Hartford Outdoes Again

Hartford Financial Services’ (HIG - Analyst Report) third quarter core earnings came in at $1.56 per share, substantially ahead of the Zacks Consensus Estimate of $1.07. This also compares favorably with the loss of $1.40 per share in the year-ago quarter. 

The results for the reported quarter exclude after-tax net realized capital loss of $885 million and an after-tax loss of $435 million from the company's variable annuity hedging programs. The results for the prior-year quarter exclude an after-tax net realized capital loss of $2.2 billion. The upside was primarily attributable to stability in the company’s protection and wealth management franchises. The quarter’s core earnings included a $232 million benefit from the deferred acquisition costs (DAC) unlock. 

GAAP net loss for the quarter was $220 million, or 79 cents per share, compared to $2.6 billion, or $8.74 per share in the prior-year quarter. Life operations reported a net loss of $323 million in the third quarter of 2009, compared to $1.8 billion in the year-ago period. Life operations’ assets under management at Sep 30, 2009, were $334.3 billion, flat compared with $333.3 billion as of Sep 30, 2008. Core earnings for the quarter were $499 million, up from core losses of $541 million in the prior year period. 

Net income from Property and Casualty operations were $190 million, including the effect of a $58 million net realized capital loss. This compares with a net loss of $774 million (including the effect of a $929 million net realized capital loss) a year ago. The current accident year combined ratio for ongoing operations, excluding catastrophes, deteriorated to 93.8% from 91.8% in the prior-year quarter. 

Total investments excluding trading securities were $96 billion as of Sep 30, 2009, compared to $89 billion as of Dec 31, 2008. Pre-tax net investment income, excluding trading securities, was $1.0 billion. This was down 5.0% from the prior-year period, largely due to lower interest rates as well as the company's decision to increase its allocation to short-term investments. 

After-tax net unrealized losses on investments were $5.8 billion as of Sep 30, 2009, compared to $13.2 billion as of Dec 31, 2009. The improvement was driven by significant spread tightening across all fixed maturity asset classes in the last two quarters, partially offset by the implementation of new impairment accounting guidance. 

Book value improved to $37.90 per share at Sep 30, 2009, from $32.20 at Jun 30, 2009, but declined from $41.80 at Sep 30, 2008. Excluding AOCI, book value declined to $46.30 per share at Sep 30, 2009 from $52.44 at Jun 30, 2009 and $55.63 at Sep 30, 2008. 

2009 Guidance 

Concurrent with the quarter’s results, the company provided an updated guidance for its 2009 earnings. Hartford currently expects 2009 core earnings to be between 85 cents and $1.05 per share, up from prior guidance in the range of zero to 20 cents per share. Though the results for the quarter were substantially better than expected, we remain concerned with Hartford’s exposure to variable annuities and its capital levels. We also suspect that the company will continue to incur increasing losses on its investment portfolio. Thus, we are maintaining our Neutral recommendation on the shares.