Why did The Hartford swing from a loss in 1996 to a large profit in 1997?

The 1996 results included about $693 million (after-tax) of charges for environmental and asbestos reserve increases and losses on the Closed Book guaranteed rate contract business. 1997 had no comparable charges, a sharp reduction in property catastrophe losses, and a $368 million pre-tax gain from the Hartford Life IPO. Excluding those items, earnings still improved meaningfully, with core earnings up 39%.

How much of 1997 earnings came from one-time or non-operating items?

The HLI IPO gain contributed $368 million pre-tax (about $239 million after tax, as the gain is largely non-taxable). Realized capital gains were $327 million pre-tax ($215 million after tax). Core earnings of $749 million exclude these items, so they are the better measure of ongoing operating performance.

What are the main risks to watch in the reserve position?

The company continues to receive environmental and asbestos claims, which involve significant uncertainty about policy coverage and liability. Net reserves for unpaid claims were $13.5 billion, and management says future reviews could change reserves and affect results, though not materially affect liquidity or financial condition. Property and casualty reserve development was nearly neutral in 1997 ($98 million of adverse prior-year development, versus $1.05 billion in 1996).

Will the dividend and buyback be sustained?

The board raised the quarterly dividend to $0.42 and expects to maintain it through 1998. Dividends depend on operating results and regulatory limits: insurance subsidiaries can pay $810 million of statutory dividends in 1998 without prior approval. The $1.0 billion repurchase program runs over three years, but only $45 million of stock was repurchased in 1997, mainly to fund employee plans.

What legislative or competitive risks could affect future results?

The 1998 federal budget proposal would change tax treatment of variable annuities and COLI, which management says could materially hurt sales if enacted. Soft pricing in commercial lines and in UK automobile insurance, plus declining large national accounts, remain pressures. Phase-out of leveraged COLI deductibility by the end of 1998 will eliminate future sales of that product.

HIG/HIG-PG 10-K FY1997 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 27, 1998. Cited figures are marked; the original filing is the authoritative source.

The Hartford Financial Services Group (NYSE: HIG) closed 1997 with a sharp rebound in profitability.

Net income rose to $1,332 million^a, or $11.16 diluted EPS, versus a net loss of $99 million ($0.84 per share loss) in 1996, which had been depressed by $693 million (after-tax) in environmental, asbestos and Closed Book GRC charges. Core earnings, which exclude realized capital gains, the HLI IPO gain and other items, rose 39% to $749 million. Revenues grew 7% to $13.3 billion, and return on equity was 28.3% reported (20.5% excluding other items).

Total assets reached $131.7 billion^b and stockholders' equity was $6.1 billion, up from $4.5 billion, driven by earnings, a $687 million IPO of Hartford Life, Inc. (HLI) Class A stock and a $501 million rise in unrealized gains. Growth engines were the Life segment, led by the number one variable annuity market share (11%) and assets that grew 26% to $101 billion, and North American Property & Casualty, which posted a combined ratio of 102.3 versus 105.2 in 1996 and benefited from far lower catastrophe losses. Management flagged continuing headwinds: soft pricing in commercial and UK auto lines, a 23% decline in large national accounts, and proposed federal tax changes affecting variable annuities and COLI.

The company also acquired Omni Insurance Group in February 1998 for $189 million^c, announced a 5% dividend increase to $0.42 per quarter, and authorized a $1.0 billion share repurchase program over three years. Investors should weigh the strong 1997 earnings against the fact that 1996 results were distorted by one-time charges, and that a large share of 1997 gains came from the one-time $368 million (pre-tax) HLI IPO gain and realized capital gains.

Core earnings and the 102.3 North American combined ratio are the more durable indicators to track. Reserve development remains a watch item given the environmental and asbestos exposures.

02—Key points

Key Highlights

Net income of $1,332 million ($11.16 diluted EPS) versus a $99 million loss in 1996; core earnings up 39% to $749 million
Total revenues up 7% to $13.3 billion; total assets $131.7 billion; stockholders' equity $6.1 billion, up 35%
Life segment became the number one U.S. variable annuity writer (11% share), with total assets up 26% to $101 billion
North American P&C combined ratio improved to 102.3 from 105.2, aided by a $204 million drop in catastrophe losses
$368 million pre-tax equity gain from the May 1997 IPO of 18.6% of Hartford Life, Inc., which raised $687 million in proceeds
Dividend raised 5% to $0.42 per quarter; $1.0 billion share repurchase authorized over three years starting 1998
Acquired Omni Insurance Group (non-standard auto) in February 1998 for $189 million

03—Questions

Frequently Asked Questions

Why did The Hartford swing from a loss in 1996 to a large profit in 1997?
The 1996 results included about $693 million (after-tax) of charges for environmental and asbestos reserve increases and losses on the Closed Book guaranteed rate contract business. 1997 had no comparable charges, a sharp reduction in property catastrophe losses, and a $368 million pre-tax gain from the Hartford Life IPO. Excluding those items, earnings still improved meaningfully, with core earnings up 39%.
How much of 1997 earnings came from one-time or non-operating items?
The HLI IPO gain contributed $368 million pre-tax (about $239 million after tax, as the gain is largely non-taxable). Realized capital gains were $327 million pre-tax ($215 million after tax). Core earnings of $749 million exclude these items, so they are the better measure of ongoing operating performance.
What are the main risks to watch in the reserve position?
The company continues to receive environmental and asbestos claims, which involve significant uncertainty about policy coverage and liability. Net reserves for unpaid claims were $13.5 billion, and management says future reviews could change reserves and affect results, though not materially affect liquidity or financial condition. Property and casualty reserve development was nearly neutral in 1997 ($98 million of adverse prior-year development, versus $1.05 billion in 1996).
Will the dividend and buyback be sustained?
The board raised the quarterly dividend to $0.42 and expects to maintain it through 1998. Dividends depend on operating results and regulatory limits: insurance subsidiaries can pay $810 million of statutory dividends in 1998 without prior approval. The $1.0 billion repurchase program runs over three years, but only $45 million of stock was repurchased in 1997, mainly to fund employee plans.
What legislative or competitive risks could affect future results?
The 1998 federal budget proposal would change tax treatment of variable annuities and COLI, which management says could materially hurt sales if enacted. Soft pricing in commercial lines and in UK automobile insurance, plus declining large national accounts, remain pressures. Phase-out of leveraged COLI deductibility by the end of 1998 will eliminate future sales of that product.

04—Continue

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