Hartford Insurance Group Inc (HIG) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to The Hartford quarterly earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the call, please press star, followed by zero on your touch-tone phone.

At this time, today's conference call is being recorded by Intercall (ph). This program is proprietary to and copyright of The Hartford Financial Services Group. No recording or rebroadcast of this call is authorized unless expressly permitted in writing by The Hartford. No other rights to this program are granted to any person or entity without a written agreement with The Hartford. Please drop off the line if you do not agree to these terms.

I would now like to introduce your host for today's conference, Stuart Carlisle (ph), The Hartford's director of investor relations. Please go ahead.

Stuart Carlisle (ph): Thank you for joining us today to discuss the third quarter results for The Hartford. Participating on the call will be the members of the Office of the Chairman, which Ramani Ayer, Chairman, President, and CEO; Dave Zwiener, COO of our P&C operations; Tom Marra, COO of the Life company; David Johnson, CFO of The Hartford; and Neil Wholen (ph), General Counsel of The Hartford. Also joining us today is David Foy (ph), CFO of Hartford Life.

This morning's call will begin with a brief discussion of the key operating trends during the quarter, an overview of our business segments, and outlook for next year by Ramani Ayer. After the presentation, we will go right into the Q&A session.

One administrative note - I hope you recognized the new exhibits in our financial supplement relating to guaranteed minimum death benefits. I believe you'll find this expanded disclosure helpful.

We've also broken out the Life company's general account and guaranteed separate account assets for the first time. If there are any questions or suggestions relating to this additional detail, please give me a call afterwards.

In light of our discussion, recall that certain information set forth this morning may include forward-looking information as defined in the Private Securities Litigation Reform Act of 1995. The company cautions investors that any forward-looking statements made are not guarantees of future performance and actual results may differ materially. Investors are directed to consider the risks and uncertainties in our business that may affect future performance and that are discussed in readily available documents, including the Form 10-K and other documents filed by the company with the SEC.

Now let me turn it over to Ramani.

Thank you. Good morning.

Third quarter for us marked a period of extreme equity market volatility, yet our diversified business model has proven that we can withstand these events, as well as other catastrophes, while benefiting from the resiliency and earnings power of our non-equity-sensitive businesses.

Companies that are diversified across products and distribution channels are the best (inaudible) to withstand the impact from volatile equity and economic environments.

The third quarter decline in equities of more than 17 percent in the S&P 500 clearly affected the profitability of our investment products businesses. At the same time our property casualty results remain as robust as they did last quarter. In fact, our results have even strengthened over the past three quarters of this year. We're experiencing a significant acceleration of earnings growth in our property casualty lines, and pricing momentum continues across all of our businesses.

Total operating earnings for The Hartford were $365 million, or $1.46 per share. Adjusting for the impact of the World Trade Center, the tax benefits and other items recorded in both quarters, operating earnings were up seven percent to 289 million or three percent on a per-share basis to $1.15.

Operating income in the Life operations was down 12 percent to 156 million, excluding the tax benefits and impact of September 11th. The decline was due primarily to the equity market impact on our individual annuity segment.

From the second quarter to the third quarter, the average daily price level in the S&P declined 16.3 percent, which is almost three times the rate of decline between the first and second quarters of this year. The effect of the market overshadowed the strong earnings growth in our group benefits segment, where adjusted operating earnings were up 21 percent, as well as our cost containment initiatives.

In our individual annuity business, operating earnings were 20 percent. The decline reflects the reduced level of fees collected off our lower asset base and higher debt benefit costs associated with our variable annuity death benefit features. Debt benefit costs increased 8 million the second quarter of this year. the equity market impacted sales of investment products, especially in July. And then conditions improved through the rest of the quarter.

As a result, we turned in a solid 14 percent year-over-year growth in variable annuities, aided by our wholesaling efforts and the market's interest in principal (ph) guarantees, which we've incorporated in our latest product feature. We call it Principal First (ph).

Despite the challenging equity market, we experienced sequential and year over year growth in sales of our lead variable annuity products, Leaders and Director. Leaders recorded its best quarter ever, with a 53 percent gain in sales over the prior year to more than $1 billion. Putnam sales remain soft, but we believe we have seen the bottom.

During the quarter we assumed full marketing responsibility of PCM, Putnam Capital Manager, and expanded to 20 wholesalers focused exclusively on the product. We expect to see improving trends beginning in the first quarter of next year. So far we have seen good momentum overall in the variable annuity sales in October.

Fixed annuity sales declined, which is acceptable from our standpoint, as sales for us typically slow in a rapidly declining interest rate environment. When rates are covered, we will be in a better position to capitalize on rising rates because of the frequency and methodology with which we set rates. Our wholesalers continue to execute well in the field, focusing on actionable ideas and new sales and marketing activities. The real benefit of these actions will be realized when the market improves.

Despite the tough environment, we believe that we have gained market share in the independent financial planner and wire house (ph) channels.

Redemptions picked up in the third quarter due to investor capitulation, especially in July, but we see these trends moderating somewhat from the beginning of the quarter. The number of fund exchanges has also slowed from the beginning of the quarter. Call (ph) was up significantly over the past three months, but we've maintained our service standards while continuing to control expenses.

One indication of that is that we just received our fourth Operations Managers' Round Table Award for Annuity Customer Service as measured by industry-leading broker dealers.

