Hartford Insurance Group Inc (HIG) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Hartford's 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 the star followed by the 0 on your touch-tone phone. As a reminder, ladies and gentlemen, today's conference call is being recorded by Intercall. This program is propriety and a copyright of The Hartford Financial Services Group, Incorporated. No rebroadcast of the call is authorized unless permitted in writing by The Hartford. No other rights of this program are given to anybody without a written agreement with The Hartford. Please step off the line if you do not agree to the terms. Now I'd like to introduce your host for today's conference, Mr. Hans Miller for Investor Relations. Go ahead, sir.

Good morning and thanks for joining us to discuss the fourth quarter results for The Hartford. Participating on the call will be the members of the office of the Chairman, which includes Ramani Ayer, Chairman, President and Chief Executive Officer; Dave Zwiener, Chief Operating Officer of the P&C Company; Tom Marra; COO of The Life Co, David Johnson; CFO of The Hartford and Neal Wolin, General Counsel of The Hartford. Also today is David Foy, CFO of Hartford Life. We will start with a brief discussion of key operating trends in the quarter and our outlook for next year by Ramani Ayer. After the presentation, we will go right into the question and answer session. In listening to this call, please 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 10K and other documents filed by the company with the SEC. Now let me turn it over to Ramani.

Thank you, Hans. Good morning and thank you all for joining us. Before we turn to questions, I will briefly review our 2002 performance and offer some comments about 2003. I'm proud that in 2002 our diversified business model demonstrated we can withstand a volatile environment. We benefited from the earnings power of our risk businesses, property and casualty and group benefits, property and casualty that's been able to capitalize in the hard pricing environment producing for the fourth consecutive quarter, a combined ratio under 100%. And group benefits earnings grew about 20%. More importantly, 2002 has positioned our property casualty franchise for solid profitable growth in the coming years. Our life businesses performed well in the challenging environment. The fourth quarter marked the end of another year of extreme equity market volatility. The third consecutive year of double digit declines and major [INAUDIBLE] and first time this has occurred in 60 years. The S & P 500s 23 point drop for the full year clearly affected our fee income. We face this challenge with good execution, continued distribution successes and product enhancements. We benefited, especially in the annuity business, from a flight to quality late in the year.

For our company as a whole, revenues grew 8% in the quarter and 5% for the full year. Operating income per diluted share grew 10% in the quarter and 64% for the year including the impact 9-11 had on our results in 2001. Book value is up 9% over year-ago. These results attest to overall solid performance in my view. Operating income reached $301 million for the quarter and $1,250,000,000 for the full year. Our operating ROE for the full year was 13.8%, within the targeted 13 to 15% range.

Now I'd like to discuss our 2002 performance by business unit. Hartford Life withstood the third year of this prolonged bear market extremely well. We did experience the impact of lower equity markets through a decline in assets under management and the resulting impact on fee income although the powerful sales of our annuity and 401(k) businesses in the fourth quarter showed that we're holding our ground well and even gaining share in key markets. In an equity market that dropped 23%, Hartford Life's operating were down just 6% for the year and 8% for the fourth quarter. Our investment products division, which include annuities and other [INAUDIBLE] products, achieved many milestones throughout the year and is well-positioned to benefit from what we hope will soon be an improving market. As we disclosed last week, variable annuity sales in the fourth quarter totaled $3.5 billion, an all time record for us. This represents a 45% increase over the third quarter and a 70% increase over the fourth quarter of 2001. Each of our variable annuity products, the Hartford Director, Hartford Leaders and Putnam Hartford Capital Manager had sales increases in excess of 30% versus the prior quarter. We expect our market share of fourth quarter variable annuity industry sales to exceed 10%. The last time our market share exceeded 10% was the first quarter of 1999.

Importantly, I want to highlight that the profitability of our new business meets our long-established pricing targets. On that note, I'd like to highlight two additional achievements. We recently received our seventh consecutive Dow Bar Award for annuity customer service and I'd add that our individual life team has just won their second Dow Bar.

Next, we have exceeded $1 billion in quarterly variable annuity sales in the independent planner channel for the first time. Total investment product sales and other deposits were $20.8 billion for the full year, up 3% over the prior year. Net income and individual annuity was down 19% in the quarter and 12% for the full year. The decline reflects the reduced level of fees collected from our lower asset base and somewhat higher debt benefit costs associated with our variable annuity death benefit features.

