Hartford Financial Services Group Inc. (HIG) reported its third-quarter adjusted earnings of $485.0 million or 98 cents per share, surpassing the Zacks Consensus Estimate of 97 cents. The improved showing was attributable to solid execution, including disciplined underwriting performance, and improved investment results. The upside was also attributable to strong growth in assets under management and Hartford’s impressive book value during the quarter.

Hartford’s adjusted earnings exclude the DAC unlock benefit of $166 million or 34 cents, benefit from net prior-year reserve development in property and casualty (P&C) Commercial and Consumer markets of $99 million or 19 cents, charge of $40 million or 8 cents, to increase reserves as a result of the Hartford’s annual environmental reserve evaluation, included in the Corporate and Other segment, and net realized capital losses, net of tax and DAC of $44 million or 9 cents per share.

Including these one-time items, Hartford reported a net income of $666 million or $1.34 per share as opposed to a net loss of $220 million or 79 cents.

Segment Results

Commercial Markets: Commercial Markets reported a net income of $352 million in the reported quarter, up 24.8% year over year from $282 million in the year-ago period.

P&C Commercial net income jumped 41% year over year to $306 million, on the back of lower catastrophes and underwriting expenses, higher investment income, and improvement in the combined ratio to 92.2% from 93.1% in the prior year quarter, excluding catastrophes and prior year development.

However, Group Benefits net income declined 29.2% year over year to $46 million in the reported quarter, primarily due to a 2% reduction in fully insured premium and an increase in loss costs.

Consumer Markets: Hartford’s Consumer Markets net income reported $70 million in the quarter, up 3.7% from $15 million in the prior-year quarter, primarily attributable to lower current accident year catastrophe losses, improvement in both ex-catastrophe current accident year underwriting results and net realized capital gains and losses.

Written premiums were $1.01 billion, compared with $1.05 billion in the prior-year period. Combined ratio was 93.3%, excluding catastrophes and prior-year development.

Wealth Management: Wealth Management net income was $320 million in the quarter, compared to a net loss of $335 million in the prior-year quarter.

Investments and Balance Sheet

Hartford’s total invested assets, excluding trading securities, were $101.1 billion as of September 30, 2010, compared with $96.0 billion as of September 30, 2009. Net investment income, excluding trading securities, was $1.1 billion, pre-tax, in the third quarter of 2010, a 3% increase over the prior-year period.

Net unrealized gain on investments was $1.2 billion as of September 30, 2010, compared with a net unrealized loss of $1.5 billion as of June 30, 2010. The improvement was driven by improved security valuation due to declining interest rates and tightening of spread across virtually all fixed maturity asset classes.

At the end of the reported quarter, Hartford’s assets under management were $301.0 billion, up 3.0% from the prior-year quarter. Book value improved to $45.80 per share as of September 30, 2010 from $37.90 as of September 30, 2009. Excluding AOCI, Hartford’s book value declined to $45.36 per share as of September 30, 2010 from $46.30 as of September 30, 2009.

Comparison with Competitors

Hartford’s rival Lincoln Financial Corporation (LNC) also reported on the same day, with second quarter profits from continuing operations of 63 cents per share, lagging the Zacks Consensus Estimate of 87 cents. Lincoln reported a profit of 84 cents in the year-ago quarter.

Another competitor, Allstate Corporation (ALL) reported its third quarter results on October 28 and posted earnings of 83 cents per share, way behind the Zacks Consensus Estimate of 97 cents. This also compares unfavorably with 99 cents in the year-ago period. PartnerRe Ltd. (PRE), also a peer, will report its third quarter earnings on November 3.

Guidance

Hartford currently expects 2010 core earnings per share to be within the $2.60−$2.70 range, which is significantly higher than its previous guidance range of $2.10−$2.30.

This guidance assumes the following:

  • U.S. equity markets produce an annualized return of 9.0% (including 7.2% stock appreciation and 1.8% dividends) from the S&P 500 level of 1,183 on September 30, 2010.
  • A pre-tax underwriting loss of $266 million from P&C operations.
  • A catastrophe ratio of 4.75% to 5.25% for the combined P&C Commercial and Consumer Markets segments, inclusive of estimated October catastrophe losses.
  • An annualized yield on limited partnerships and other alternative investments of 0% for the fourth quarter of 2010.
  • Diluted weighted average shares of common stock outstanding of approximately 481 million for 2010.

Dividend Update

On October 21, the board of Hartford declared a quarterly dividend of 5 cents per share. The dividend will be paid on January 3, 2011, to shareholders of record as on December 1, 2010. The board also declared a dividend of $18.125 on each share of Series F Preferred Stock (equivalent to 45.31 cents per depositary share) payable on January 3, 2011 to shareholders of record at the close of business on December 15, 2010.

Our Recommendation

Over the past few quarters, Hartford has suffered from losses in its investment portfolio and higher costs related to the variable annuity business. Though Hartford has been trying to bring down the investment portfolio risk by reducing its net commercial real estate-related holdings by about $800 million during the third quarter, we remain concerned with the company’s exposure to variable annuities and pressure on Life segment as consumers seek relatively safe investment vehicles for their retirement assets.

We also suspect that Hartford will continue to incur heavy losses in its investment portfolio. However, its TARP repayment has somewhat cushioned its capital position. We believe that Hartford’s earnings will gain momentum once the market rebounds to its historical highs.

Currently, Hartford carries a Zacks #3 Rank, which translates into a short-term Hold recommendation, indicating no clear directional pressure on the stock over the near term.

 
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