Two issues that have garnered a lot of investor retention in the past couple of quarters are guaranteed minimum death benefits, or GMDBs, and deferred acquisition costs, or DAC. With respect to GMDBs, you'll notice we've enhanced our disclosure on this topic. We've historically reinsured a significant portion of the risk from these product features. As of the third quarter, over 80 percent of our total net amounted risk and over 90 percent of the net amounted risk associated with our maximum anniversary value, or MAV feature, is reinsured.

However, in recent years the costs and availability of reinsurance for these features has become more difficult. This is why, for new business sold in the fourth quarter, we would only expect to reinsure about 15 percent to 20 percent.

Due to this factor, we're in the process of restructuring our variable annuity contract. The new product will not include the MAV as part of the base benefit. This will improve our risk profile and reduce our lines (ph) on reinsurance. In addition, we will offer optional death benefits that the consumer will have to pay extra for. These will likely be heavily reinsured. This will reduce the cost for consumers who do not wish to pay for the MAV while still giving those customers who more highly value enhanced death benefits an opportunity to purchase this protection.

As far as our DAC, we still remain comfortable with the adequacy and recoverability of our DAC asset. We did not change our long-term separate account market appreciation assumption of nine percent when the boom market was raging in the late '90s, and to be consistent, we do not believe we should be changing it now.

Let me make one final note about our variable annuity business. All the talk about DAC and GMDBs has diverted investor retention from the most important question -- how much is this business worth? In an effort to assist investors in this endeavor, we've included in our financial supplement for the first time our internal calculation of the embedded value of our individual variable annuity business. Despite the lower asset levels and higher GMDB costs, our in-force book of business is still worth about $2 billion.

Earnings in our other investment products business were up 14 percent, led by higher spread income in our institutional business, while assets were up due to strong sales in '01 and '02. Mutual fund sales were down, reflecting the tough market for equities. We are continuing to diversify our product platform and the addition this quarter of five income-oriented funds managed by HEMCO (ph).

In addition, we'll be adding 15 dedicated mutual fund wholesalers in the wire house (ph) channel to increase our sales effectiveness.

Sales of 401(k)s were up 13 percent over the prior year, benefiting from the proprietary products sold through Edward Jones and UBS PaineWebber, as well as the increased field expertise of our wholesalers.

Government were up more than threefold as a result of one large case sale (ph), and we have a promising backlog of new cases in the pipeline.

We've been excited with the progress of our Japan results. We recorded 295 million in dollar denominated sales, more than two times the prior year level. This brings our assets to just shy of $1 billion, or more than 120 billion yen as of September.

For those of you who visited our management in Tokyo, you've seen how we've been gearing up for the introduction of annuities through banks well before the launch on October 1st. Month to date, we've added 20 new financial institutions representing over 2,000 branches and $1.4 trillion in deposits. Through these institutions we've sold more than $70 million in variable annuities month to date, and the momentum is very encouraging, particularly as our wholesalers become more seasoned.

Individual life earnings and account values were flat to the prior year, primarily due to the lower equity markets. Sales results reflected weaker variable life production and one large universal life contract sold in the third quarter of last year. Our sales platform has been built around estate planning and variable life products. This has been impacted by the tax law changes, the downturn in the equity markets, and a switch in customer preferences towards universal life.

To broaden our product platform, we've recently introduced a new universal life contract that's beginning to show favorable acceptance in the market.

In spite of the third quarter's performance, we're gaining share in key markets through banks and broker dealers, and this new product will allow us to grow (ph) in our distribution to property casualty agents and life professionals too.

Earnings continue to be strong in group benefits, showing a solid 21 percent growth. Fully insured premiums were up 12 percent in the quarter, reflecting growth in all three product segments. The sales environment continues to be challenging, particularly in the large case market. Our loss ratio improved even further, which is remarkable given how well this has been running the past several years. This is a reflection of our terrific underwriting and claims management capabilities.

Overall, this business segment continues to run at double-digit growth rate in premiums and earnings for the full year.

Now let me turn to property and casualty. Property and casualty continues to deliver exceptionally strong results with operating income growth of 37 percent for the third quarter, excluding the impact of September 11th on '01 results. This marks the third consecutive quarter of double-digit earnings growth in a combined ratio under 100. This superior performance was due to significant improvement in the specialty commercial and reinsurance operations and continued favorable catastrophe .

During our call last year we said that the underwriting actions being taken would result in improved operating results, particularly in the second half of '02. While this is playing out exactly as we anticipated, written pricing increases have flowed into earned (ph) premiums, lost cause (ph) have been behaving well, which have resulted in solid improvements in operating cash flow. This quarter really shows the strength of our operating cash flow within our property casualty lines, which has virtually doubled from last year despite the head winds from reduced interest rates, higher reinsurance costs, and flat investment income.

When you combine these factors with the overall recovering state of the industry, performance of foreign owned players in the U.S. markets, and lower returns on assets, all these factors give me confidence in seeing the cycle extend through 2003 and beyond.

We're seeing a flight to quality (ph) among carriers, and Hartford is a go-to market for commercial and personal lines. Certainly commercial lines have benefited most from the solid underwriting market. Our enterprise agency's strategy is enabling us to expand our relationships with regional brokers and is allowing us to capture a meaningful share of their most profitable business.

Business insurance turned in an exceptional performance with a combined ratio of 95.6, our sixth consecutive quarter under 100. Both small commercial and middle market are operating at combined ratios in the mid-90s and are benefiting from the strong written pricing and favorable loss cause environment.