As you know, our other investment products unit includes mutual funds, 401(k), government and institutional business. Mutual fund sales were down, but the trend toward -- a trend turned around and improved throughout the quarter. For the full year, we sold $4.8 billion of mutual funds. We introduced five new fixed income funds on October 31, which helped build momentum as will our improving fund performance in the fourth quarter. I'm also very excited about the very strong growth in our 401(k) business. We exceeded $1 billion in sales in 2002, an all-time record for us. I believe our small case strategy is really paying off here. Individual life sales were impacted by uncertainty over a state tax laws and volatility in the markets. We produced $34 million in earnings in the fourth quarter and $133 million for the full year. Up 10% over 2001. This included our first full year of benefit from the Florida's transaction. However, for the fourth quarter, our income was down slightly and sales remain under pressure. Disciplined execution led the group benefits division to another tremendous year with fourth quarter earnings up 20%, reflecting continued strong underwriting and claims handling discipline. Both group disability and group life are at the threshold of being $1 billion businesses. We're beginning to see renewed competitive pressures here.

Internationally, our Japanese company sold more than $750 million of annuities in the fourth quarter. These numbers are in addition to the U.S. sales numbers I cited just a few moments ago. We ended the year with $1.4 billion of assets under management. This was the second full year of operations and is really a great emerging story for us. Our property and casualty company executed well, closing the year with an outstanding fourth quarter. This is testimony to our strong operating platform.

North American property and casualty operating income was $140 million, a 54% increase in the quarter and 30% higher for the full year excluding 9-11. Business insurance is building a level of consistency and sustainable performance while achieving our targeted returns. Delivering 18% premium growth and for the seventh consecutive quarter, a combined ratio under 100. Excluding, of course, the 9-11 events. We're growing market share in the right mix of classes and at adequate pricing levels. In specialty commercial, we continue to focus on underwriting and pricing in every product area and premiums grew strongly in every business segment. Although all of the pricing has not yet flowed into earned premiums, we were able to hit a 98.1% combined for the quarter and for the full year. A 10 percentage point improvement over 2001, also, again, excluding the impact of 9-11.

In particular, property and professional liability lines sustained their solid performance, taking full advantage of favorable market conditions. Personal lines continued its year-long improvement, making a lot of progress in product and pricing and I'm encouraged by the fourth quarter combined ratio of under 100 for the first time this year. We're encouraged by the positive developments in state driven pricing and underwriting in 2002. I'm looking for personal lines profitability to improve further in 2003. We're in the second year of our efforts to refocus our reinsurance business and restore it to profitability. We continue to maintain a disciplined approach to pricing and contract terms and conditions and the full-year combined ratios improved 9 points to 107.1 excluding 9-11.

There are two parts to our reinsurance book and traditional reinsurance block which delivered 102.1 combined ratio and a smaller ART book, hit by a loss in the fourth quarter. We expect to recapture the loss in the pricing going forward. Overall, we continue to see a good pricing environment, business insurance achieved double digit pricing throughout 2002. Personal lines pricing has improved each quarter. We're aggressively pushing rates in targeted states and increasing rate adequacy in several states, if not most states.

Within specialty, pricing remains strong, especially for property and professional liability where prices remain as significant levels. In our property and casualty company, the current operating climate is still favorable so we expect continued earnings growth throughout next year. Historically low interest rates in both industry balance sheet deficiencies and inadequate returns suggest that pricing will remain firm through 2003. I'm very pleased with our fourth quarter and full year North American property casualty results. The property casualty operation is well-positioned. We're successfully executing on our market and product expansion strategies, too. In fourth quarter, we added $30 million to asbestos reserves and paid claims of $45 million in the fourth quarter. We ended the year with gross asbestos reserves of $2 billion and net reserves of $1.1 billion. It's obvious that asbestos today commands significant attention and continues to be a tough issue. The litigation environment continues to develop. The policyholders have become more aggressive against insurers. And, continued expansion of the use of the bankruptcy courts, in addition to the court system, in order to address high-profile, high-dollar cases. As you know, we constantly evaluate our reserve positions. Over the past 15 months, we have taken multiple actions that have significantly increased our asbestos reserves. Given the rapidly-changing environment, an appropriate next step is to complete a review of our asbestos exposures. We accomplished three things. First, we'll scrutinize our exposures and determine the implications on our gross claims reserves. Second, we'll apply any of these earnings in the context of our assumed and rating insurance. And last, we'll be able to provide the detailed disclosure over the breakdown of exposures and reserves by category that we know investors want. We expect to complete this review in the second quarter.

