Asbestos Reserve Study and Capital Plan Call May 12, The Hartford Financial Services Group, Inc.

Transcription

1 Investor Presentation Asbestos Reserve Study and Capital Plan Call May 12, 2003 The Hartford Financial Services Group, Inc.

2 Safe Harbor Statement Certain statements made in this presentation should be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of These include statements about the adequacy of our asbestos reserves, our capital raising plans and our future results of operations. We caution investors that these forwardlooking statements are not guarantees of future performance, and actual results may differ materially. Investors should consider the important risks and uncertainties that may cause actual results to differ. In particular, the adequacy of our asbestos reserves is subject to a number of potential adverse developments including, among others, the development of novel legal claims by asbestos plaintiffs and the effect of bankruptcies of asbestos defendants on claim development and severity. Our capital raising plans are subject to volatile capital markets. Other important risks and uncertainties are discussed in our K and the other filings we make with the Securities and Exchange Commission. We assume no obligation to update this presentation, which speaks as of today s date. The discussion in this presentation of The Hartford s financial performance includes financial measures that are not derived from generally accepted accounting principles, or GAAP. Information regarding these non-gaap financial measures, including reconciliations to the most directly comparable GAAP measures, is available in the Investor Relations section of The Hartford s website at 1

3 Presenters and Participants Presenters Ramani Ayer, Chairman and Chief Executive Officer David Johnson, Executive Vice President and Chief Financial Officer Thomas Johnston, Senior Vice President of Claims, Project Leader Andrew Pinkes, Senior Vice President, Asbestos and Environmental Claims Hans Miller, Senior Vice President, Investor Relations, Planning and Development Participants Dave Zwiener, President & Chief Operating Officer, Property and Casualty Tom Marra, President & Chief Operating Officer, Hartford Life Neal Wolin, Executive Vice President and General Counsel David Robb, Executive Vice President, P&C Runoff Operations Elizabeth Sacksteder, Senior Vice President, Director of Litigation 2

4 Agenda Introduction Overview Asbestos Study Capital Plan & Business Initiatives Conclusion Hans Miller Ramani Ayer Thomas Johnston/ Andrew Pinkes David Johnson Ramani Ayer 3

5 Overview Our Announcements Today Decisively deal with asbestos and other overhanging concerns Fundamentally change our capital strategy; build capital cushion by 04 Reduce costs of our operations The Plan Is Designed To Result In Likely net accretion to EPS in 03 and 04 Consistent, high quality earnings moving forward ROE back to 13 15% by 04 Strong core growth engines in P&C and Life 4

6 Strengthening of Asbestos Reserves Asbestos reserves strengthened by: $4.0 billion gross $2.6 billion net After tax = $1.7 billion Three-year survival ratio of 37.2 on a net basis 5

7 Financial Goals Immediately replace lost surplus Generate significant capital cushion by 2004 year-end Accretive to 2003 and 2004 EPS 13 15% ROE for

8 Asbestos Study Methodology Teams of over 250 claim, actuarial, finance, legal and reinsurance professionals committed full time to effort Scope included primary, excess, and assumed and ceded reinsurance evaluations Comprehensive: Reviewed all 990 open direct U.S. accounts Deep dive on over 600 accounts, comprising over 98% of company s year-end case reserves, including all accounts with potential non-products exposure Initial team projected insured s ultimate exposure to asbestos liability without regard to The Hartford s coverage 7

9 Asbestos Study Methodology Ultimate exposure evaluations considered: Years and type of operation Disease mix and latency periods Historical and pending settlement amounts Recent claim filing trends Trends in settlement costs, current and future Dismissal ratios Current and future defense costs Jurisdiction and legal defenses Potential bankruptcy impact Separate team applied results of exposure evaluation to coverage chart to determine The Hartford s ultimate liability 8

10 Asbestos Study Methodology Intensive analysis of non-products exposures Intensive analysis of assumed reinsurance Consistently conservative assumptions Assumed no improvement in judicial or legislative environment 9

11 Methodology: Non-Products Reviewed all 990 open accounts for potential non-products exposure, whether or not insured has ever tendered a nonproducts claim Reviewed closed accounts, including settlement agreements, for potential non-products exposure Performed full ground-up exposure analysis of every account identified with potential non-products exposure Made consistently conservative assumptions with regard to unsettled legal issues 10

