The Hartford: Only Paper Profits

I was excited to see The Hartford (HIG) had turned the corner to profitability, until I realized that they only had positive earnings if you excluded the losses. I am sorry, but that is accounting profits, not actual profits. Without the losses the firm posted a whopping $1.56 per share, but including the losses the firm lost $.79 per share. Of course, no one is going to look under the hood at the balance sheet in the media, so come with me for a ride at looking at an insurance company’s balance sheet.

First, let’s take a look at this statement about these quarters’ results:

“Impairments were $536 million, pre-tax, in the third quarter of 2009. The majority of impairments were related to potential future credit losses on certain structured securities.

Net unrealized losses on investments were $5.8 billion, pre-tax, as of September 30, 2009, compared with $13.2 billion as of December 31, 2008. The improvement was driven by significant spread tightening across virtually all fixed maturity asset classes in the second and third quarter of 2009, partially offset by the implementation of new impairment accounting guidance.“

So, there is still $5.8B in losses on the books, that will have to be realized because everything is catching a bid nowadays. However, what caught my eye was new impairment accounting guidance. That is the fabled market-to-fantasy land issue that we have all been talking about. What would happen if we did not have that rule in place? I am sure you know that that $5.8B would go way up, but that must be good news, somehow.

The firm did not enjoy prosperous growth across its business lines, its P&C business was down pretty much across the board. Its variable annuity business had significant net outflows, its fixed annuities had less than $1B in net inflows. The mutual fund arm of the firm did have strong inflows of about $2.7B, but it is a low profit margin product. Its group benefits did okay with $4.4B and its individual life has margins of about 4%. Overall, it is not that strong of a report in my view as its core business were way down.

If you actually look at the balance sheet there is simply nothing to really like. Every division, except for the P&C division, lost money, but had a credit from previous losses which offset the loss and made it a gain. This is a paper gain, not an actual gain at all. For example, The Hartford had a loss of ($323M) in its core life business, but Less: Net realized capital losses of $822M and what do you know, you have a profit of $499M. I know, I am being picky, why argue with a profit, right? Sorry, but a profit is something you earn, not carry forward credits or offset losses. I am not saying that The Hartford’s earnings are not legitimate, but I am saying it is just accounting.

This type of accounting realized losses were on every line of the earnings statement, which makes me think that the $.79 loss is the only number to go with here. I know we are all looking for good numbers and good news, but accounting profits are just that, and not real. What happens when you have no more losses to offset anything or the rules get changed (I hope) back to mark-to-market? The Hartford is a good firm and I know they will be fine, but I do not like this quarter’s earnings at all. I do not own any long or short positions in The Hartford and I encourage you to look for yourself at the earnings report and judge it for yourself.

The earnings report is HERE

Disclosure: No positions HIG

Comments

[Stone Fox C...:]

blah, blah, blah.... it was a good report. The stock will continue to soar after profit taking today.

They are unrealized losses because the underlying asset isn't impaired and is expected to fully recover. By your theory HIG would've taken a massive 13.2B loss last year that would've destroyed the company for no real reason. Those assets have already recovered 7.4B in value and should continue to recover to full value. Your wrong to suggest they'll have to write those off.

Why no mention of the book value? Guess talking about a $46 BV with a $25 wouldn't help your bearish case.

Nov 04 12:19 PM

[Daryan:]

Agree with all of the above from the Fox. This bearish tone from almost everyone is getting annoying.

Nov 04 02:06 PM

[Sham718:]

Gotta love these bloggers that think they're professional analysts...
hmmm professional and analyst...i just realized that is also an oxymoron..

Nov 04 09:34 PM

[metal27:]

Your 79 cent quarterly loss is incorrect. You got that by writing off the $5.8B remaining unrealized loss but ignoring the fact that it is smaller than a year earlier. You can't have it both ways--either write off the $13.2B from last year and then take the ensuing gain into income this year, or leave HIG's accounting alone, HIG is reporting results from this quarter, during which their unrealized loss SHRANK.

Nov 05 12:37 AM

[satyr:]

Mark-to-market changes gave everyone in the financial industry a boost, so HIG is not alone in seeing profits from balance sheet revaluations. While I agree that the quarter was not exciting in of itself, I think that investors are comfortable seeing some stabilization. Perhaps the more important interpretation is that the company is on solid ground and in a reasonable place from which to repair and grow. The current valuation certainly does not suggest that investors somehow think that HIG is currently going gangbusters and there are no blemishes.

Nov 05 11:49 AM

[Jeff B.:]

This is a pretty dumb article...
"Every Div except the P&C Div lost money..." ?? Duh. There are only two major divs at the Hartford, and P&C is doing very well thank you, while there are still a few residual issues to iron out from the Life Div past problems." You don't really understand what you are talking about, Ray.

Nov 09 11:16 AM