In small commercial, premiums are up 16 percent and written pricing increases were substantial, too. In middle market, premiums were up 25 percent. The commercial segment is benefiting from the flow of business through our insurance centers, which is resulting in very high renewal retentions. Middle market is benefiting from our ease of doing business approach to new business admissions, which is totally unique capability in the industry.

We're also beginning to penetrate our new business -- a new business channel that straddles the small commercial and middle market segments, a potential $30 billion market. Lost cost trends have been favorable in both segments, and we continue to benefit from relatively low frequency. We believe that our favorable operating performance in both small commercial and middle market is sustainable.

In personal lines, pricing is driving the loss ratio improvements. The combined ratio hit at 100.3, beating the prior year and benefiting from lower catastrophes. The pace of rate increases has increased in our affinity and agency personal lines (inaudible) for both auto and homeowners. Our homeowners book continues to perform well despite the industry issues. In auto, lost cause continued to be impacted by bodily injury severity, and this trend is consistent with what we saw in the first half of this year.

We're achieving appropriate price increases in those stakes in line with our underwriting performance. And we're ahead of plan in pricing in those states where we need more aggressive pricing and have more meaningful market share. Premiums in agency lines contracted a bit in the third quarter as we carry out our conversion to six-month policies in selected states. However, we've seen a favorable benefit to our loss ratio in those states.

Personal lines is very well positioned to compete with anyone in the market. We will continue to aggressively improve profitability by achieving rate adequacy across our entire book, addressing lost cause issues in certain states, and repositioning our non-AARP affinity business.

Also you saw earlier in the third quarter that we transferred our New Jersey personal auto insurance business sold through (ph) independent agents, which demonstrates our commitment to improving profitability and competing in markets where we are better positioned. The strong written pricing increases will result in improved performance in '03 and '04.

Trends in specialty commercial lines have continued from the second quarter as we are seeing dramatic pricing power. The combined ratio improved by 9.3 points to 98.3 as the price increases implemented since last year continue to work their way through the results. Premium growth was 41 percent in the quarter and continues to accelerate in our core lines of professional liability, property, and specialty casualty.

Professional liability has benefited from equally strong pricing power as property, and we've seen improved changes in terms and conditions. Across all lines of commercial we're still managing our aggregations in key locations. Our new terrorism modeling software is allowing us to manage our liability in any given building or location and determine our susceptibility to any one event. Overall we've seen no let-up in the hard (ph) market within these lines and believe we can sustain our strong operating performance. Reinsurance has shown significant underwriting improvements since the prior year. Excluding the effect of

Reinsurances has shown significant underwriting improvement since the prior year. Excluding the effect of September 11th, the combined ratio in the third quarter declined 19 points to 103.1, which is well within our targeted range. We're achieving these results due to our shipped to lines with the greatest profit potential, particularly in property risk excess and faculty and casualty programs.

In all three of these lines, we're experiencing double digit price increases. Our shift to excessive (ph) loss is resulting in better terms and pricing, as well as considerable profit improvement.

Premium growth is down over the prior year due to our exit from the international lines last year. So we're excited about all of these trends in the property and casualty lines. Pricing momentum continues across all segments, and we're successfully executing on our market and product expansion strategies. Because the current operating trend ship shows no signs of abating, we expect continued earnings growth throughout next year. Before closing, it's obvious that we've been facing one of the most challenging credit markets and I want to talk about it a little.

We've seen the most challenging credit markets in the past 25 years and it's clear that The Hartford is not immune to the downturn. We have a substantial corporate bond portfolio. While our performance is consistent with market benchmarks, we're disappointed with the level of losses we're experiencing. We continue to actively manage the investment portfolio to ensure that we maximize value to shareholders.

And while we expect additional losses through the end of the year, we anticipate the level of losses to diminish going forward and to be within the expanded bands for this expected credit cycle. Furthermore, it's important to point out that, even after the impairments, our book value is up 11 percent over prior year.

And one more final note. As you know, asbestos continues to be a very tough issue. In particular, as we have said before, there's substantial uncertainties for our industry related to so-called non-product exposures. The bar here in policyholders have become even more aggressive against insurance in this area.

Given investor focus on this topic, I feel it's appropriate to highlight for you a disclosure item we will include in our third quarter 10-Q filing. Earlier this month, the month of October, a former Hartford insured (inaudible) Company and Western MacArthur (ph) and several asbestos claimants filed suit against Hartford and two other insurers in California. This is a remarkable situation. We previously provided coverage to MacArthur (ph)for its asbestos claims and paid out our primary policy limits in 1987. MacArthur (ph)agreed we had exhausted and sought coverage from excess carriers and others.

13 years later MacArthur (ph) returned to Hartford demanding additional coverage for the same type of asbestos claims as before on a non-products basis. But MacArthur (ph) had failed to provide us with notice or tender of these claims and default judgments have been entered against MacArthur (ph) in many instances before it sought additional coverage from us.

In other words, MacArthur (ph) contends we're responsible for claims and default judgments that we've never had a chance to handle or defend and never were tendered to us, as well as unknown amount of unresolved current or future claims.

I want to assert that we believe we have significant defenses to MacArthur's claim for additional coverage, and we will defend against it vigorously.

So now let me step back for a minute and focus on the outlook. Looking at The Hartford in its entirety, we have a fundamentally strong business platform that's both well diversified and well positioned for many years to come. We have been able to withstand significant market and economic events, responding when appropriate by making changes in our products and distribution when market conditions dictate, and identifying new business opportunities where we can leverage our strengths. We also have an outstanding management team dedicated to managing returns and shareholder capital wisely.

