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The Hartford Financial Services Group Inc. reported an operating loss of $52 million for the third quarter of 2001, reflecting a $440 million loss related to the Sept. 11 terrorist attack. The results also reflect a $130 million federal tax benefit at Hartford Life, primarily related to the favorable development of certain tax matters.
Excluding the Sept. 11 loss and the tax benefit, The Hartford’s operating income for the third quarter of 2001 was up 5 percent to $258 million compared to $245 million in the same period in 2000. The increase was primarily due to favorable operating performance in the company’s business insurance and group benefits segments and operating income from the acquisition of Fortis Financial Group (FFG) in April 2001. This was partially offset by the impact of the lower equity markets on the company’s life operations, weaker reinsurance results and increasing loss costs in personal lines.
Operating income excludes net realized capital gains or losses (after-tax) and the cumulative effect of accounting changes.
“The Sept. 11 terrorist attack had a profound impact on the economy, the insurance industry and the American psyche,” said Ramani Ayer, The Hartford’s chairman and CEO. “Over the long-term, this event will have a lasting impact on the evaluation of risk and the price of insurance.
“We are committed to helping our customers rebuild their lives and get back on their feet. While it will take time to know precisely the extent of damages caused by this event, it is clear that the financial impact on the industry is substantial. The Hartford has the capital strength to handle the significant impact of losses from the terrorist attack and our businesses are well positioned to benefit from the steep increases in insurance prices and the flight to quality,” Ayer added. “We recently raised $450 million in net capital, which will allow us to fully capitalize on the growth opportunities in all lines of our business.”
On a per diluted share basis, The Hartford’s operating loss was 22 cents. Excluding the Sept. 11 event and the tax benefit, operating income per diluted share was $1.07, level with the same period last year, as a result of the additional shares issued for the FFG acquisition.
For the quarter ended Sept. 30, 2001, The Hartford’s net loss was $103 million or 43 cents per diluted share. Excluding the Sept. 11 event and the tax benefit, net income was $207 million or 86 cents per diluted share compared to net income of $250 million or $1.09 per diluted share in the same period last year. Included in net income were after-tax net realized capital losses of $51 million in the third quarter of 2001, compared with $5 million of after-tax net realized capital gains in the third quarter last year.
Revenues for the third quarter of 2001 were $3.7 billion, down 2 percent from $3.8 billion for the same period a year ago. Contributing to the decrease were a $114 million reduction in North American property-casualty premiums from additional ceded reinsurance related to the Sept. 11 event and higher net realized capital losses reflecting the sale of certain international subsidiaries, including the company’s stake in an Argentine joint venture. This was offset by strong new business growth in group benefits, earned premium growth across virtually all North American property-casualty segments and the FFG acquisition.
Net investment income, before taxes, increased 5 percent to $714 million this quarter, reflecting the FFG acquisition and improved cash flow.
Property-Casualty Operations
The Hartford’s North American property-casualty operations reported an operating loss of $319 million for the third quarter of 2001, including $420 million of losses related to the Sept. 11 terrorist attack. The $420 million estimate is net of tax and reinsurance. The gross loss for property-casualty is estimated at $1.2 billion. Excluding losses related to the Sept. 11 event, operating income for North American property-casualty operations decreased 6 percent to $101 million compared with $108 million for the third quarter of 2000.
Property-casualty results reflected:
— Weaker reinsurance results and higher loss costs in the personal insurance and affinity segments;
— continued significant growth in business insurance due to price increases, strong premium retention and an improved operating environment;
— an increase in net investment income reflecting improved operating cash flow; and
— catastrophe loss ratios, excluding Sept. 11, in line with the prior year.
North American net written premiums were $1.9 billion in the third quarter of 2001, excluding $114 million of additional ceded reinsurance related to the Sept. 11 attack, a 3 percent increase over the same period a year ago.
Excluding the effect of ceded reinsurance, unearned premiums related to the Reliance portfolio acquisition in the third quarter of 2000 and discontinued businesses, North American property-casualty’s net written premiums were up 11 percent in the third quarter. The increase in net written premiums resulted from price increases, strong new business growth and improved renewal retention, particularly within the company’s business insurance segment.
Small commercial (select customer) written premiums increased 20 percent, while middle market (key accounts) grew 17 percent. The momentum in the business insurance segment continues to remain strong, with increased pricing and favorable loss costs across all lines.
Written premiums for personal auto and homeowners insurance sold to members of AARP and other affinity groups increased 12 percent. Premium trends in this business remain very favorable, with strong new business growth and renewal retention running at historically high levels.
The combined ratio (excluding the Sept. 11 losses) for the third quarter of 2001 was 103.4, compared to 102.4 in the same period last year.
Among recent highlights, the company’s property-casualty operations:
— Achieved a combined ratio of 97.5 in the third quarter for business insurance, excluding losses related to the Sept. 11 event; and
— reorganized its reinsurance operations in October to focus on the North American market and centralized all underwriting and claims activities in its Hartford headquarters.
Life Operations
For the third quarter of 2001, The Hartford’s life operations reported operating income of $282 million. Excluding the $130 million tax benefit and $20 million of losses related to Sept. 11, operating income rose 13 percent over the same period last year.
