Why did The Hartford report a net loss in 2003?

The loss was driven by a first-quarter 2003 asbestos reserve addition of $2.6 billion pre-tax ($1.7 billion after-tax), following a comprehensive study of asbestos exposures that found deteriorating litigation trends such as pre-packaged bankruptcies and expanded 'non-products' claims. The charge was recorded in the Other Operations segment; excluding it, the company would have reported solid earnings.

How much does The Hartford still face in asbestos and environmental exposure?

As of December 31, 2003, net asbestos reserves were $3.8 billion and net environmental reserves were $408 million, up from $1.1 billion of net asbestos reserves in 2002. Management acknowledges significant uncertainty and says ultimate liabilities could exceed recorded reserves, potentially by a material amount, so further reserve changes are possible.

What is the MacArthur settlement and when will it be paid?

Hartford Accident and Indemnity agreed in December 2003 to settle its dispute with MacArthur, a former asbestos distributor, by paying $1.15 billion into an escrow account in Q1 2004 for a trust serving asbestos claimants. The settlement depends on final court approvals and confirmation of a bankruptcy plan; the bankruptcy court approved it in January 2004, but the injunctions still require district court affirmation.

How is the company's capital position after the 2003 capital raising?

The Hartford raised about $2.1 billion in Q2 2003 through $1.2 billion of common stock, $669 million of equity units, and $249 million of senior notes, and further issued common stock in January 2004 with net proceeds of about $411 million. Stockholders' equity rose to $11.6 billion, though debt-to-equity increased to 49% from 41%. Statutory surplus for insurance subsidiaries was $10.4 billion.

What drives earnings sensitivity in the Life business?

Life's variable annuity and mutual fund fee income depends on assets under management, which move with equity markets, and guaranteed minimum death and withdrawal benefits create equity-market exposure. Adoption of SOP 03-1 on January 1, 2004 requires a $199 million GMDB liability (a $54 million after-tax cumulative effect charge), and deferred acquisition cost recoverability assumes separate account returns do not fall more than about 15% in 2004.

HIG/HIG-PG 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 27, 2004. Cited figures are marked; the original filing is the authoritative source.

The Hartford Financial Services Group (HIG) reported a net loss of $91 million^a, or $(0.33) per diluted share, for 2003, compared with net income of $1.0 billion ($3.97 per diluted share) in 2002.

The loss was driven almost entirely by a first-quarter 2003 asbestos reserve addition of $2.6 billion^b pre-tax ($1.7 billion after-tax), which reflects a detailed ground-up study showing deteriorating asbestos litigation trends. Excluding that charge, the core businesses performed well: Life net income rose 38% to $769 million, and North American Property & Casualty's combined ratio improved to 98.0 from 99.8, with growth in Business Insurance and Personal Lines. The balance sheet grew substantially.

Total assets reached $225.9 billion^c and stockholders' equity $11.6 billion, supported by roughly $2.1 billion of capital raised in the second quarter of 2003 through common stock, equity units, and senior notes. Individual variable annuity sales hit a record $16.5 billion, The Hartford remained the largest seller of individual retail variable annuities, and retail mutual fund assets reached $20.3 billion. The company also closed the $485 million acquisition of CNA's group life and disability businesses on December 31, 2003, and exited assumed reinsurance.

For investors, the key considerations are the size and remaining uncertainty of asbestos exposures, the $1.15 billion^d MacArthur settlement payment due in Q1 2004 (contingent on court approvals), the higher debt-to-capitalization ratio (33% vs. 29%), and sensitivity of fee income and DAC to equity markets. Dividends were increased to $0.28 per quarter.

02—Key points

Key Highlights

Net loss of $(91) million, or $(0.33) per diluted share, in 2003 versus net income of $1.0 billion ($3.97/share) in 2002, primarily due to a $1.7 billion after-tax asbestos reserve strengthening.
Life segment net income rose to $769 million from $557 million, led by Investment Products (+18% to $510 million) and Group Benefits.
Record individual annuity sales of $16.5 billion (up 42%), with the Company the largest U.S. seller of retail variable annuities; Japan variable annuity sales reached $3.7 billion.
North American P&C combined ratio improved to 98.0 from 99.8, with Personal Lines' combined ratio at 95.9 and Business Insurance written premiums up 16%.
Total assets of $225.9 billion and stockholders' equity of $11.6 billion at year-end 2003; debt-to-capitalization rose to 33% from 29%.
Acquired CNA's group life and disability businesses for $485 million on December 31, 2003; agreed to a $1.15 billion MacArthur asbestos settlement payable into escrow in Q1 2004.
Quarterly dividend increased to $0.28 per share (from $0.27), a 4% rise, with 2003 dividends declared at $1.09 per share.

03—Questions

Frequently Asked Questions

Why did The Hartford report a net loss in 2003?
The loss was driven by a first-quarter 2003 asbestos reserve addition of $2.6 billion pre-tax ($1.7 billion after-tax), following a comprehensive study of asbestos exposures that found deteriorating litigation trends such as pre-packaged bankruptcies and expanded 'non-products' claims. The charge was recorded in the Other Operations segment; excluding it, the company would have reported solid earnings.
How much does The Hartford still face in asbestos and environmental exposure?
As of December 31, 2003, net asbestos reserves were $3.8 billion and net environmental reserves were $408 million, up from $1.1 billion of net asbestos reserves in 2002. Management acknowledges significant uncertainty and says ultimate liabilities could exceed recorded reserves, potentially by a material amount, so further reserve changes are possible.
What is the MacArthur settlement and when will it be paid?
Hartford Accident and Indemnity agreed in December 2003 to settle its dispute with MacArthur, a former asbestos distributor, by paying $1.15 billion into an escrow account in Q1 2004 for a trust serving asbestos claimants. The settlement depends on final court approvals and confirmation of a bankruptcy plan; the bankruptcy court approved it in January 2004, but the injunctions still require district court affirmation.
How is the company's capital position after the 2003 capital raising?
The Hartford raised about $2.1 billion in Q2 2003 through $1.2 billion of common stock, $669 million of equity units, and $249 million of senior notes, and further issued common stock in January 2004 with net proceeds of about $411 million. Stockholders' equity rose to $11.6 billion, though debt-to-equity increased to 49% from 41%. Statutory surplus for insurance subsidiaries was $10.4 billion.
What drives earnings sensitivity in the Life business?
Life's variable annuity and mutual fund fee income depends on assets under management, which move with equity markets, and guaranteed minimum death and withdrawal benefits create equity-market exposure. Adoption of SOP 03-1 on January 1, 2004 requires a $199 million GMDB liability (a $54 million after-tax cumulative effect charge), and deferred acquisition cost recoverability assumes separate account returns do not fall more than about 15% in 2004.

04—Continue

← View all 10-K filings