Friday, June 19, 2009

Hartford Financial (NYSE:HIG): Stock has more than 100% upside - Deutsche Bank

Deutsche Bank is out very positive on Hartford Financial (NYSE:HIG) saying the new TARP and equity capital insulates the company from significant credit and equity market deterioration. The stock at 25% of book (x-AOCI) is suggesting almost zero value for the life insurance operations. Based on Deutsche's updated valuation analysis, they maintain their 1-year target price of $19 but they believe The Hartford stock offers potentially more than 100% upside over a three-year period. Despite the capital and ratings volatility the company’s franchise remains intact, and we should have clarity on management succession within six months.

New capital provides meaningful cushion
Deutsche Bank estimates The Hartford can withstand significant credit deterioration (losses of 11% of risk-weighted assets over a three-year period) and a further equity market decline (down 25% to S&P at 700) following the new capital of $3.4 billion of TARP and $750 million of common equity. Should the S&P 500 index remain at the 900 level, they estimate The Hartford would have $3.4 billion of capital above what is needed for a 325% risk-based capital ratio, even after factoring in investment losses.

Key points from CEO meeting
Firm met with Mr. Ramani Ayer, Chairman and CEO of The Hartford. Three key points: 1) TARP should have little effect on running the business; there is no limit on compensation, only a limit on the composition of compensation; also, there are no constraints on agency commissions; 2) Ratings volatility has affected just a handful of businesses; and 3) The Hartford’s strategy is set to being a US-focused insurance company; in firm's view, that will lead to lower growth and returns, but also less volatility.

According to Deutsche analyst, updated valuation analysis takes a 3-year view, and it suggests the Hartford’s stock price could be $23 to $26 per share in three years, translating into potentially more than 100% upside.

Notablecalls: I like this call, especially after Lincoln (LNC) was on the move yesterday on positive comments from CSFB and Mother Merrill.

I already see some conviction buyers in the name early on so I suspect it will get play today. The stock surely has ability to move a cool 5-6% on this call.

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