Key contributors to life earnings:
— Double-digit earnings growth, excluding Sept. 11, in all four business segments (investment products, individual life, group benefits and corporate-owned life insurance) despite the difficult equity market; and
— the favorable impact of the FFG acquisition.
Sales and other deposits of investment products decreased 3 percent from the prior year quarter to $4.6 billion, while total investment products assets under management decreased 8 percent from a year ago to $110.0 billion.
Investment products sales and assets were lower over the prior year period as a result of the lower equity market performance during the quarter. For the third quarter of 2001, sales of variable annuities were $2.1 billion, reflecting a 7 percent decrease over the same period last year. All reported results for life operations include the benefit of the FFG acquisition.
Retail mutual fund sales this quarter decreased 5 percent to $1.2 billion from the third quarter of 2000, while retail mutual fund assets as of Sept. 30, 2001, increased 38 percent to $13.6 billion compared to $9.8 billion as of Sept. 30, 2000. The increase in retail fund assets reflects organic growth and includes the contribution from the FFG acquisition.
Also in the third quarter, corporate 401(k) sales more than doubled to $209 million, resulting from a significant increase in new business activity, while institutional sales, including structured settlements, terminal funding and guaranteed investment contracts, were up 70 percent to $545 million.
The group benefits segment reported a 22 percent increase in operating income to $28 million in the third quarter, excluding the impact of Sept. 11, as total fully insured ongoing premiums rose 13 percent to $507 million.
Fully insured sales, excluding buyouts, increased 4 percent, reflecting growth in both the large- and small-case group life markets, while persistency continues to run favorably.
Excluding the impact of Sept. 11, individual life operating income increased 74 percent to $33 million, benefiting from the FFG acquisition, as variable life assets increased 15 percent to $3.5 billion as of Sept. 30, 2001. Despite the weakening equity markets, individual life achieved 49 percent growth in total sales, including the addition of a large universal life contract.
In addition, The Hartford’s life operations reported more than $150 million in variable annuity sales from its Japan subsidiary, Hartford Life Insurance K. K., which is in its third quarter of operation.
Among the recent highlights, the company’s life operations:
— Achieved 56 percent growth in sales of The Hartford Leaders variable annuity over the year ago quarter and recently added nine funds from AIM to the product;
— reopened The Hartford Focus Fund to new investors; and
— introduced two new 401(k) products for PaineWebber and Edward Jones.
Nine Month Results
For the first nine months of 2001, The Hartford’s net income was $363 million, or $1.52 per diluted share. Excluding the Sept. 11 event and the favorable tax benefit, year-to-date net income was $673 million, or $2.81 per diluted share, compared with net income of $701 million, or $3.15 per diluted share, for the comparable 2000 period. Operating income for the first nine months of the year was $463 million, or $1.93 per diluted share. Excluding the Sept. 11 event and the tax benefit, operating income was $773 million, or $3.23 per diluted share, an increase of 9 percent from $710 million in the same period last year.
Total revenues for the first nine months of 2001 increased 5 percent to $11.3 billion from $10.8 billion for the same period in 2000.
As of Sept. 30, 2001, The Hartford’s total assets were $170.6 billion, down 4 percent from a year ago, while total assets under management, which include the company’s mutual fund assets, declined 1 percent to $185.0 billion. The company’s book value, excluding unrealized gains and losses, rose 11 percent to $32.94 per share as of Sept. 30, 2001, compared with $29.57 per share as of Sept. 30, 2000.
Capital Raising and Fourth Quarter Outlook
Earlier this month, The Hartford raised $900 million in two separate capital raising initiatives. These included the sale of $400 million of common stock at a price of $56.82 per share and the sale of $500 million of 7.45 percent trust preferred securities.
The company has contributed $450 million of the proceeds to its property-casualty operations and plans to use the balance to retire or redeem indebtedness. Following the common stock offering, the company had approximately 245 million common shares outstanding.
The Hartford issued the capital at this time to take advantage of favorable market conditions and, in particular, to avoid competing with a large number of expected offerings by insurance companies and other financial institutions over the next few months. Since the securities the company currently plans to redeem do not mature or become redeemable until December, in the interim, The Hartford will record lower income from investing the new funds at short-term rates versus the higher rate accrued on the securities expected to be retired, temporarily diluting operating earnings per share.
In connection with the planned December redemptions, The Hartford will record an extraordinary charge for early retirement of indebtedness in the fourth quarter associated with this refinancing. In addition, as a result of the reorganization of The Hartford’s international reinsurance operations, the company will also record a restructuring charge. In aggregate, the two charges will be approximately $20 million (after tax).
2002 Outlook
Based on current information, the company expects operating earnings for 2002 to range between $4.65 and $4.95 per diluted share. This estimate is subject to adjustment based on changes in market conditions affecting both life and property-casualty operations. It includes the expected 22 cents benefit from the elimination of the amortization of goodwill.
The earnings estimate incorporates the impact of depressed equity markets on the earnings generated by the company’s assets under management; expected decreases in net investment income due to lower interest rates; negative loss cost trends in property-casualty personal lines insurance; and the impact of changes in reinsurance pricing on the company’s assumed reinsurance business and in those lines of business where The Hartford cedes a material portion of its exposure. The estimate also includes the effect of favorable pricing trends in commercial property-casualty insurance; continued growth in the investment products, group benefits and individual life segments; and the net dilutive impact of the company’s capital raising activity in October 2001.