IB Net Payout Yields Model

Hartford Financial Trading at Half Book Value

After the close today, Hartford Financial (HIG) reported earnings basically in line with expectations following the tornado disasters in the US during Q2. More importantly though, HIG announced plans for a $500M share buyback equalling 5% of their current market cap of $10B.

This always begs the question of why the stocks of insurers such as HIG and Lincoln National (LNC) remain so weak. Both stocks are solid position in our portfolios since they have consistently strong earnings and trade below book value. HIG trades at a PE of sub 6. Sure they are a financial, but they don't face the regulatory issues as banks.

Based on a quick estimate, the book value per share for HIG would rise by $2 to $45.26 if the complete buyback were completed around the current price of $22.50. Naturally HIG is likely to rebound higher before it gets the opportunity to complete this buyback, but if not 22M shares will be removed from the market.

Another nugget is that the BV will jump to $50 with earnings through the next 12 months combined with the buyback. What are investors waiting for? Can't remember another industry that is very profitable that continues to trade substantially below book value. The sector has historically traded at 1.5 BV suggesting a price north of $70 next year, but most investors would be happy to just them trade at liquidation prices around $45.

Per HIG earnings release:

  • Board of Directors authorizes a $500 million repurchase program
  • Second quarter core earnings* of $12 million and net income of $24 million, as previously announced on July 13, 2011
  • Book value per diluted common share increased 13% to $43.11 as of June 30, 2011 compared with June 30, 2010
  • Total P&C current accident year catastrophe losses of 18.2 points, or $290 million after tax, the highest level of second quarter catastrophe losses in The Hartford’s history

Disclosure: Long HIG and LNC in client and personal accounts. Please review the disclaimer page for more details. 


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