12 Methodology: Assumed Reinsurance Used ultimate exposure valuation from the direct book Not dependent on cedants giving us notice of an asbestos claim Captures the ultimate exposure for our assumed reinsurance book 50 additional exposure evaluations completed on our cedants insureds that had no open direct insurance from The Hartford 11

13 Methodology Validation An internationally recognized actuarial firm reviewed our ground-up methodology and found it is comprehensive and provides a reasonable basis to evaluate The Hartford s asbestos reserve levels for its U.S.-based companies. Their review was a methodology review only. The actuarial firm found our methodology to be comprehensive, with the following strengths: A thorough search for all known exposure to asbestos defendants has been conducted The approach on assumed reinsurance was unusually strong, in that it utilized multiple sources of exposure information The Hartford s claims and actuarial functions work closely together to value asbestos accounts on a ground-up basis The valuation approach shares information, where appropriate, among direct, assumed and London Market claims to provide a more complete perspective on emerging issues Our auditor Deloitte & Touche reviewed the work as part of its quarterly review and in anticipation of its year-end audit and approved our methodology 12

14 Financial Results 1st Quarter Reserves Reserve Adjusted 2003 Reserves ($ in millions) 12/31/02 Addition Reserves Payments 3/31/03 Total Gross Reserves $1,994 $3,971 $5,965 $63 $5,902 Ceded Reinsurance Net Collectable Reinsurance (876) (1,367) (2,243) (26) (2,217) Net Asbestos Reserves $1,118 $2,604 $3,722 $37 $3,685 Net 3 Year Survival Ratio Net 1 Year Survival Ratio Note: All reserves are held at nominal undiscounted value with the exception of the PPG structured settlement as previously disclosed 13

15 Gross Asbestos Liabilities ($ in millions) Number % of of All Time Total Asbestos All Time Accounts Paid Reserves Reserves Ultimate 3 Year 3 Year Survival Paid Loss Ratios+ A) Top 70 Major Asbestos Defendants * (37 open accounts, 28 closed, 5 with no coverage) 70 $965 $1,054 18% $2,019 $ Structured Settlements (Includes 2 Wellington accounts) % Wellington (Direct only, excl structured settlements) % Other Major Asbestos Defendants % No Known Policies (Includes 3 Wellington accounts) B) Accounts with future exposure > $2.5 M ,474 25% 1, C) Accounts with future exposure < $2.5 M % D) Unallocated IBNR - 1,810 30% 1, E) Total Direct $1,545 $4,462 75% $6,007 $ ** F) Assumed Reinsurance % 1, G) London Market % $2,384 $5,965 $8,349 $782 ** 22.9 Subtotal 100% First quarter 2003 payments 63 (63) - Grand Total $2,447 $5,902 $8,349 * This group includes Wellington accounts and Tillinghast s published list of Tier 1 and Tier 2 asbestos defendants ** Totals include payments of $68 on closed claims +12/31/02 survival ratios adjusted to reflect the 3/31/03 reserve addition 14

16 Gross Survival Ratios Three Year Survival Ratio Three Year Adjusted Survival Ratio* One Year Survival Ratio One Year Adjusted Survival Ratio* *Adjusted to exclude structured settlements and Wellington accounts reserved to limits 15

17 Gross Asbestos Liabilities ($ in millions) Number % of 3 Year of All Time Total Asbestos All Time 3 Year Survival Accounts Paid Reserves Reserves Ultimate Paid Loss Ratios+ A) Top 70 Major Asbestos Defendants * (37 open accounts, 28 closed, 5 with no coverage) 70 $965 $1,054 18% $2,019 $ Structured Settlements (Includes 2 Wellington accounts) % Wellington (Direct only, excl structured settlements) % Other Major Asbestos Defendants % No Known Policies (Includes 3 Wellington accounts) B) Accounts with future exposure > $2.5 M ,474 25% 1, C) Accounts with future exposure < $2.5 M % D) Unallocated IBNR - 1,810 30% 1, E) Total Direct $1,545 $4,462 75% $6,007 $ ** F) Assumed Reinsurance % 1, G) London Market % $2,384 $5,965 $8,349 $782 ** 22.9 Subtotal 100% First quarter 2003 payments 63 (63) - Grand Total $2,447 $5,902 $8,349 * This group includes Wellington accounts and Tillinghast s published list of Tier 1 and Tier 2 asbestos defendants ** Totals include payments of $68 on closed claims +12/31/02 survival ratios adjusted to reflect the 3/31/03 reserve addition 16

