01—Abstract
Summary
Summary of the 10-K filed March 3, 2003. Cited figures are marked; the original filing is the authoritative source.
The Hartford Financial Services Group (HIG) reported a sharp rebound in 2002, with net income of $1,000 milliona ($3.97 diluted EPS) versus $507 million in 2001, which was depressed by roughly $440 million of after-tax September 11 losses.
Total revenues rose 5% to $15.9 billionb, and operating income grew 73% to $1,250 million. Growth was led by Property & Casualty, where North American combined ratio improved to 99.2 from 112.4, and Life's operating income was roughly flat-to-down at $753 million. Life results were pressured by the weak equity market, which reduced fee income and raised death benefit costs, and by $363 million of other-than-temporary impairments on corporate and asset-backed securities.
The key risk for investors is asbestos. The Hartford's exposure to MacArthur litigation and asbestos reserves, which stood at $1.1 billionc net, prompted a comprehensive ground-up asbestos review to be completed by Q2 2003. A.M.
Best placed ratings under review with negative implications, and Fitch and Moody's also took negative actions, so the outcome of that study could lead to material reserve charges and capital actions. Management stated that ultimate liabilities may exceed recorded reserves by an amount that could be material. Balance sheet capital rose to $10.7 billiond of stockholders' equity, supported by a $649 million capital raise in Q3 2002 (common stock and 6% equity units).
Total assets were $182.0 billion, and the company paid a quarterly dividend of $0.27, a 4% increase. Management's stated priorities are capital strength and continued growth in retirement and savings products, but the asbestos study and a 2002 share price decline from roughly $70 to $37 are the main sources of uncertainty.
02—Key points
Key Highlights
- Net income rose 97% to $1,000 million ($3.97 diluted EPS) in 2002, compared with $507 million in 2001, which included $440 million of after-tax September 11 losses.
- Operating income increased 73% to $1,250 million, driven by a North American P&C combined ratio improvement to 99.2 from 112.4 and a 5% revenue increase to $15.9 billion.
- Largest U.S. variable annuity seller: $11.6 billion of annuity sales in 2002 and $64.3 billion in individual variable annuity account values, though account values fell with equity markets.
- Asbestos and environmental reserves of about $1.7 billion net, with a comprehensive ground-up asbestos study announced in January 2003 and due by Q2 2003; management warned of possible material additional reserve needs.
- Ratings under pressure: A.M. Best placed ratings under review with negative implications, Fitch placed ratings on Rating Watch Negative, and Moody's revised its outlook to negative, all tied to the asbestos review.
- Realized capital losses of $400 million in 2002, including $363 million of other-than-temporary impairments on corporate and asset-backed securities (telecom, utilities, airlines), and a $11 million after-tax Bancorp litigation charge.
- Stockholders' equity rose to $10.7 billion after a $649 million Q3 2002 capital raise, and the quarterly dividend was increased 4% to $0.27 per share.
03—Questions
Frequently Asked Questions
Why did net income more than double in 2002?
The 2001 result was depressed by roughly $440 million of after-tax losses from the September 11 attacks and a $130 million tax benefit in Life that partially offset them. In 2002 there were no comparable catastrophe losses, P&C underwriting improved sharply (combined ratio 99.2 vs. 112.4), and goodwill amortization ceased. Net income of $1,000 million compares with $507 million in 2001, a 97% increase. Note that 2002 also included a $76 million tax benefit in Life and larger realized capital losses of $400 million.
What is the main risk to the investment case?
The asbestos exposure is the primary risk. The company is conducting a ground-up asbestos study expected to be completed by Q2 2003, and management stated that ultimate liabilities could exceed current reserves by a material amount. MacArthur litigation is ongoing and could produce adverse outcomes, and ratings agencies have placed the company under review or negative outlook pending that study. Investors should watch for reserve charges, potential capital raising, and any rating downgrades.
How strong is the company's capital position?
Stockholders' equity was $10.7 billion at year-end 2002, up from $9.0 billion, helped by $560 million of other comprehensive income (mainly unrealized gains on fixed maturities as interest rates fell) and the Q3 2002 raise of $649 million. The debt-to-capitalization ratio was 29% including trust preferred securities, and statutory surplus was $8.2 billion. Those figures are offset by a $364 million after-tax minimum pension liability charge that reduced equity in Q4 2002.
How exposed is the company to equity market declines?
Significantly. Variable annuity account values were $64.3 billion at year-end 2002, down from $74.6 billion, and fee income depends on separate account assets. Management noted that a prolonged equity decline could reduce fee income, increase death benefit costs on guaranteed minimum death benefits (gross exposure of $22.4 billion, net $4.1 billion), and require accelerated DAC amortization. The company stated its DAC asset would remain recoverable even if separate account assets fell 25%.
Is the dividend sustainable?
The company declared $262 million in dividends in 2002 and paid $257 million. The quarterly dividend was raised to $0.27 per share, a 4% increase, and annual dividends per share were $1.05 versus $1.01 in 2001. Holding-company cash comes from insurance subsidiary dividends, with $1.8 billion of statutory dividends permitted in 2003 without prior regulatory approval, which covers the dividend comfortably. Future increases may depend on how the asbestos review affects capital.
04—Continue