Tuesday, February 9, 2010


Fundamental Outlook Still Clouded

Key Conclusions: We continue to recommend investors stay on the sidelines with Hartford stock, despite a valuation which has recently come under considerable pressure. From our perspective, the fundamental outlook is still heavily clouded, which was evident in guidance that ran below what most were expecting for 2010. Further, we remain concerned over heavy net redemptions of assets in life and annuity, potentially sizable dilution from exiting TARP, and a challenging environment for property casualty. In aggregate, we presently see significantly stronger potential upside in other equity sensitive names at what we consider to be more attractive entry points, leading us to reiterate our Equal‐weight rating. Other things equal, we would consider a valuation of below $20 as an attractive entry point, but at its current level we recommend investors stay on the sidelines.

Results: Hartford reported operating EPS of $1.51, $0.02 below our estimate but in‐ line with its guidance range of $1.45‐1.60 that it preannounced in January. For 2010, management set guidance at $3.70‐4.00, which was below our estimate of $4.05 prior to the release. Further, we believe some of the underlying assumptions behind the guidance range look somewhat aggressive, such as written premium growth and equity market assumptions, making us view the lower end of this range more likely. On the back of the results and guidance commentary, we are cutting our estimates for 2010 to $3.80, down $0.25.

What Happened

EPS in‐line with preannouncement: Hartford reported operating EPS of $1.51, in‐line with its guidance range of $1.45‐1.60 it preannounced in January.
Disappointing guidance: Guidance for 2010 was set at $3.70‐4.00, but included various assumptions which we believe could be aggressive, making the lower end more likely.

What We Liked

Property casualty results: Underwriting results well exceeded expectations, although this was mostly due to abnormal developments with current year catastrophe losses. That said, the written premium decline of 5% was modestly better than expected.
Credit developments: Realized investment losses declined meaningfully, and the improvement in unrealized losses, down 14%, was better than we expected. Excluding all TARP related distortions, we put diluted book value at $34.26, up 3% sequentially.

What We Did Not Like

Life and annuity results: Excluding favorable DAC and other items, core results fell below expectations, with the largest shortfalls being in the company’s individual life and retirement plans segments.

Sales and Flows: Overall, the company continues to lose substantial assets, with sizable outflows in several segments including variable annuities, institutional, and Japan. While mutual funds and 401(k) continue to generate in‐flows, mutual fund flows fell shy of expectations. When we couple the weak flows with recent equity market declines, we remain concerned about franchise deterioration.

Guidance Assumptions: Guidance is based on an average level of the S&P500 of 1,155, which may prove aggressive, while written premium growth of 0‐4% also looks optimistic to us. The one offset is the assumption of breakeven results in alternative investment, where we believe there could be potential upside.

How it Changes our View

Reducing estimates: We are reducing our 2010 EPS estimate $0.25 to $3.80.
Reiterating Equal‐weight: While the valuation is already low, we presently see better risk‐adjusted returns in other equity sensitive names where we see stronger growth and less dilution concerns with respect to exiting TARP.
Morgan Stanley Nigel Dally

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