Now, I'd like to focus on the earnings outlook for 2003. Looking at The Hartford in its entirety, we have a fundamentally strong business platform that is both diversified and well-positioned in its markets. We've been able to withstand significant market and economic events and earn consistent returns, responding when appropriate by making changes in our portfolio, our products and distribution and identifying new business opportunities where we can leverage our strengths. We have an outstanding management team dedicated to generating value. In our third quarter call, we shared initial guidance for 2003 operating earnings per share in the range of $4.50 to $5.00. We explained it was our expectation that results be in the lower end of the range and achieving the higher end of the range would require both that the equity markets recovered to levels experienced in the first half of 2002 and that property casualty results come in at the high end of our expectations. As of today, although P&C conditions are favorable, the equity markets clearly have not recovered to levels seen in the first half of 2002. We now expect 2003 operating earnings per share in the range of $4.50 to $4.75. This is consistent with our view during our last call. Since that time, we have taken into consideration current equity market levels as well as additional pressure on pension costs resulting from further decreases in discount rates late in 2002.

I didn't want to highlight the in fact there is organic earnings growth underlying the 2003 outlook. Expensing options, additional pension cost dilution, dilution and decreasing financial leverage will impact EPS by approximately 30 cents a share in 2003 relative to 2002. Lower assets under management has a direct impact of lower equity markets account for another 15 cents per share. These facts are important in comparing 2002 to 2003 and are fully accounted for in our guidance. So, with the completion of 2002, another remarkable year in almost any terms you might describe, I'd like to end the first call of '03 with a very brief discussion of our primary areas of focus.

The businesses within our P&C and life operations constitute, in my mind, a diversified portfolio that gives us a range of product, distribution and skills to seize opportunities and respond rapidly to merging risks. With this portfolio, we are positioned to meet our goal of consistently achieving profitable long-term growth. The bottom line is that while the last five years have been tumultuous, we have returned an average operating ROE over that period, excluding September 11th, of 14.7%. We believe that we have been good managers of capital including our buyback of more than $1 billion of stock, when that was the most appropriate action. Today, though, the times have changed. Fewer, stronger companies are being rewarded with secured ratings and attractive opportunities. We are determined to remain one of those companies. Looking to the future, we're going to take advantage of our market strengths, growing our larger businesses organically and by acquisition. The Hartford will continue to focus on leadership positions on execution and on managing our capital wisely. We're now available to take your questions.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. We will pause for a moment to compile the Q&A roster. Your first question is from Michelle Giordano of JP Morgan.

Good morning. Steve, I wondered if you could address the current capital position and if you were to take an additional reserve towards for asbestos, how much of a reserves charge could you be able to sustain without having to raise capital? And then, secondly, I was hoping that Tom Marra could address the variable annuity sales and environment, clearly sales were extraordinarily strong in the fourth quarter. Could you give us a little more color on what's going on there? And also, could you give us sort of the outlook for where you think variable annuity sales could grow in 2003? And what you're seeing so far in the first quarter.

Okay, I guess I'm first. With regards to capital and the outcome of our study, it's obviously, you know, difficult to project what the -- where we would end up with -- at the end of that process. First, I think I'd note that it's not a question of liquidity or solvency, with respect to capital. Obviously The Hartford is way over any of those bars. So, when we think of capital, it's a question of what level of capital and strength is consistent supporting our ratings at the current levels. That's really our goal when we think about capital. You know, heretofore, we were at a stable rating with each of the agencies and how they looked at the company and what stable means in terms of capital adequacy is obviously a function of each agency's methodology, and it's difficult to speculate exactly all the different things go into their analysis, but I think it would be safe to say that there's a plus or minus range of adequacy around a stable rating of hundreds of millions and a question of how many is obviously a function of each agency's approach and the various factors they consider. So, it is a series of ifs in order to address your question, you know, if we complete the study and if it causes us to increase reserves in a way that affects our capital and if that would be beyond the perimeters that one or more of the agencies felt was outside of the range that supported their current rating, that would be the scenario to raise capital. And so it's, you know, very difficult to give you an answer other than it's obviously -- if those series of ifs leaves us outside the range one or more of the agencies thought was around the current rating, we'd have to address that in order to maintain our ratings within the current level and that is clearly -- it is our strong intention to keep our ratings at our current level and to maintain financial strength consistent with them. So, it's a long way of saying that there is some point where we might have to increase capital. It would basically be the point to take you outside of the range that's consistent with the current ratings and if we got to that point we would work with the agency or agencies in question to figure out what would be the appropriate response. But, beyond that, it's really responsible to speculate exactly where the thresholds might be and if we would ever be in a position of and detriment.

What would you say the excess capital is at today, though?