18 Structured Settlements (including 2 Wellington Accounts) Agreement for specific monetary sum with fixed payments over time Total Three Year Reserves Survival Ratio ($ in millions) Structured Settlements $ insureds (including 2 Wellington accounts) have settlement agreements with fixed payment obligations PPG: $367 million nominal settlement with agreed upon discount rate of 5.5% for a discounted reserve of $224 to be paid between others include settlements with balance of $65.2 million to be paid between

19 Gross Asbestos Liabilities ($ in millions) Number % of of All Time Total Asbestos All Time Accounts Paid Reserves Reserves Ultimate 3 Year 3 Year Survival Paid Loss Ratios+ A) Top 70 Major Asbestos Defendants * (37 open accounts, 28 closed, 5 with no coverage) 70 $965 $1,054 18% $2,019 $ Structured Settlements (Includes 2 Wellington accounts) % Wellington (Direct only, excl structured settlements) % Other Major Asbestos Defendants % No Known Policies (Includes 3 Wellington accounts) B) Accounts with future exposure > $2.5 M ,474 25% 1, C) Accounts with future exposure < $2.5 M % D) Unallocated IBNR - 1,810 30% 1, E) Total Direct $1,545 $4,462 75% $6,007 $ ** F) Assumed Reinsurance % 1, G) London Market % $2,384 $5,965 $8,349 $782 ** 22.9 Subtotal 100% First quarter 2003 payments 63 (63) - Grand Total $2,447 $5,902 $8,349 * This group includes Wellington accounts and Tillinghast s published list of Tier 1 and Tier 2 asbestos defendants ** Totals include payments of $68 on closed claims +12/31/02 survival ratios adjusted to reflect the 3/31/03 reserve addition 18

20 Wellington (Direct Only) Agreement signed June 19, 1985 between various asbestos producers and certain of their insurance companies, including The Hartford Total Three Year Reserves Survival Ratio ($ in millions) Account Development Open Accounts, Beginning of Period New Accounts with Asbestos Claims Closed Accounts $ Open Accounts, End of Period Wellington insureds (excluding two structured settlements) - 16 closed, settled or limits have been exhausted - 15 open 6 reserved to limits 1 coverage-in-place agreement 8 actively managed 19

21 Gross Asbestos Liabilities ($ in millions) Number % of of All Time Total Asbestos All Time Accounts Paid Reserves Reserves Ultimate 3 Year 3 Year Survival Paid Loss Ratios+ A) Top 70 Major Asbestos Defendants * (37 open accounts, 28 closed, 5 with no coverage) 70 $965 $1,054 18% $2,019 $ Structured Settlements (Includes 2 Wellington accounts) % Wellington (Direct only, excl structured settlements) % Other Major Asbestos Defendants % No Known Policies (Includes 3 Wellington accounts) B) Accounts with future exposure > $2.5 M ,474 25% 1, C) Accounts with future exposure < $2.5 M % D) Unallocated IBNR - 1,810 30% 1, E) Total Direct $1,545 $4,462 75% $6,007 $ ** F) Assumed Reinsurance % 1, G) London Market % $2,384 $5,965 $8,349 $782 ** 22.9 Subtotal 100% First quarter 2003 payments 63 (63) - Grand Total $2,447 $5,902 $8,349 * This group includes Wellington accounts and Tillinghast s published list of Tier 1 and Tier 2 asbestos defendants ** Totals include payments of $68 on closed claims +12/31/02 survival ratios adjusted to reflect the 3/31/03 reserve addition 20

