Friday, July 15, 2011

Hartford’s Q2 Guidance

The Hartford Financial Services Group pre-announced their Q2 results because they declared six special items, which collectively reduced projected EPS from a consensus of $.77 to $.03. Of these six, four do not impact UASBIG’s thesis. In descending order of after-tax significance, they are: P&C catastrophe losses of $290m, reserve increase for legacy asbestos liabilities of $189m, disposition of a bank acquired for TARP eligibility $74m, and a $52m tax benefit related to an IRS settlement from the years 1998-2001.

The two remaining items require a little more color before their impact on investors confidence can be fully assessed. First, it is important to understand which management regime started the failed policy administration software project that was discontinued and written off for $73m. Second, the negative DAC unlock, resulting in a $76 million impact to net income implies that either a mistake was made in a recent period, or that they have changed their assumptions about their life insurance or variable annuity products.

There were two positive developments. Hartford’s investment portfolio contained a net unrealized gain of approximately $800 million at the end of June, and Japan did not have a major impact.

The totals reported do allow UASBIG to make a quick backward calculation: a sum of the after tax items, assuming half the catastrophe losses and adding in the projected net income of $24m, yields $518m* after preferred dividends. or $1.03 in quarterly earnings. $1.03 would have been 8.4% above the highest Q2 consensus estimate of $.95. That number suggests that the positive pricing and renewal trends from the first quarter are being sustained. Margins and management’s guidance have the potential to drive a significant up or down move on august 3rd and 4th. UASBIG will be ready.

*This post has been corrected to include preferred dividends.


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