Well, as I said, excess capital is in the eyes of the beholder. Ie, the rating agency. We obviously have billions of dollars of solvency and liquidity available to the enterprise. It's not a matter of traditional numbers, we're off the charts in terms of minimums there. So, again, you know, I -- you know, have gotten out of the business of speaking for the rating agencies and exactly what's the dollar amount of their methodologies, they all vary and all have different ways of looking to it. I think investors obviously can and do speak to them directly, that's the best way to get their view. My view would be, as I said, there's probably a range of hundreds of millions of capital adequacy around a rating at a stable outlook. The exact amount of that depends by agency, but, so, if that gives you kind of a sense of what's probably "excess" or at least kind of a margin around the current ratings prior to any possible outcome of the asbestos study that, would be my view. But it's going to be very interactive with the agencies and they're going to weigh all the factors, you know, that build up into their rating analysis on the company, you know, in the months to come.

Tom, Michelle, I will jump in on the variable annuity sales. We were extraordinarily pleased. It was a faraway record in the quarter for not only us are but for the history of the VA industry. The execution was the central theme. I think all of our products are now really up and running extremely well. I point to the leaders of success as really coming fully of age and totally accepted in the market. As you know, we are seeing a flight to quality in the industry, I think we surely benefited from that and our product development innovations, including principal first, surely contributed to it. I really want to reiterate what Ramani said in the opening remarks that the business that we wrote in the fourth quarter was fully profitable, right in our historical pricing targets. As we get into this quarter, I think we continue to see positive momentum. I will say it's going to be really, really difficult to keep that kind of forward pace, but I still feel good about our position and our momentum. A quick word, we're in one of those variable annuity periods for us with interest rates low, both fourth quarter and as I see this quarter developing, I think it's going to be VA leading the charge and fixed annuities playing a much lesser role, but obviously we're pleased and feel the momentum that's going to continue.

What are your sales growth goals for 2003 in variable annuities?

We'd like to do better. It was a great year '02, but I'd like to increase just a little bit over that.

Great. Thank you.

Your next question is from Nigel Dally from Morgan Stanley.

Great, thank you. Good morning. I had a number of questions. First, on the elimination of tax loan dividends. How can you give us what you expect -- what sort of impact it will have on your annuity operations? And any change in the dividend received rededuction? Any update on the lawsuit? And third, with deck balances, sort of the amortization rate slowed down in individual annuities. I want to get an explanation why. And what level would you need to see in the market, all things being equal, before you'd be forced to accelerate your amortization rates looking forward?

Let me call on Tom. Tom?

Nigel, I will start with the tax on dividends. Certainly the political environment is very unclear. The democrats are attacking the president's proposal as we speak. What we're doing as an industry is we believe that annuities should get a similar treatment, so, almost an in-kind pass through of dividends that would be paid should pass through so we can get the same treatment within variable annuities, that's actively being discussed with the ACLI leading that charge. The other thing we're looking for that's currently on the table is the lifetime annuity payout proposal, which we believe the country needs in term of people's longevity and providing incentives for people to go on these kind of payout streams that they can now outlive. So, I think our industry is very active and I'd like to think that if anything happens, we would get a like benefit, so, perhaps we can even see an improved situation regarding attractiveness of VAs and only time will tell. I think I will call on David Foy relative to the DRD.

Yeah, Nigel, on the DRD, you remember that the Congress would have to actually go in and change the law, specifically in the DRD provision. And so we'd have to wait and see if anything came out firefighter there and if they did, we'd have to, you know, react accordingly. So, there is a specific place in the law where that one has touched upon.

And a question on DAK, too, David.

Yes, as far as the DAK amortization rate it was consistent with the third quarter year to date. As you recall that in the third quarter, the market went down significantly and also our surrender rates picked up. So, we did with have a catch-up in the third quarter to get the year to date third quarter to where it needed to be. So, the third quarter stand-alone ended up being higher than we would have seen in the first couple of quarters. The fourth quarter surrender rates and the market was fairly consistent with where it was in third quarter. That's why the fourth quarter amortization rate was consistent with the third quarter rate and with what ended up being the full rate for the year. As far as the DAK balance goes, I said all year long that if the equity markets hung around the 900 level, we wouldn't have to take any acceleration that would -- would be the result of an experience on locking and so that's what happened and so we were fine there. Looking forward, though, we do assume 9% per year and eventually if the markets don't -- you know, if the equity markets don't grow, eventually we would get out of bounds there. So, we do need the equity markets to grow here over the next several periods.

Nigel, what was the next question?

All right, the last one was on the Carsar

I'm going to call on Neal. Neal, do you want to update?