22 Other Major Asbestos Defendants Total Three Year Reserves Survival Ratio Account Development Open Accounts, Beginning of Period ($ in millions) New Accounts with Asbestos Claims $ Closed Accounts Open Accounts, End of Period other major defendants (excludes 3 structured settlements) 12 closed 5 settled 7 exhausted or policies contained applicable exclusions 17 open No new accounts have been opened since

23 Gross Asbestos Liabilities ($ in millions) Number % of of All Time Total Asbestos All Time Accounts Paid Reserves Reserves Ultimate 3 Year 3 Year Survival Paid Loss Ratios+ A) Top 70 Major Asbestos Defendants * (37 open accounts, 28 closed, 5 with no coverage) 70 $965 $1,054 18% $2,019 $ Structured Settlements (Includes 2 Wellington accounts) % Wellington (Direct only, excl structured settlements) % Other Major Asbestos Defendants % No Known Policies (Includes 3 Wellington accounts) B) Accounts with future exposure > $2.5 M ,474 25% 1, C) Accounts with future exposure < $2.5 M % D) Unallocated IBNR - 1,810 30% 1, E) Total Direct $1,545 $4,462 75% $6,007 $ ** F) Assumed Reinsurance % 1, G) London Market % $2,384 $5,965 $8,349 $782 ** 22.9 Subtotal 100% First quarter 2003 payments 63 (63) - Grand Total $2,447 $5,902 $8,349 * This group includes Wellington accounts and Tillinghast s published list of Tier 1 and Tier 2 asbestos defendants ** Totals include payments of $68 on closed claims +12/31/02 survival ratios adjusted to reflect the 3/31/03 reserve addition 22

24 Accounts with Future Exposure >$2.5M Total Three Year Reserves Survival Ratio Account Development Open Accounts, Beginning of Period ($ in millions) New Accounts with Asbestos Claims $1, Closed Accounts Open Accounts, End of Period Only 11 new accounts reported in the last three years: 9 of the new accounts were excess only Over 80% of total reserves in this category relate to excess liability 23

25 Gross Asbestos Liabilities ($ in millions) Number % of of All Time Total Asbestos All Time Accounts Paid Reserves Reserves Ultimate 3 Year 3 Year Survival Paid Loss Ratios+ A) Top 70 Major Asbestos Defendants * (37 open accounts, 28 closed, 5 with no coverage) 70 $965 $1,054 18% $2,019 $ Structured Settlements (Includes 2 Wellington accounts) % Wellington (Direct only, excl structured settlements) % Other Major Asbestos Defendants % No Known Policies (Includes 3 Wellington accounts) B) Accounts with future exposure > $2.5 M ,474 25% 1, C) Accounts with future exposure < $2.5 M % D) Unallocated IBNR - 1,810 30% 1, E) Total Direct $1,545 $4,462 75% $6,007 $ ** F) Assumed Reinsurance % 1, G) London Market % $2,384 $5,965 $8,349 $782 ** 22.9 Subtotal 100% First quarter 2003 payments 63 (63) - Grand Total $2,447 $5,902 $8,349 * This group includes Wellington accounts and Tillinghast s published list of Tier 1 and Tier 2 asbestos defendants ** Totals include payments of $68 on closed claims +12/31/02 survival ratios adjusted to reflect the 3/31/03 reserve addition 24

26 Accounts with Future Exposure <$2.5M Total Three Year Reserves Survival Ratio Account Development Open Accounts, Beginning of Period ($ in millions) New Accounts with Asbestos Claims $ Closed Accounts Open Accounts, End of Period Accounts with an ultimate exposure of less than $75,000 make up over 70% of this category Vast majority of these accounts are minor defendants in the asbestos tort system 25

