Tom A's Stock Picks

Hartford Financial Group Takes a Dive

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Today as the market and financials in particular were bouncing back from yesterday's plunge, Hartford Financial Group (HIG) declined from 51.25 to as low as 31.26, apparently on Fitch's announcement changing their outlook to negative. I have a small starter position and spent some time trying to figure out how to respond to the sudden movement.

I looked at options activity and saw October puts at 30 and 35 trading at what I considered to be expensive prices. Often that kind of activity is a sign that "someone knows something," and reason for concern. With Hartford on the list of stocks that can't be shorted I don't have short-sellers to blame.

When reviewing the stock before I bought, I noted that it would normally trade at a P/B of greater than 1.5 at some point during the year and buying in the area of book value I expected to do well. Possible issues included a large amount of MBS, creating a riski of being forced to liquidate at market prices rather than holding to maturity, a DAC unlock for the 3rd quarter, and the exposure common to any financial of a rating agency downgrade. DAC stands for deferred acquisition costs and is a timing issue as I understand it - the company has to recognize the agent's commissions on Life and Annuity as an expense, but the exact timing is variable.

Double checking, I searched the 10-K to see if HIG has any exposure to the collateral type liquidity issues that created AIG's problems and did not find any.

My experience has been that these financial stocks, once they start trading well below book value, can just keep going down - often to mere fractions of that metric. HIG does not appear to have any Achilles heel of the sort that sank AIG so I am at a loss to see why that should happen here.

It is the last day of the quarter, so maybe somebody is dumping a position to take it off the books before they report.

Taking all of this together my big decision is to do nothing. I will consider adding to the position if and when it trades at well under half the book value, because in the past that has permitted me to average in at favorable prices. I will not reduce the position until I have more information - such as whether a bailout will be passed and a look at 3rd quarter earnings.

P.S 10/1 Located an article that cited exposures to WaMu, AIG and Lehman totalling 655 million. that would be 3.2% of Book Value or $2.08 per share. That number would compare with a capital cushion of 1.5 billion Hatford estimated they had on the strictest rating agency requirments as of 6/30/08. With the stock already trading under book the declines of $10-20 per share are over-reactions. Earnings will be out in late this month