Nigel, on the Carsar, we continue to fight that litigation very, very hard as we said we've been doing. The California state court is -- for the moment -- stayed the action there in favor of letting the federal court in New York have an opportunity to consider our motion for summary judgment and McArthur's motion to dismiss. We believe we had strong arguments in the litigation and continue to believe that and we're going to continue litigating this with a whole lot of vigor as we said before. That's really the update there.

Great, thank you.

Your next question is from Dan Johnson of UBS Global Assets.

Good morning, Dan.

Good morning. Actually, my question was on the VAs and has been answered. Thank you.

Thank you, Dan.

Your next question is from Eric Berg of Lehman Brothers.

Good morning, Eric.

Good morning to everyone. I actually have a couple of questions on the life side. While I certainly heard you say repeatedly that the profitability on the variable annuity business was consistent your historical expectations and current expectations, I'm struck by the fact that Citigroup and other, I think you would agree, high-caliber organizations, sharply lowered annuity seals both a sequential quarter basis as well as year-over-year. And I just happened to have have dinner the other night with another annuity executive who runs one of the largest businesses and described the business as flat. Maybe what precisely are you doing that allowed you to prosper in the December quarter when two other very big annuity companies, also quite confident, floundered? And then a question regarding the group insurance business.

Eric, this is Tom. I -- I think we enjoyed the benefit of having multiple products that work. I think I'd start with that. Planko's fully staffed and I think just executing extremely well. Within the leader's park, we get the benefit of American funds, which is, you know, certainly the fund group right now in terms of retail distribution and frankly I think our principal first feature, which is an attractive withdrawal benefit that we fully reinsured, has just been very successful, about 50%, since we offered -- began offering that product in August, we, about 50% of our contracts are electing that feature. So, I think everything just seems to be working together.

Okay. And that -- that's helpful additional detail. And with respect to group insurance, you -- you referenced, you know, Ramani, I think referenced in passing, a merging more competitive environment. Sales were sharply lower, I don't remember if across-the-board, but for several of the group products to. And premiums for the year were flattish, I think up 3%. What's the outlook for 2003? Do you think you can expand this business say in the mid to high single digits or not?

Eric, Tom again. I do think we can grow. In terms of earnings, we had 20% growth year-over-year. So, certainly --

But it all fairness it wasn't driven by the top line?

It was -- the lost costs were extremely well managed. I think the team starts with underwriting, accentuates that with the extreme management and then we have a highly effective field force that can opportunistically take advantage. Right now, you're right. The pricing environment is tough, somewhat across-the-board, but we've been here before and sticking with that discipline and I think we can grow earnings, again, albeit at a lower rate, and, you know, premium growth will be under strain, but I think we're doing the right thing and think we've proven that over the years, that formula has been very successful for us.

I -- Eric, this is David FOY. I think that the premium growth you probably should be expecting is probably in the mid single digits.

That's helpful, too. Thank you very much to both of you.

Your next question is from Alain Karaoglan of Deutsche Banc.

Good morning, Allen.

Good morning. I have a couple of questions and then Vanessa Wilson will have a couple on the life side. Ramani, was there any reserve movements in the quarter on -- other than asbestos for business within prior to 2002?

Allen, this is Ramani, I'm going to call on David to address this issue. David?

Yeah, Allen, Dave, good morning. I would say very slight movements, some slight weakening in prior years in the commercial side, some slight strengthening in personal, but very negligible.

Okay. And with respect to -- to -- to capital position,the third quarter, you raised $600 plus million dollars of capital and downstreamed $300 million into the property casualty company. Some was left at the holding company and I believe you put the $150 million in the life company in the fourth quarter. Any of that capital is -- is any of that capital still available?

Ramani, you want to take that?

Yeah. That leaves a balance of $200 million, which, you know, while we have put it for technical reasons in various operating companies right now, is fully available to be deployed wherever in the enterprise we need it.

Thank you, and Vanessa has a question.

Good morning, Vanessa.

Thank you, thank you. Good morning. Tom Marra, on the very robust sales this quarter, was there any change in the level that were 1035 exchanges that you might have been acquiring from, from other players.

Vanessa, I don't think so. There is a little debt for the year, up -- now you can hear me.

Yes.

I don't think it's material. We ended up with a little over 40% for the year. As I recall it was about the same in the third quarter. So, I don't think that was material.

Okay, and Tom, you're going to be launching new products, I guess, in May. Can you give us any early look on the -- on the features or the pricing or how -- what you expect to do at that time?

