Thursday, May 5, 2011

The Hartford Q1 Result and Outlook

           On May 2nd, The Hartford (HIG) announced Q1 earnings of $1.01 per share, modestly exceeding estimates of $.95. CEO Liam McGee stated full year EPS is trending towards the top of the previously issued 3.70–3.90 range. He noted, “First quarter core earnings were up 24% over prior year... [and] book value per share was $45.93; up 3% during the quarter.” Since the announcement, the consensus Yahoo estimate for FY2011 has been raised by 11 analysts from $3.81 to $3.92 (3%), nearing UASBIG’s modeled EPS target of $3.94. According to Bloomberg, the consensus target price is now $32.64 up 4% from the pre-earnings estimate of $31.36, which is still shy of the pitched 12-18 month target price of $36.49. As of today’s close HIG is trading at $27.10, which is 0.7 % under our cost basis of 27.28.

           The conference call featured two bearish topics: Japan, and the recent domestic tornado damage. Management implied that Japan is no longer an important issue for HIG, “[our hedging program] will limit The Hartford's downside risk under severe capital markets conditions, while preserving some of the upside should markets improve.” On the Tornados, “second quarter catastrophe losses may exceed last year's second quarter total of about $200 million.” However, P&C is only about 40% of total revenues and I find it hard to believe that management would give optimistic guidance if it thinks losses are going to be extreme.

           There were four bullish topics: a recovery in insurance pricing, solid results in the financial products segments, renewed optimism for their embattled variable annuity business, and possible capital returns. First, the Council of Insurance Agents & Brokers finds, “fifty-seven percent of the brokers responding to the survey said they saw an increase in demand, compared with forty-seven percent last quarter.” Hartford’s P&C commercial written premiums grew 9%, and individual life sales were up 13%. Second, “Wealth Management, retirement plans, and non-proprietary mutual funds each reported double-digit sales growth.” Third, McGee provided more color on the company’s pending return to the variable annuity market, “We are working toward an all-weather, rational portfolio of products in 2012… [some] we expect to launch this year. And overall, I'd say that we remain confident about our goal of $5 billion in sales in 2012.” This is important because UASBIG is currently projecting half that. A move to four billion or five billion in annuity sales would put 2012 EPS in the $4.10 to $4.32 range, ahead of the modeled $3.80 and current consensus of $4.05. Fourth, as the balance sheet continues to stabilize, management will have more free cash to accelerate gains in shareholder value, “it could be for dividend actions, it could be share or warrant repurchases, it could be risk mitigation.”

           Ultimately, Q1 results and commentary further solidified UASBIG’s investment thesis and 12-18 month target price of 36.49, or 34.6% above today’s close. It doesn’t seem prudent to revise the target price at this early stage, but we’ll continue to monitor the position.


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