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We have maintained our Neutral recommendation on Hartford Financial Services Group Inc. (HIG - Analyst Report) based on the measures taken to improve financial and risk management and the company’s increased focus on its high-yielding mutual funds business. However, continued deterioration in net investment income, a decline in statutory surplus and a challenging regulatory environment are the downsides.

Hartford reported fourth-quarter 2011 operating earnings of $442.0 million or 90 cents per share, beating the Zacks Consensus Estimate of 59 cents per share. However, results were marginally behind $454 million or 91 cents per share reported in the fourth quarter of 2010.

Harford realizes the need to improve its financial efficiencies and risk management functions. For this, the company signed a multi-year consultancy and outsourcing agreement with Accenture Plc (ACN - Analyst Report). Moreover, in order to boost its mutual fund business, which traditionally generates higher growth and return on equity for the company, Hartford hired Wellington Management as its sole mutual fund sub-adviser.

Hartford also restructured its reporting segments in the fourth quarter of 2011 to reflect the organizational structure more lucidly. The company remains committed to enhancing shareholder value and has also been reviewing its business structure and strategies recently to consider benefits of a potential spin-off.

However, the net investment income of Hartford varies significantly with changes in market conditions, thereby impacting the company’s net income to a great extent. The poor investment results are expected to continue amid the ongoing weak market conditions, although the company’s increased investments in some high-yielding assets are expected to partially offset the negative impact in future.

Moreover, the statutory surplus of Hartford slid 4.5% in 2011 to $14.8 billion and is expected to decline further in 2012 hurt by declining interest rates, expenses related to increased hedging activities, spread compression and decline in Group Benefits earnings. A decline in the statutory surplus adversely affects the company’s financial strength and a continued deterioration may even lead to ratings downgrade.

The Zacks Consensus Estimate for the company’s first-quarter 2012 earnings is currently pegged at 86 cents per share, down about 26% year over year. For full-year 2012, the Zacks Consensus Estimate stands at $3.36 per share, up 73% from 2011.

Currently, the shares of Hartford carry a Zacks #3 Rank, implying a short-term Hold rating.

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