Yeah, we're -- we've just recently, in fact, one question that came up was -- was some of the sales success of MAV fire sale, because we're transitioning off of that and it really wasn't. It wasn't until early January that most of the -- the -- the distributors were even consulted on our change. Obviously we had reported it to investors and we had talked through it with a couple of key distributors in the fourth quarter, but I really don't think that change had any impact on fourth quarter. What we're going to do is probably offer a choice of death benefit, either return of premium or a new death benefit that operates a lot like the anniversary value, it eliminates the downside for us, so, eliminating the nasty tail with the surplus crunch on it and that downside would be limited to 25% of the otherwise maximum anniversary value benefits. So, we think that that would give brokers and clients a choice of traditional return of premium or a more limited maximum anniversary value benefit and in either case our capital position would be significantly improved in terms of the tail risk.

Okay, Tom. And any update on the Cigna arbitration?

The only thing I can say, again, we're bound by the confidentiality and, of course, we don't mention the -- who we have arbitration with. That's not to be made public. But the only thing I can say is that we expect to have that resolved within the first quarter and perhaps even within the next few weeks.

And last question: David Johnson, what were the changes in your pension discount rates and expected rates of return? What are they now?

David, you ready?

Yep, caught me with a muffin in my mouth!

Sorry!

The -- we changed on the -- the discount rate year-to-year because as you know, you do this once a year.

Yep.

And we went from 7.5 to 6.5.

Okay.

The earned rate assumption went from 9.75% to 9%.

Thank you.

Thank you, Vanessa.

Your next question is from Brian Meredith of Banc of America.

Hi, yeah, I have a few quick questions here and then Jason will have a follow-up. First, on the asbestos, just kind of follow up from there. If you could give me, us, a little more clarification on what specifically caused you to do it now versus say two quarters ago, were there some internal developments with paid losses or something? Or was it purely the macro environment that was causing you to -- to -- to implement this -- this study?

Okay, Brian. Now this is Ramani, first of all, as you know, we've been continually assessing our exposures and what we did in the second quarter was a more detailed ground up our other liability exposures, which caused us to recognize a need to transfer $600 or so into our asbestos reserves, which we did. Secondly, you know I've been talking to the Street and talking to investors for quite some time now, maybe several quarters about the asbestos environment continues to be challenging. You know, we're seeing more unimpaireds enter the system, accelerations in bankruptcies and we're also seeing, if you will, nonproducts type coverages getting challenged. And consequently, we, you know, felt it would be more appropriate for us to first do a more comprehensive review, which will enhance disclosure, which will put our current reserves in a ground-up type framework and recognize any additional needs if they exist and that's really the purpose of it.

Okay.

But we've been doing this, as you know, for some time.

Great. And the second question is back on the capital question. As we all know, the rating agencies aren't giving companies much credit for the price increase and you've got pretty robust top line right now. With this kind of overhang here right now of the asbestos reserve study, and I guess you've got $200 million of excess capital or capital that the holding company can contribute down. Do you have restrictions going forward on how much you can grow that business without bumping up against some capital concerns?

No, Brian, as a matter of fact, we are clearly benefiting from a flight to quality across-the-board, I think what you heard me say in the earlier -- in my opening comments with property casualty, across-the-board we're seeing a flight to quality in the individual investment products. We're seeing a very, have I good opportunity to take advantage of our brand in quality and -- and at the same time, you know, we have done a fairly good job of capital planning, so, that is not -- capital is not a problem when it comes to our growth aspirations over the next 24 months.

Great. Here's Jason.

Good morning, everybody. A couple of questions. The first, any evidence of dollar for dollar partial withdrawls during the quarter? And is it something you're able to track? And then the second question, just with respect to the $3 billion in statutory surplus at the life company, I would assume that the earnings guidance takes into account that the parent would not have to put more capital into the life company than the $3 billion can be sustained? I hoped you could confirm that with me.

Jason, it's Tom. I will probably turn it over to one of the Davids for the second part. Dollar for dollar, it hasn't been a significant event. We are able to track it. One thing we do look at is the number of contracts where the death benefit is a certain percentage of the account value and just to put it in perspective, under 1% of our enforced contracts have a death benefit that's over three times the account value. And my view is if it's a script policy, you might be talking about more like even seven or eight times account value for death benefit if they really striped it down to bare bones. So, it has not been a factor for us, under 1%, if even within that conservative range of three times the account value. David?

And on the earnings guidance is not assuming that we need to put any more capital into the life company. I think the life company is quite appropriately capitalized now and frankly even if we did put more capital in, well, you know that, changes relative allocations within the company. I'm not sure that that would have a bottom line impact if we shifted some capital down to the life company for the overall enterprise, you know, within -- within in some bounds. But at this point and I think the -- the life company is definitely stable at the current capital level. Great. Thank you.

Your next question is from Tom Cholnoky of Goldman Sachs.

Good morning, Tom.

