Hartford’s earnings continue to be a tale of two companies. Their wealth management and P&C divisions continued to deliver solid results, while their family of life insurance businesses struggled to generate positive results. For the quarter, GAAP net income was $0M or $(.02) EPS, which included a $516M after tax charge from a negative DAC unlock, $134M in after tax catastrophe losses, and the low yield environment. Management asserted that in a normalized environment the company would have earned $0.73 per share. Third quarter 2010, which was boosted by low catastrophe losses and solid yields, resulted in net income of $666 million, or $1.34 per diluted share.
In the conference call, management projected the life insurance segment to be self-sufficient but unable to contribute to the holding company’s statutory surplus in 2012. They think that by 2013 yields will surpass the assumptions embedded in old business, and the sale of newly introduced products will ramp up towards pre-2008 levels. Lastly, Hartford wants to wait until there is more clarity in Europe before deploying the $500M is has earmarked for buybacks, but has promised to be done by Q2 2012.
While it will still be a number of quarters before the Hartford can prove that they are moving in the right direction, a number of analysts have found the valuation compelling. Morgan Stanley recently joined JP Morgan, Credit Suisse, Sterne Agee and others by upgrading HIG to a buy with a target price in the mid 20s.
-Zach
Showing posts with label HIG. Show all posts
Showing posts with label HIG. Show all posts
Thursday, November 10, 2011
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.
-Zach
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.
-Zach
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.
~Zach
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.
~Zach
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