27 Gross Asbestos Liabilities ($ in millions) Number % of of All Time Total Asbestos All Time Accounts Paid Reserves Reserves Ultimate 3 Year 3 Year Survival Paid Loss Ratios+ A) Top 70 Major Asbestos Defendants * (37 open accounts, 28 closed, 5 with no coverage) 70 $965 $1,054 18% $2,019 $ Structured Settlements (Includes 2 Wellington accounts) % Wellington (Direct only, excl structured settlements) % Other Major Asbestos Defendants % No Known Policies (Includes 3 Wellington accounts) B) Accounts with future exposure > $2.5 M ,474 25% 1, C) Accounts with future exposure < $2.5 M % D) Unallocated IBNR - 1,810 30% 1, E) Total Direct $1,545 $4,462 75% $6,007 $ ** F) Assumed Reinsurance % 1, G) London Market % $2,384 $5,965 $8,349 $782 ** 22.9 Subtotal 100% First quarter 2003 payments 63 (63) - Grand Total $2,447 $5,902 $8,349 * This group includes Wellington accounts and Tillinghast s published list of Tier 1 and Tier 2 asbestos defendants ** Totals include payments of $68 on closed claims +12/31/02 survival ratios adjusted to reflect the 3/31/03 reserve addition 26

28 Unallocated IBNR Provision for: Total Percentage of Reserves Gross Direct Reserves ($ in millions) $1, % Direct insureds with no known asbestos claims Adverse development on allocated reserves Potential non-products exposures 27

29 Gross Asbestos Liabilities ($ in millions) Number % of of All Time Total Asbestos All Time Accounts Paid Reserves Reserves Ultimate 3 Year 3 Year Survival Paid Loss Ratios+ A) Top 70 Major Asbestos Defendants * (37 open accounts, 28 closed, 5 with no coverage) 70 $965 $1,054 18% $2,019 $ Structured Settlements (Includes 2 Wellington accounts) % Wellington (Direct only, excl structured settlements) % Other Major Asbestos Defendants % No Known Policies (Includes 3 Wellington accounts) B) Accounts with future exposure > $2.5 M ,474 25% 1, C) Accounts with future exposure < $2.5 M % D) Unallocated IBNR - 1,810 30% 1, E) Total Direct $1,545 $4,462 75% $6,007 $ ** F) Assumed Reinsurance % 1, G) London Market % $2,384 $5,965 $8,349 $782 ** 22.9 Subtotal 100% First quarter 2003 payments 63 (63) - Grand Total $2,447 $5,902 $8,349 * This group includes Wellington accounts and Tillinghast s published list of Tier 1 and Tier 2 asbestos defendants ** Totals include payments of $68 on closed claims +12/31/02 survival ratios adjusted to reflect the 3/31/03 reserve addition 28

30 Assumed Reinsurance Exposure Total Three Year Reserves Survival Ratio ($ in millions) Assumed Reinsurance $ % of the IBNR for business on accounts with claims not yet reported by cedant or only reported on a precautionary basis 29

31 Gross Asbestos Liabilities ($ in millions) Number % of of All Time Total Asbestos All Time Accounts Paid Reserves Reserves Ultimate 3 Year 3 Year Survival Paid Loss Ratios+ A) Top 70 Major Asbestos Defendants * (37 open accounts, 28 closed, 5 with no coverage) 70 $965 $1,054 18% $2,019 $ Structured Settlements (Includes 2 Wellington accounts) % Wellington (Direct only, excl structured settlements) % Other Major Asbestos Defendants % No Known Policies (Includes 3 Wellington accounts) B) Accounts with future exposure > $2.5 M ,474 25% 1, C) Accounts with future exposure < $2.5 M % D) Unallocated IBNR - 1,810 30% 1, E) Total Direct $1,545 $4,462 75% $6,007 $ ** F) Assumed Reinsurance % 1, G) London Market % $2,384 $5,965 $8,349 $782 ** 22.9 Subtotal 100% First quarter 2003 payments 63 (63) - Grand Total $2,447 $5,902 $8,349 * This group includes Wellington accounts and Tillinghast s published list of Tier 1 and Tier 2 asbestos defendants ** Totals include payments of $68 on closed claims +12/31/02 survival ratios adjusted to reflect the 3/31/03 reserve addition 30

32 London Market Total Three Year Reserves Survival Ratio ($ in millions) London Market $ Policies with much lower limits Gross survival ratio of 24, net survival ratio exceeds 30 31

33 Financial Results Reserves ($ in millions) 3/31/03 Total Gross Reserves $5,902 Ceded Reinsurance Net Collectable Reinsurance (2,217) Net Asbestos Reserves $3,685 Net 3 Year Survival Ratio 37.2 Net 1 Year Survival Ratio 24.7 Note: All reserves are held at nominal undiscounted value with the exception of the PPG structured settlement as previously disclosed 32