So let me open it up for any questions.

At this time I would like to remind all participants, if you would like to ask a question, press star, then the number one on your telephone keypad. Again, that's star then the number one on your telephone keypad.

Your first question is from Mr. Brian Meredith (ph) with Bank of America.

Brian Meredith (ph): Good morning. I have a few questions. On Western MacArthur (ph), is there any kind of dollar figure you could provide us right now? And how long could you have known about this and are the rating agencies aware of it?

First of all, it's very early stages -- as I mentioned to you on the call, this came to our attention -- the case was filed in California sometime this month. And we believe we have significant defenses. As I mentioned in my earlier points, we had exhausted our limits in 1987 and MacArthur (ph) asserted that we exhausted our limits to excess carriers as well as to the courts. So we feel we have significant defenses, and we believe that, over time, this will become a lot clearer.

As far as rating agencies are concerned, I'm going to call on David Johnson to just add a couple of words.

We've communicated this to the rating agencies (inaudible) extremely early (inaudible). We had communicated to them (inaudible) with you.

Brian Meredith (ph): OK. No indications from them, any problems with this?

No, none so far.

Brian Meredith (ph): One other question from my side. On the property casualty side -- more of a macro question here -- if I look at your property casualty return on equity in the quarter, it was around 13.6 percent, I guess, annualized basis. And this is a fairly good quarter, obviously, from CAD (ph) losses perspective, and hurt a little bit by investment income. Going forward, is that the return on equity, given the current interest rate environment, we should expect going forward, or should we expect higher ROEs given that we're in such a favorable part of the property casualty market right now?

Let me have Dave Zwiener address your question.

Good morning. Dave Zwiener. Can you hear me all right?

Brian Meredith (ph): Yes.

I think what we think about when we're targeting returns, we're thinking in two ways. One is obviously the business that we're writing on a day-to-day business, and we reflect current interest rates in the pricing model. So obviously with the decline in interest rates we've adjusted our pricing targets accordingly. But I think you're asking the macro question in terms of, where should the company be on a combined ratio in total to stay within the target range of 13 to 15 ROE in this rate environment?

And it's a function of not only interest rates, but it's a mix of business, then the financial levers that we apply to the businesses. And I think, given where we are with interest rates, our financial leverage mix of businesses, combined at about 98, plus or minus half a point, is really where we need to be to stay comfortably in that range.

Brian Meredith (ph): I guess the question I was trying to get at also is that, given that we're in such a favorable part of the market, (inaudible) your goals of 13 percent to 15 percent return on equity, but shouldn't it be at the high side or above that range as we move into 2003, or even 2004, given that we're at the peak of the cycle and ultimately things are going to roll over here at some point?

There too I got to break it down business by business. Clearly in the specialty reinsurance and most of business insurance businesses, we're operating at the high end or through the high end of the range. Mitigating the impact of that good news on the total is obviously the first (inaudible) where we've communicated consistently we've been operating below our targets. We're making dramatic improvement. I can talk about that later if anybody's interested. But I think the mix of the business, with personalized (ph) being such a significant part of the total operation, is what keeps the total results in that 13 percent to 15 percent operating range right now.

Hopefully if we make the kind of progress we're expecting in '03 and '04, you're going to start to see the improvement there.

Brian Meredith (ph): Great. Thanks - Jason (ph).

Jason (ph): Couple of questions back on the annuity segment. Tom, have you stopped selling the MAD (ph) feature? Do you believe it's going to hurt sales? And the other question I have, are there any other companies offering a Principal First (ph) type of option, and really, were all the sales gains from this new feature and really (inaudible) or were there some commission specials during the quarter as well?

Nothing unusual in the commission special front, Jason (ph). But I think Franco (ph) is at the top of their game right now and combining that with our shelf space and the maturation of the Leaders product, which Ramani highlighted, but for that to have broken through the billion dollar a quarter barrier, I think is a real a key aspect of the third quarter success.

So going forward, I expect Leaders to continue to continue to grow, and that will continue to allow us to actually expand market share. I'm confident that the transition of the product, which will be done by second quarter of next year, that we'll be able to maintain the sales momentum. We've got a lot of good product ideas underway that I won't get into it in detail today, but I believe it's not only the right thing to do from a risk perspective, but that our sales momentum will not be impacted.

Jason (ph): Do you think GMDBs will for the most part dry up?

Tom Marra (?): I think there's probably some movement among competitors similar to what we're seeing.

Jason (ph): Great. Thank you very much

Next question is from Mr. Nigel Diley (ph) from Morgan Stanley.

Nigel Diley (ph): Question on debt assumptions -- last quarter you said the markets could fall 35 percent before recoverability will be an issue. Do you have a similar number for this quarter? And also, just (inaudible) guaranteed minimum death benefits gain, do you have the level of GMDB expenses that you expect for '03?

I'm going to have David Boyd take this one.

Okay. In terms of the DAC recoverability, as I said last quarter the market could fall 35 percent or probably even more from the 630 level where the S&P was at about 990. You're talking about lower 600 S&P 500 level before there would be any issue with recoverability. So I think that's just not an issue for us. And ...

Nigel Diley (ph): How about the amortization rates on DAC as well? If the S& P was to fall, I think you'd still need to accelerate your debt even before recoverability became an issue. Is that correct?

As I said on the second quarter call, we have maintained a consistent approach throughout the 15 years that we have -- since we adopted FAS 97 in the late '80s where we take out a long-term approach to our market (ph) appreciation assumption of nine percent. So when we got into the rapid bull market in the late '90s, we did not change the assumption, and therefore we're amortizing a significant amount of DAC during that period.