Good morning, Ramani. I guess a couple of questions, then Joan will probably pipe in, as well. First of all, just two numbers questions. If you had after-tax investment income in the North America business and also paid losses, and then, Ramani, a broader question, you know, as I look through these numbers and look at your targeted returns on capital of 13 to 15%, if I'm doing my numbers right, you're roughly about 11.5% ROE in the P&C business and right around 14.5 in the life business with the benefit of, I guess, some tax credits. Shouldn't, at this point,an underwriting cycle, shouldn't that be significantly better? And frankly if you look at the earnings guidance you've given us for '03, it would be roughly an 11.5% ROE, well below your target. So, what can you do to really improve the returns in this business at a time when we're in a cyclical peak, certainly in the P&C business, and understanding notwithstanding the pressures on the life side?

Thank you, Tom. I'm going have Dave Zwiener -- David --

Yes, Dave Zwiener, Tom. Your question on the after-tax and property casualty, what can I answer there, the absolute number?

Yes, the absolute number. I've been asking for years to put it in the supplement. I guess it didn't get in there.

For the quarter, $197 million, up 9% over fourth quarter last year and last year, up 2% over the same period last year.

Okay. And, David, you want to take the return question or --

Let me just lead it and then flip it over to David, Tom. I assume you're looking at North American property capital as opposed to the total.

I'm looking at total P&C.

There's all the answer. David, you want to take it?

In terms of how we could improve the returns, Tom?

Yeah, I mean, you know, 11.6%, you know, at this point in the underwriting cycle, just seems low to me, you know, and it doesn't quite jive with the 13 to 15% ROE. One would think if that's your target you should be well above that target at this point in the underwriting cycle. The 11.6 is total property casualty. Correct?

Part of that is a drag on the runoff operations. We Federal Emergency Management Association, although from a shareholder perspective, those are real, we focus on the ongoing business that's continue to be in the 13 to 15 range. I think that we are reasonably optimistic that there still is opportunity to improve on the returns in '04 and I think that we look to several of the businesses where, you know, written pricing this year in '02, rather, was significantly more than the earned pricing. We think that's going to be coming through and think that's going to be, hopefully, more than enough to offset the normal capital. So, I think that '04 and potentially '05, we believe we're going to have earnings and return upside in the business.

The other point I'd add, Tom, you know, the way that we have structured this internally, the -- the capital allocated to the runoff business, you know, basically supports the runoff and the North American property casualty company runs its return targets and thresholds in the capital allocated to that.

Okay.

Hi. I have just a few questions on the life side. The first is on the -- on the annuity business. Is it fair for us to assume that your return on assets in 2003 is going to be comparable to the return on assets that we have seen in 2002? And therefore that the growth will be tied to the growth in assets under management? That's my first question. My second question is on the employee benefit line. You had a terrific loss ratio. Could you talk to the movements of your discount rate on your in-force and your new business? And are you concerned with the scrutiny of claims now that is surrounding the disability business that your very, very low loss ratio might be a flag? And, you know, the whole litigation issue. That's my second question. My third question has to do with gross losses. Your real-life losses looked lower. Were the gross losses lower, as well? Are we maybe at an inflection point where credit is no longer an issue?

Let me turn to David Boyd on the numbers questions, Tom, you can then pick it up.

Joan, on the annuity, I think the low 40s ROA in the annuities business is still a good target. I think you can forecast out the asset growth and that will allow you to forecast out the earnings growth. On the group benefits line, the discount rate has come down in the last few years, a couple of years ago more in the 6.5 range. It's down to the lower 6s range. I presume that when we do the 2003 it will come down further as rates have continued to come down. So, that's really on the numbers side.

Okay, and Joan, on the claims, I couldn't feel better about our practices. I think we operate with the utmost integrity. In fact, we call our claims function a service function and our client is the claimant and I couldn't be more proud of that team and more confident with with the way they operate. They just, overall, in the group benefits business. Just to point out, we have had great success with lost cause, but in '02, we did see premium growth of 14%. So, down toward the end of the year and, you know, sales were up 12% for the year. So, we did get growth both top line and bottom line. So, I think the performance of that division was extraordinary.

And on the gross -- on the real-life losses?

Refresh my memory again, Joan, the question is are we seeing a bottoming out of the credit cycle? My sense is that early indications are we're continuing to see an improvement from our credit cycle standpoint, we're not ready to declare victory yet. Do you have a number for gross losses, David?

Yeah, for credit impairments in the quarter, we're $83 million after tax. And that's, you know, pretty much the same as gross losses.

And that would be for the enterprise?

Yes.

