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Weak 1Q for Hartford

Zacks Equity Research

Hartford Financial Services Group Inc. (HIG) reported first-quarter 2012 operating earnings of $447.0 million or 91 cents per share, lagging the Zacks Consensus Estimate by a couple of cents per share. Hartford’s operating earnings in the reported quarter exclude the adjustments for DAC unlock benefit of $192 million or 39 cents per share, net prior-year Property and Casualty (P&C) loss and loss adjustment expense reserve releases of $19 million or 4 cents per share and net current year accident catastrophe loss of $46 million or 9 cents per share.

Operating earnings, excluding loss from discontinued operations, amounted to $1 million and net realized loss of $515 million in the reported quarter. Including the adjustments, Hartford’s net income in the reported quarter was $96 million or 18 cents per share, nosediving from $501 million or 99 cents per share in the comparable quarter of 2011.

The decline in earnings was attributable to poor results across most lines of business. While the net profits of the Commercial Markets segment plunged sharply on a year-over-year basis, the Runoff Operations and Corporate and Other segments reported larger net losses. Wealth Management segment was the only saving grace and reported improved income, while the Consumer Markets segment remained flat year over year.

Segment Results

Commercial Markets: Commercial Markets reported net income of $207 million in the reported quarter, down from $334 million in the year-ago period.

P&C Commercial operating income witnessed an 8% decline to $162 million from $177 million in the prior-year quarter, mainly due to reduced underwriting results.

However, P&C Commercial written premiums edged up 3% to $1.69 billion from $1.55 billion in the year-ago quarter, reflecting higher pricing, strong retention and increased exposures. The combined ratio, excluding catastrophes and prior-year development, was 96.4% versus 95.3% in the prior-year quarter. The increase was primarily due to lower profits from workers’ compensation.

Group Benefits operating earnings in the first quarter of 2012 were $5 million, down 74% from $19 million in the first quarter of 2011, as a consequence of unfavorable long-term disability results.

Group Benefits fully insured premiums declined 7% to $954 million from $1.03 billion in the comparable quarter of 2011, due to increased competition and Hartford’s pricing initiatives. Meanwhile, loss ratio increased to 83.0% from 79.3% in the year-ago quarter, as a result of higher long-term disability claims incidence and reduced terminations.

Consumer Markets: Hartford’s Consumer Markets segment generated net income of $108 million in the reported quarter, at par with the prior-year quarter.

Written premiums were $861 million, down 3% from $884 million in the prior-year period, while combined ratio, excluding catastrophes and prior-year development, was 88.8% as against 89.0% in the year-ago period.

Wealth Management: Wealth Management segment’s net income increased 16% from the prior-year level of $194 million to $225 million in the quarter. At the end of the reported quarter, Hartford’s assets under management were $207 billion, down 7% year over year, mainly due to net outflows and account value decline in Individual Annuity and non-proprietary mutual funds, partially offset by higher account values in Retirement Plans and Individual Life.

Runoff Operations: Hartford established the Runoff Operations segment in the fourth quarter of 2011 to include the P&C Other Operations and Life Other Operations. The segment reported net loss of $378 million in the quarter, compared with $49 million in the year-ago quarter. The decline resulted primarily from losses on hedging activities related to the international variable annuity business, arising from poor equity capital market condition as well as yen depreciation.

Corporate and Other: This segment’s net loss was $96 million, increasing 12% from $86 million in the year-ago quarter.

Financial Update

Hartford's total invested assets, excluding trading securities, were $102.9 billion on March 31, 2012, compared with $97.4 billion on March 31, 2011. Net investment income, excluding trading securities, was $1.07 billion, reflecting a 3% year-over-year decrease from $1.11 billion in the year-ago quarter.

Shareholders’ equity stood at $21.3 billion as of March 31, 2012, reflecting a 9% upside from $19.4 billion as of March 31, 2011. Book value per share improved to $43.25 as of March 31, 2012 from $38.50 as of March 31, 2011. Excluding accumulated other comprehensive income (AOCIF), Hartford’s book value increased to $40.55 per share as of March 31, 2012 from $39.96 per share as of March 31, 2011.

Business Update

On April 26, 2012, Hartford announced an agreement with Houston-based Forethought to sell its Individual Annuity new business facilities, including the product management, distribution and marketing units, and all the Individual Annuity products it currently sells. However, the company will retain its in-force annuity book of business, which will be reported within the Runoff Operations segment from the second quarter of 2012.

Hartford will also continue to sell new annuity products till the completion of the divestiture, while Forethought will get reinsurance on the newly-issued products to cover all the expenses and risks on them. The terms of the contract were not divulged. However, the company does not expect any significant impact on its earnings due to the divestiture.

Share Repurchase Update

During the reported quarter, Hartford repurchased 2.6 million shares at an average price of 16.58, totaling $42.3 million. As of March 31, 2012, the company had $106.3 million remaining under its current share repurchase authorization.

Additionally, on March 30, 2012, the company agreed to repurchase warrants worth $300 million from Allianz SE. The warrants can be used to purchase 69.4 million Hartford shares at an average price of $25.23 per share.

Our Take

Hartford’s performance deteriorated in the reported quarter, with most segments reporting net losses or declining income. Net investment income also declined, reflecting poor market trends. However, the Wealth Management segment showed substantial improvement, probably a consequence of hiring Wellington Management as the sole sub-adviser for the mutual funds business. Hartford has been emphasizing on the mutual fund business as it traditionally generates higher growth and return on equity for the company. However, the company needs to hedge itself from market fluctuations. It also needs to improve its operating performance, particularly in the Commercial Markets.

Hartford’s competitor, American International Group Inc. (AIG), is expected to release its first quarter financial results after the market closes on May 3, 2012.

Another peer MetLife Inc. (MET) registered net operating earnings of $1.46 billion or $1.37 per share compared with $1.32 billion or $1.23 per share in the year-ago quarter. This also compares favorably with the Zacks Consensus Estimate of $1.30 per share.

Hartford carries a Zacks #3 Rank, which translates into a short-term Hold rating.

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