If you look at the pre-1998 book, we had amortized over 53 percent of that book already. So that put us in really good stead as we headed into the bear market. Obviously the bear market has been (ph) fairly severe. When we got to the second quarter level, we were right back on about our future gross profit assumptions -- if we had done an experience on walking out the second quarter there essentially would have been no event.

In the third quarter the market did come down from the second quarter level, but one quarter behind after being ahead for a decade, it would have been a very inconsistent approach to have taken an adjustment in the third quarter. We are going to continue to analyze it going forward.

As I said, again, on the second quarter call, the S&P level of 900, I don't think there would be any adjustment this year, but clearly if the market retested its the lows back in the 700s, we'd have to take a real sharp look at it in the fourth quarter analysis.

On to the GMDB costs for next year. In the quarter we had 17 million on a net basis. You look at where the S&P 500 was in the third - similar to where it is now. I think that's probably a pretty good estimate for where it's running, plus or minus 2 million. You can annualize that out, and that's probably a decent estimate for where we come in in '03.

Nigel Diley (ph): That's great. Thanks a lot.

Your next question is from Jay Cohen (ph) with Merrill Lynch.

Jay Cohen (ph): Good morning. I have one question, and Ed (ph) will have a question as well. I guess I want to drill down a little bit with Brian Meredith's (ph) topic and focus on one specific area, and that's business insurance. It looks like the combined ratio X 9/11 improved by about 2 points from a year ago, obviously at a good level.

But one would suspect that, given the fact that there were low CADs (ph) in the quarter, given the fact that you've had price increases now for more than several years, and the earned premium effect is really starting to catch up, and as you said, the loss costs are manageable, that shouldn't that be even better? We do have St. Paul putting up combined ratio in their general commercial business, kind of below 90 and their specialty business below 90. I'm wondering why, given the dynamics, why your numbers aren't better -- not that they're bad.

I'm glad you acknowledge that. Let me turn the question over to Dave Zwiener on this one.

It's nice to be in this position where people are asking why aren't they better than 95.5. But I think first of all I got to say we're real pleased -- this is where we expected to be right now. And without trying to compare it to others who are I know making their own judgments as to how well they're doing, I think in addition to the absolute level, we've looked in this business to build a level of consistency that I think few others have been able to achieve -- that is, our small commercial product, as you know, has been below 100 for quite a time, and our key accounter mid-market businesses has performed terrifically well and ahead of the market.

So I think we're driving for both consistency and performance -- at 95.5, I think we're right about as good as we're going to get. I would not expect that to improve dramatically. That's well above our targeted range. And I think that if we can carry that or close to it next year, we'll be very happy. Now, next year we'll be sailing into a couple of head winds. I think you correctly identified that this has been a light CAD (ph) year. I think you and others have to assume it's going to be a more normal CAD (ph) year. I know we are too.

Two, you're going to see that we and others are going to incur higher reinsurance costs in '03 than we have in 2002. I think the continued performance, the earned pricings (ph) continue to increase, reflecting the written price we're getting this year. If we can be in the mid-'90s next year, I think that's terrific performance.

Ed (ph): If I could ask two questions on the Life side. First of all, I was wondering, Tom, if you could comment at all on if we're seeing any benefit in your sales from a flight to (ph) quality given some pretty high profile difficulties for competitors that a few years ago were pretty significant players.

And secondly, a question for David Foy (ph) -- when we think about the - be in (ph) the money GMDB, to what extent have you seen or are we expecting to see any impact on the policyholder persistency when you have this in the money guarantee, and are we still at levels where we would rather see persistency improve for these policies that are in the money, or would we rather see them lapse? Thanks.

I'll go first, but I'll answer part of David's for you. we want this business to persist, and look at margins being steady and solid. So I'll let David elaborate.

But regarding your question on flight dequality (ph), I think there is a component that's starting to take hold there. One of our successes in the independent channel, I think, is going to benefit from that aspect. But I'd say it's really the whole - the success we had during the quarter, which by the way got steadily better as the quarter unfolded, July being a rough month because of the - our crash in the equity market, but then things really came back strong and September was an outstanding month. But I think the whole package is working extremely well right now and it's what I would attribute the success to.

David Foy (ph): Okay. I'm going to take a twist to your question, because I think right now you're focusing on the liability side and the net amount at risk and how much that might cost. And then if you can see in our new disclosure how much that is and then the percentage that's reinsured, it shows how much The Hartford actually has at risk.

But when you look at the present value of the future costs of that on an actuarial basis, and you run that out, factoring in the net amount of risk, and factoring in the surrenders that we have, the total cost for all those GMDB is 184 million. So that's the liability side.

But the key thing is you can't forget the fees. Even in the bear market that we have, we got over 200 million of fees in the quarter for the variable annuity business. And so, when you project out all the fees and you subtract out the GMDB costs and the expenses, you still have a tremendous value in that in-force book of business.

In fact, as Ramani said, we disclosed for the first time the embedded value of our variable annuity in-force book, and you can see when you take the present value of all those future cash flows, the in-force business is still worth $2 billion. To echo Tom's comment, absolutely we want that business to persist.

Ed (ph): Let me just follow up. I guess the question I had was, to what extent? There's probably some of that business that's perhaps so in the money that you might not want it to persist, or is that not true? I understand, obviously, the overall book, persistency is key and you want to be. But is there any portion at this point that we have to worry about?