34 Ceded Reinsurance Management Very experienced team of professionals dedicated to managing reinsurance recoveries Established track record and long-standing relationships with reinsurance community enhances collectibility Claims-paying protocols for asbestos claims reduce uncertainty Through commutations, reduced credit risk posed by financially troubled reinsurers 33

35 Analysis of Reinsurance Ceded ($ in millions) Original ceded reinsurance $ 4,155 Less: Known insolvencies 303 Commutations 961 Existing settlements 385 Currently available ceded reinsurance 2,506 Less: Future insolvencies/settlements 289 Net collectible ceded reinsurance $ 2,217 34

36 Unique Features of The Hartford s Study Ultimate exposure evaluation (by insured) performed independently of Hartford policy coverage for the insured Conservative non-products methodology Exposure-based reinsurance reserving: Extensive knowledge of direct book used to estimate ceding companies exposures on a ground-up basis 35

37 Our Capital Plans Earnings positives in plan should entirely offset the dilution of raising capital Should be accretive to 2004 earnings depending on the common stock price at which we raise capital Plan swiftly restores capital levels in our P&C units to pre-charge levels $500 million or more of capital cushion will be developed by year end 2004 Plan creates framework to manage capital risk investors perceive from DAC 36

38 Capital Funding Plan Composition $1.6 billion common equity and equity-linked securities $250 million senior debt Timing Seek completion of entire program by end of quarter 37

39 Capital Enhancement Plan ($ in millions) Expected Aggregate Benefit by Year-end 2004* Exit reinsurance and other business mix changes $500 Investments -Limited Partnerships -Equities $ Gains Aggregate impact of expense reductions $300 Aggregate impact of enhanced investment income $140 *Aggregates both actual gains and reduced agency capital charges 38

40 Cost Reduction Plan $48 $54 million in 2003 cost savings expected $132 $139 million in 2004 cost savings expected Approximately 850 people will lose their jobs by the end of the second quarter and approximately 650 fully budgeted vacancies will be eliminated Minimal impact on field sales and service Consolidating: - P&C, primarily home office - Enterprise IT and HR service units Ultimate annual run rate savings of $165 million, after-tax Q2 severance charge of $25-35 million, after-tax 39

41 Eliminate DAC Overhang on Capital Unlikely to unlock at current market levels Unlock only effects GAAP Capitalization Ratios, not statutory operating capital 3/31/03 pro forma after-tax unlock impact ($ in millions) Unlock $ Reduce to 8%* $ HIG will manage rating agency ceilings to leave room for unlock should markets deteriorate * Fund-performance estimate 40

42 Pension Funding The Hartford plans to voluntarily contribute approximately $300 million to its qualified defined benefit pension plan Approximately $200 million in cash Approximately $100 million will be in Hartford common stock This contribution is approximately $260 million in excess of 2003 required funding under ERISA requirements After this contribution, The Hartford does not expect to have any required contributions until 2005 at the earliest 41

43 Projected Earnings Impact ($ in million; except per share) (after-tax) Change in Net Income Change in EPS 2004 Restructuring of Investment Portfolio ($8) - ($6) ($9) - ($7) ($0.03) - ($0.02) ($0.03) - ($0.03) Shift in P&C Business Mix ($11) - ($7) ($55) - ($43) ($0.04) - ($0.03) ($0.21) - ($0.16) Interest Expense ($13) - ($11) ($25) - ($23) ($0.05) - ($0.04) ($0.10) - ($0.09) Investment Income* $77 - $81 $109 - $115 $ $0.32 $ $0.44 Pension Earnings $8 - $10 $18 - $20 $ $0.04 $ $0.08 Expense Reductions $48 - $54 $132 - $139 $ $0.21 $ $0.53 Dilution from Common Issuance** ($0.26) - ($0.24) ($0.56) - ($0.54) Total $101 - $121 $170 - $201 $ $0.24 $ $0.23 * Investment income on capital raise and Other run-off operations ** Assumes issuance at 5/9/03 HIG stock closing price of $43.62/share 42

44 Conclusion 43