Fitch Raises Outlook on Hartford Before Japan Losses

The shares for insurers like, Hartford Financial (NYSE:HIG), MetLife (NYSE:MET), AIG (NYSE:AIG) and Prudential Financial (NYSE:PRU) have been under pressure recently due to estimates on the costs of the earthquake in Japan. Hartford Financial is one of largest providers of investment products, individual life, group life and group disability insurance products, as well as property and casualty insurance products in the US.

We have a price estimate of $23.68 on The Hartford’s stock which is about 14% below the current market price.

Strong performance in 2010 has resulted in improved ratings

Hartford Financial posted net income of $1.68 billion for the year 2010 compared with a loss of $887 million in 2009 and a loss of $2.7 billion in 2008. The increase in net income was driven by the decline in deferred acquisition cost (DAC) and a decline in net realized capital losses. Fitch raised its outlook on Hartford to stable from negative on primary life and property & casualty insurance division, and it’s rating remains BBB. ^[1]

Fitch’s rating reflects the company’s underwriting performance of the property & casualty segment compared to the industry and peers and sizable level of company’s cash position and financial resources. ^[2]. According to the Fitch, Hartford’s life insurance profitability will improve but intermediate term growth in earnings will be challenged by its concentration in lower margin, competitive retirement savings businesses and a group benefits operation that is experiencing higher loss ratios. ^[3]

Fitch Ratings is a global independent rating agency and is widely recognized by investors, issuers and bankers, and an improved ratings for Hartford Financial will boost investors’ confidence in the company and will also help the company in marketing its policies to the consumers.

Hartford’s yield on realized capital gains dropped to about -5% in 2008 primarily driven by $3.9 billion OTTI losses which were reduced to $434 million in 2010. The impairments were primarily concentrated in structured securities associated with commercial and residential real estate which were impaired primarily due to continued property-specific deterioration of the underlying collateral and increased delinquencies. We expect Hartford’s yield on realized capital gains to improve going forward as the company lowers its credit and investment risks by limiting its exposure to commercial real estate and related investments.

See our full estimates for Hartford Financial.

1. Fitch Raises Outlook for Hartford, February 25, 2011, Zachs [↩]
2. Fitch Affirms Hartford’s Ratings; Outlook Revised to Stable, February 25, 2011, Bradenton [↩]
3. 14 Insurers See Ratings Updates, March 2, 2011, Insurance Networking [↩]