David Foy (ph): I think the key is you have to remember that it's a joint probability. Just because you have a net amount of risk of 4.9 million (ph), people have to die to get the benefit, and they (ph) can't select against us. So you look at the actual cost in any one year - again, we talked about it earlier, you annualize out the number, it might be 70 million of cost. And you get over 800 million of fees, you have to take that tradeoff everyday.

So people aren't going to die for quite some time on average. And so you still rather get all those fees for all those years before they die and then pay the death benefit at the end.

The other thing that you have to recognize is we don't sell product here hoping that customers wouldn't use it. That's never been the Hartford way, and I believe that Tom and his associates feel very strongly that we have managed the risk on the product very carefully and we have sold a product so customers can appreciate its value. So we don't think of things that way. It's important that you understand that. That's typically the Hartford way.

Ed (ph): Thank you

Your next question is from Michelle Giordano (ph) with JP Morgan.

Michelle Giordano (ph): Good morning. I have a few questions. First, for David Foy (ph) -- if the equity markets were to remain around - say if S&P 500 remained around 800, do you think there's any reason why your full-blown DAC analysis at the end of the year would suggest that you might have to take a DAC charge? And secondly, there's some new accounting proposals for DAC/GMDB reserves. Based on looking at the proposals at this point, what kind of hit do you think you'd see to GAAP reserving on GMDB in 2004? And then I'll have a follow-up question for Tom Marra.

In terms of the DAC again, I think if it stays at the current level, 900 is no issue. If it does retrace down back to its lows, I think we'll have to do the analysis, look at where surrenders (ph) are running, and where it comes out and figure out if an adjustment is needed. I would say, though, even if we get to the point of that happening, let's say an adjustment was needed, I don't think you're talking more than five percent to 10 percent of the DAC balance on kind of an outside range of that.

But again, I don't think it's certain that 800 -- and there's no specific trigger, Michelle. We talked about this last quarter. We're going to have to really look at all the pieces, the surrenders, expenses, market performance, and so forth and really fine-tune it if the market again retraces to its lows. But I want to reiterate at the current market level I would not anticipate any experience on locking (ph) in the fourth quarter.

Secondly, your second question, Michelle, was just remind me?

Michelle Giordano (ph): The new accounting proposals on GAAP GMDB reserving -what kind of impact based on the proposals as they stand now do you think it would have on your earnings for 2004?

If SOP (ph) comes through as it's currently proposed - and I think the comment (ph) period here ends October 31st, I think there's going to be a lot of industry players, including Hartford, that puts in responses to the SOP (ph). So we'll have to see where it ultimately shakes out.

But let's assume for a minute it comes out as originally proposed. We did include again in the supplement the present value of unreinsured death benefits of 184 million. But one thing the SOP (ph) does from that, it takes off the present value of future fees associated with these enhanced death benefits. I assume that once you do -- when you do that analysis, it will be about two-thirds of the 184 million number, or about 120 million. And again, that would be a first quarter '04.

If the equity market stayed at 815 -- remember the analysis we did as of September 30th was based on the equity markets as of that time. If you go back to the S&P at 815 or where the asset balances were on September 30th, probably look at 120 million one-time change in accounting in the first quarter of '04.

Michelle Giordano (ph): Thank you. For Tom Marra, two questions. First, sounds like you're making some changes to some of the product features to help the profitability. Clearly the profitability of variable annuities have been under a lot of pressure. What are some other things you can do, and based on what you described, how will that help the profitability of the variable annuity product?

And secondly, if you could just give us some broad themes about what you're seeing in terms of competition right now in the variable annuity market. Have some of the foreign players eased up and some of the domestic players that had problems eased up on product features also?

I think there's a movement, particularly around the guarantee death benefit, because it does have a surplus volatility component to it. So I think everyone is taking a good hard look at that, as are we. And that's our motivation, really, for designing the product, but we're also looking at things such as fees, opportunities to create a better consumer deal.

But certainly the driver -- because we think our pricing margins have been okay, but that surplus risk associated within uncapped mass (ph) death benefit that's not completely reinsured is something we are committed to getting (inaudible). But as I said earlier, I'm confident that we can keep the marketability, the profitability, and I think the consumer value in the right places as we go through this product period -- design period.

Michelle Giordano (ph): Any comments on what the foreign players have been doing recently, and some of other players (ph) beyond GMDB. Are they backing off commission enhancements?

The variable annuity market, it's an attractive place to play. So I think it will always be competitive. I think one thing that's occurred with some of the players is they shifted focus onto the fixed annuity side. We've stayed very strong with the variable annuity, and our fixed annuities are priced on a new money basis every two weeks. And as we speak, our sales team is really focused on the VA. I think it's led to a lot of the success that we've seen in the past couple of months.

Michelle Giordano (ph): Thank you.

One point I want to embellish on which I think Tom mentioned in his response to your question, we are very happy with the profitability of the annuity block. It's really a question of surplus volatility that is - and the uncapped nature of the MAB (ph) that's causing us to restructure the product. I just want to be sure that you caught that little nuance in how he answered your question.

Michelle Giordano (ph): Thank you

Your next question is from Mr. Andrew Cliggerman (ph) with Bear Stearns.

Andrew Cliggerman (ph): Three quick questions. First, with regard to catastrophe disaster benefits, you indicated that they were favorable. When I do the math, I think that The Hartford has about 3.5 percent of earned premium budgeted for that. If I look at the 16 million of CAD (ph) losses you have in the quarter, if you make it a prefax ph) number it's a little more than one percent. Question one is, what exactly was the favorable CAD (ph) benefit?

