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Fourth-quarter earnings for Hartford Financial Services Group (HIG) lagged the Zacks Consensus Estimate by 5 cents due to plummeting profits in both the commercial and consumer sides of the property and casualty (P&C) insurance business.

However, Hartford provided better investment results, strong growth in assets under management and impressive book value during the fourth quarter.

We have thus reiterated our 'Neutral' rating on Hartford.

The Wealth Management segment posted an increase in net income of $375 million, driven by a significant improvement in net realized capital gains. Meanwhile, the other segments of Commercial and Consumer markets were adversely impacted by catastrophe losses and more positive releases of reserves in prior periods, as well as lower capital gains.

Hartford's total invested assets, excluding trading securities, were $98.2 billion as of December 31, 2010, compared with $93.2 billion as of December 31, 2009. In addition, the company’s net investment income, excluding trading securities, increased 5% year over year.

In addition, Hartford’s assets under management increased in the quarter reflecting equity market appreciation and positive flows in non-annuity businesses, particularly in Retirement Plans.

Book value also improved to $44.44 per share as of December 31, 2010 from $38.92 as of December 31, 2009.

Although there are concerns regarding the company’s exposure to variable annuities, the TARP repayment has somewhat cushioned its capital position, resulting in allocation of capital for share repurchases and dividend payments.

Hartford bought back preferred stock worth $3.4 billion issued to the Treasury as part of the federal bailout program, from where Hartford received financial support at the height of the financial crisis.

Apart from that, Hartford has been disposing its non-core businesses in order to concentrate on its U.S. operations and enhance its operating leverage. During the quarter, Hartford sold two non-core businesses, Canadian mutual funds and Specialty Risk Services, LLC (SRS).

In December 2010, Hartford completed the sale of its mutual funds business Hartford Investments Canada Corp, known as Hartford Investments, to CI Financial Corp. for approximately C$1.75 billion in assets.

Later, Hartford sold its wholly owned subsidiary SRS to Sedgwick Claims Management Services Inc. (Sedgwick CMS) for $278 million in cash, as part of the restructuring process. The deal is expected to close in the first quarter of 2011 and Hartford expects to recognize an after-tax gain of $150 million.

Hartford also doubled its dividend for the first time in the quarter since the recession, and declared a quarterly dividend of 10 cents per share, to be payable on April 1 to shareholders of record as of March 1.

Further, to improve its credit rating outlook, Hartford intended to reduce its exposure to real estate related securities and hedge funds. Consequently, Fitch Ratings upgraded its outlook on Hartford to stable from negative, in February 2011, on the primary life and property & casualty insurance division, and reiterated the rating of “BBB”, on the back of impressive net income in the fourth quarter results.

Later in March, the rating agency Standard & Poor’s affirmed its “BBB” counterparty credit rating on Hartford and increased the outlook to stable from negative, on account of lower investment losses.

However, Hartford’s financial condition and operating results are expected to be adversely impacted by The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which was enacted on July 21, 2010.

Under this reform, U.S. and overseas governmental and regulatory authorities are considering enhanced regulatory requirements to prevent future crises and stabilize the institutions under their supervision.

Such measures are likely to lead to stricter regulation of financial institutions generally, and heightened prudential requirements for systemically important companies in particular. Such measures could include taxation of financial transactions and restrictions on employee compensation.

The quantitative Zacks #3 Rank (short term Hold rating) on the stock indicates no directional pressure on the shares over the near term.

Headquartered in Connecticut, the Hartford Financial Services Group is one of the largest multi-line insurance and investment companies in the country, providing investment products, individual life, group life and group disability insurance products, and property and casualty insurance products in the U.S. The company competes with PartnerRe Ltd. (PRE) and Allstate Corporation (ALL).

 
ALLSTATE CORP (ALL): Free Stock Analysis Report
 
HARTFORD FIN SV (HIG): Free Stock Analysis Report
 
PARTNERRE LTD (PRE): Free Stock Analysis Report
 
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