Hartford's Repayment of TARP Money Signals Recovery

Mar.17.10 | About: Hartford Financial (HIG)

In order to repay the entire $3.4 billion of bailout money it received from the government for its participation in the Troubled Asset Relief Program (TARP) at the height of the credit crisis, Hartford Financial Services Group Inc. (NYSE:HIG) said on Tuesday that it will raise $3.05 billion from new securities.

The securities of Hartford will consist of $1.45 billion in common stock, $500 million in convertible preferred stock and $1.1 billion in bonds.

The move will free the life and property insurer from government involvement in its affairs and pay restrictions, even though the Treasury will still hold Hartford’s warrants for about 52 million shares at an exercise price of $9.79 each. However, Hartford does not intend to repurchase the warrants at this point.

In Jan 2009, Hartford became a thrift holding company with the approval of the Office of Thrift Supervision. The holding company status made Hartford eligible to apply for TARP funds.

Separately, Discover Financial Services (NYSE:DFS) said on the same day that it has gotten regulatory approval to repay $1.2 billion of TARP money it received from the government.

After incurring sturdy credit losses, Hartford reduced its dividend and raised billions of dollars in private and public transactions last year. It has also reduced headcount to stabilize its financial position.

Nevertheless, during the fourth quarter of 2009, Hartford returned to profitability for the first time since mid-2008. Hartford’s fourth quarter core earnings came in at $1.51 per share, substantially ahead of the Zacks Consensus Estimate of $1.40. This also compares favorably with the core loss of 72 cents in the year-ago quarter.

The upside was primarily attributable to stability in Hartford’s life and property and casualty businesses. Also, Hartford ended the year with a strong capital position. Despite the overall market conditions remaining timid, Hartford delivered strong underwriting results. During the fourth quarter, rising stock markets helped strengthen investment income in the company’s life insurance business.

However, the results suffered from losses in Hartford’s investment portfolio and higher costs related to the variable-annuity business. We remain concerned with Hartford’s exposure to variable annuities and pressure on the Life segment as consumers seek relatively safe investment vehicles for their retirement assets.

Most of the major institutions in the financial market like JPMorgan Chase and Co. (NYSE:JPM), Bank of America Corp. (NYSE:BAC), Wells Fargo & Co. (NYSE:WFC) and Goldman Sachs Inc. (NYSE:GS) have repaid the TARP loan. Also, the Treasury has started auctioning stock warrants it acquired from the banks that received a significant portion of taxpayers’ money and have fully repaid the same.

We think that the repayment of government money and auction of warrants can be viewed as a sign of recovery of the institutions as well as the economy. According to the Treasury, losses on TARP investments are likely to be significantly trimmed with the improvement in the overall financial condition.