Group Inc. (HIG) remains focused on divesting non-core businesses and adopting measures to improve financial and risk management. It scores strongly with rating agencies and has increased its focus on high-yielding mutual funds business.

However, poor operating performance, weak market trends and a challenging regulatory environment are the downsides. We thus retain our Neutral recommendation on the company.

With its second quarter earnings release scheduled on August 1 after the bell, the Zacks Consensus Estimate is currently pegged at 70 cents, representing a huge improvement from 2 cents earned in the year-ago quarter.

In order to concentrate on its U.S. operations and enhance its operating leverage, Hartford has been selling off its non-core businesses. In March 2012, the company announced its decision to divest its Individual Life and Retirement Plans segments and Woodbury Financial Services and terminate its Individual Annuity business.

The changes are intended to increase Hartford’s focus on its P&C, Mutual Funds and Group Benefits segments, which apart from generating strong revenues have impressive market position as well, without being too sensitive to capital market fluctuations.

Moreover, the decision to cut its premium rates for its accidental death and dismemberment policyholders by 45% is expected to boost Hartford’s membership significantly in the upcoming years. Further, the company repurchased its junior subordinated debentures and outstanding warrants from Allianz in April 2012, by issuing various senior notes and new junior subordinated debentures, apart from utilizing the share repurchase program for the warrant purchases.

The repurchases are expected to reduce the company’s interest obligations, improve the capital structure and debt maturity and increase the company’s financial flexibility.

Meanwhile, the upside in auto and home new business written was dwarfed by a surge in non-renewal of existing policies, thereby leading to lower earned premium. Further, Hartford’s financials and operations are significantly impacted by the challenging regulatory environment. In April 2012, the company had to refund premiums worth $24 million to its accidental death and dismemberment policyholders, after failing to meet the minimum medical loss ratio requirement of the Patient Protection and Affordable Care Act.

Hartford, which competes with insurance companies like American International Group (AIG) and MetLife Inc. (MET), carries a Zacks #2 Rank, implying a short-term Buy rating.

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