And secondly, on debt to capital ratio, I think from a year ago you had 20.8 percent debt to capital, now you're at 23. Where would you like that number to be? And thirdly and lastly, a follow-up to Michelle's question on GMDB reserves. David, is the NAV (ph) simply getting from the present value of guaranteed un-reinsured benefits on a statutory basis, you just simply subtract out the present value of fees and that's how you get the GAAP reserve, so that's what we would be applying to all of these other companies as well? And that's it?

Let me first have Dave Foy (ph) answer the GMDB question, then I'm going to have Dave Johnson pick up on the (inaudible) and then turn it over to Zwiener on caps.

David Foy (ph): David Foy (ph) here. It's a two-step process. First you need to take the statutory reserve and you have to strip out the conservatism of the mortality. If you looked at the disclosure we had, you saw that the statutory reserve was 366 million and the present value of un-reinsured guaranteed death benefits, which is more, I would call, a traditional actuarial 50/50 best guess reserve was 184 million.

You see the statutory (ph) reserve is actually up close to the 95th percentile of the results. We have a 95 percent confidence interval showing 91 and 378. The reason for that is that the mortality rates assumed in the statutory calculation are extremely conservative. So when you put in more appropriate mortality assumptions, that's why you get the 184.

The second step, once you get the 184, is you subtract off the present value of the future fees associated with this. I'm saying that might be about 60 million or so, and that's how you get to the 120 million that would be the GAAP reserve.

Andrew Cliggerman (ph): Very helpful. Is that a operating or non-operating number that you would take in the fourth quarter?

David Foy (ph): That actually would be effective probably in the first quarter of 2004, and it would come through really below the line as a change in accounting principles. So (inaudible) when you saw FAS 133 or EITS that we've had in the past.

Andrew Cliggerman (ph): Gotcha.

I'll have Johnson address the capital (ph) question.

There were two unusual items in the third quarter on the balance sheet, one which will be temporary and one which will be more sustaining. Our target is still kind of around 20 percent debt to cap, excluding trust preferred and similar securities. You saw two things happening on the balance sheet ratio at 9-30. The first is we prefunded our November 300 million debt maturity with an offering in August. So you had a temporary $300 million dollar up in aggregate debt that will go away in November when the cash proceeds from that offering are used to retire the debt that matures in November.

So that's about half of it. The other that will be more longstanding, but again, a good thing, is that we issued about half our capital that we raised in September in the form of equity units which are going to the balance sheet in the debt structure, but yet significant capital credit from the rating agencies as a security that's going to fund the issuance of equity in four years.

So the rating agencies -- and each is a little different -- makes an adjustment with regards to the debt treatment that they give those securities. So you had a $600 million up, 300 of which will go away and 300 of which we get significant capital credit for its form. But on a pure apples to apples basis, our target is still 20 and we're right about that area.

David, do you want to take the CAD?

This is Dave number three with the CAD (ph) question. First of all, as you noted, the CAD (ph) story is not a big story in the third quarter relative to third quarter last year. In fact, after-tax CADs (ph) were only $3 million less this third quarter versus last year, ex-WTC.

But you do correctly point out that the real story is that '02, like '01, has been thus far a light CAD (ph) year. And the ratio for the quarter is 1.1. I think looking at the nine months year-to-date at about 1.6, last year year-to-date is about 2.1. And I would say we're normally planning on an average CAD (ph) year at about three points or so. Right now we're running about a point and a half below that average trend line. And I think that our assumption going forward into '03 is we'll probably see something closer to a normal trend line.

Andrew Cliggerman (ph): Thanks for the answers

Your next question is from Ms. JoAnn Smith (ph) with UBS Warburg.

JoAnn Smith (ph): Good morning. I have a few questions, and then I think Mike Lewis (ph) will have a few questions as well.

On the variable annuity business, I was wondering, in the embedded value calculation, can you give us some indication of the type of runoff rate that you've assumed in the business and what year do you assume shock last rates (ph)? And second is, how much do you anticipate charging for enhanced death benefits, and how does that compare competitively. Third is, does the Leaders product currently have the three-year MAV (ph) embedded in it? I'm sorry for all these questions. Fourth, and this is the last one on my part, then Mike (ph) has some property and casualty questions -- given the fact that you have this outstanding liability for GMDB, or potential liability, why not just establish a GAAP reserve now so that you can eliminate having to kind of have that one-time effect in '04? Why not just go ahead and start establishing a reserve even though it isn't required on a GAAP basis.

JoAnn I'll start and turn it over to David. On the enhanced death benefit, we'll allow optionally, once we get our new structure in place. Our plan is to have that heavily reinsured. We're actively discussing that with several reinsurers. We're actually confident we'll get something. The actual charge we pass on to the customer will, of course, be dependent on the outcome of those discussions with the reinsurers. So that's kind of a float (ph) at this point. But I'm confident we'll find available reinsurance and price accordingly.

The Leaders questions, JoAnn, I think I missed that.

JoAnn Smith (ph): Does the Leaders product currently have the three-year MAV (ph) embedded in it?

It has an annual MAV. The MAV (ph) (inaudible) is available in all the product structures currently. So it's an annual step up.

JoAnn Smith (ph): Okay.

JoAnn, I think I've got the two questions you had for me. First, on the surrenders, what we assume usually is in the first like four or five policy years of something that has a seven-year surrender charge, we're assuming fairly low last (ph) rate during that time, maybe five percent or so. General experience has been as good as that or better.

And then what happens is that, as the surrender charge starts to wear off and you start to get one or two years before, you start to grade up the surrender rate maybe up to seven, 10 percent. And then that first year out of the surrender charge period you assume somewhere between 20, 25 percent. And then it kind of grades off from there to like 16, 20 percent, and then maybe 15 percent on up. So that's kind of how you look at it. We have other products that have other surrender charge structures, and we have to tailor the surrender charge assumptions to that.

JoAnn Smith (ph): Have you made any assumption concerning expense levels? Is this business we're going to run off?

Actually, we don't give ourselves credit for, say, running the business into a liquidation mode. We're really are doing on a growing concern concept, so we're kind of taking the current expense levels that are required to maintain the in-force business or running that throughout the period because really the usefulness of this is kind of looking at this into valuing the business. And because we obviously are growing (ph) concerned, we want to look at it in a going-concerned (ph) kind of matter.

JoAnn Smith (ph): Should we look at the $2 billion in terms of relative to the DAC asset?

If you want to look at it relative to the DAC asset, you have to make a two major adjustments. First you need to make is you have to pretax it, because the DAC is pretax and this is after tax. Do that, you get more like a $3 billion number. Then you have to add back the [inaudible] reserve adjustment so you can get them on a comparable statutory basis, because obviously the DAC is, GAAP cost left in the embedded value of statutory concept. You add that 1.6 billion back and you get 4.6 billion total, you compare it to the 3.3 of variable annuity DAC.

That lends yourself to why it takes so far in the market decline before you have a recoverability issue.

JoAnn Smith (ph): Thanks.

Then on the SOP and why we wouldn't have done it now, you don't really want to change your accounting twice. You really want to wait until the SOP is fully finalized and you have a final answer to that. And then you want to make the adjustment, because doing it twice I don't think makes a lot of sense.

JoAnn Smith (ph): Okay. Here's Mike Lewis (ph). Thank you, David.

Mike Lewis (ph): Very quickly, number one, the personal lines, (inaudible) the number of auto writers (ph) reaching rate adequacy in most states, would that make it more difficult for you to reach rate adequacy and achieve the kind of results you want? Number two, on the asbestos MacArthur issue, does the fact that you doubled your asbestos reserves give you some additional protection just in case things go against you as they did for St. Paul? And lastly where do you stand with S&P? They still had you, I think, on a watch basis even after your capital raising in light of the asbestos issue and the reduced profitability of investment products.

Let me, first of all, have David address the auto issue, and then Johnson, do you want to address the S&P issue after that, and then I'll come back to asbestos.

Good morning. On the auto, a couple of points. One is, although you're absolutely correct, a number of the major players are getting closer to rate adequacy in some of the key states, and I think the industry has a long ways to go to get to rate adequacy in general. We would look at the pricing momentum we've seen over the last four quarters that sequentially have been up, and we would continue to be up, and that would suggest to us we have plenty of room to go to get to adequacy in the key states. So I don't see any impediment there.

We're also filing rates in almost all the states. And I don't believe we will be challenged from an adequacy standpoint. So we're not concerned about that issue.

Let me turn it over to Johnson on the S&P.

As you know, we are on credit watch negative from S&P, have been there for a couple of weeks. The action putting us on watch was largely driven by their changed view on the life insurance industry. And we're scheduled to meet with S&P in the near future to review our situation and review some of the strategies we have that you guys have been asking about for the last hour with respect to the risks in the life insurance business. We think it's a very impressive story. We're looking forward to that dialog.

With regards to asbestos, the stuff that Ramani talked about is new information for S&P, which we communicated to them very recently, and I presume that will be part of our discussion with them.

Mike Lewis (ph): On the reserves, Mike - this is Ramani - we have (inaudible), and the IBNR (ph), as you know, provides for all sorts of contingencies. Now, whether that ID number will cover Western Mac (ph) or not is way to premature to tell.

Our belief is that Western Mac is going to take a minimum of a year, but probably a lot of years before we will ever achieve conclusion on this one. As I mentioned, I think it's worth repeating, you know, we believe that we have exhausted our policy limits, and Mac (ph) agreed to that, expressed that to excess carriers and to the courts. So we have a lot of strategies here to defend.

Mike Lewis (ph): Thanks very much.

Stuart Carlisle (ph): I apologize -- we're probably going to have to cut it off here as we have another company that's scheduled its conference call at this time, so if I could, let me had it over to Ramani if he'd like to make any concluding remarks, and we'll wind up the call.

Thank you, Stuart (ph). I'm sorry we have to cut this off, principally because of another carrier's conference call. We don't want to intrude on their time and their opportunity to talk to investors.

On more time, I really want to emphasize that, today, if you look at markets and the uncertainties and the challenges that companies are facing, I'm very proud of our management team and the quality of execution you see across the enterprise, and this is very evident not only in the products that we are bringing to market, not only in the distribution and wholesaling efforts that we're doing on all sides of our business, but also the discipline with which we are executing from a pricing perspective, maximizing our effectiveness in this marketplace.

So I'm proud of what we have accomplished. I really do believe that we - if we have a nice break in the market, '03 ought to be better on the higher end of that range, and if not, we certainly feel that we have given you good guidance with respect to what to expect. So we've been conservative and included different contingencies to '03. We're confident that we're on our game, and we look forward to talking to you next quarter. Thank you again.

Thank you, ladies and gentlemen, for participating in today's call.