And is that -- is that -- is that pretty much a -- a -- a run rate that you've seen over the last quarters? Or is that a --

The high water mark was in the second quarter. And for the year, we were the $773 million of impairments. We had very little in the first quarter. Big number in the second quarter, came down substantially in the third and we thought maybe a minor improvement into the fourth. So, yeah, I would say that, you know, for the next couple of quarters, this is probably a run rate, maybe, hopefully, you know, small, steady improvement, but, you know, the credit cycle does seem -- at least for us, the high water mark seems to have been second quarter, but we're going to continue to see friction.

Thank you.

Your next question is from Andrew Kligerman of Bear Stearns.

Yes. Two areas. On the asbestos, just to try to get a little more clarity. First, who's going to conduct the study are there outside consultants involved? If so, who? Secondly, with Travelers having taken -- and correct me if I'm wrong here, with Travelers having a survival ratio now of 16 or 17 times and Hartford at around 12 times, why or why not would it be appropriate to get your number up to around 17? And just to try to -- I know there were a lot of ifs involved in what the agencies would think, you know, might be a capital raising point, but let me throw a number out. Let's say you had to raise reserves by $400 million, do you think that would be a trigger point? And then finally on the group businesses. The benefits ratio in the quarter was fantastic it was 78%. I was expecting something more in the 80 to 82% range. Do you think the 78% is a sustainable number or do you think that 80 to 82% is more appropriate? Or even higher than that might be appropriate given the competitive environment?

Let me take the easy one first. The 80 to 82% is probably more realistic so we have had excellent -- I think Tom pointed out we've had excellent claims activity and we've done, you know, we really take a lot of pride in our claims management in this area. I just wanted to assure you that's really the reason behind '02's results. Going to the question of asbestos, Andrew, my assertion will be that we will do the best job we can. Always, as we look at something, we do a very thorough job to involve both inside and outside experts. The second thing is, you know, I -- I do not look at survival rates as being a very efficient and unequivocal barometer of what reserve adequacy or reserve levels ought to be. Our three-year survival rate at the end of '02 is around 12.4. Now we want to put our current reserves and at a ground-up type analysis. We will do that and complete it and I'd rather refrain from hypothetical evaluation and when we're ready to share details with all of you, we will. And I think that's the best approach we should take at this point in time.

Fair enough. Thanks a lot, Ramani.

Yeah.

Your next question is from Joanne Smith of UBS Warburg.

Hi. I have a couple of questions. First, I -- you talked about some success in the small case market in the 401(k) area. I wondered if you could elaborate on that. I was also wondering if you could reconcile in our minds a difference in a comment that you made about the competition and the group life and group disability markets versus what we heard from others back in the fourth quarter at their investor conferences saying that competition had eased up a bit and that pricing was a little more rational. Is this a sudden change in the market? Or is this something that you've been seeing all along. And then on the product restructuring that you're undertaking and I wondered if you could talk about, have you brought the new products to the market? What has been the reaction, you know, by the distribution system? And what early indications of sales, if you, in fact, you have launched those products already, what the reaction has been? And then I guess the other thing is -- I guess the last question and then Mike Lewis has a couple on the property casualty side, is that I understood that the ACLI had a meeting with the treasury department a couple of weeks ago on the dividend treatment for variable annuities and wondered if you had an update to that and if there was progress in the meeting? After those questions, Mike will have a couple. Sorry. Thanks.

I think we got all your questions, Joanne. Let me ask Tom to lead off on the small case disability.

Hi, Joanne. It's Tom. And we've been pleased with the 401(k). Again, we're aiming at kind of a small and middle market case. Might have a 1.5 to $2 million rollover and maybe an ongoing flow of $200,000. The way we're successful, I point to two things, one, this is great team work between planko that has all the contacts with financial advisors. And then the team of about 45 retirement plan specialists that we have that go in and close the deal and their team work has been very successful. We do have -- the other thing I'd point to, the second reason, is we've teamed up a couple of key propriety deals. One with Everett Jones, one with Payne Weber and that's been key to the growth in the sales and this year we're going to add, in the first half of the year, [INAUDIBLE] and Legg Mason, too. We're excited to see the business continue to grow.

Tom -- Tom, are you seeing mostly takeover cases or seeing new case formation?

Most of these are takeover cases.

Okay.

And the -- and typical would have a million and a half to two million that we rollover to us. On group life and disability, all I can tell you is, you know, our -- we're losing more cases to competition. So, I can't speak for the comments you've heard from others. Regarding the product restructuring on the VA side that, goes live May 1. It's just been recently that we've unveiled those changes. So far, I'd say the reaction has been positive and understanding of why we're making the change. And we will have to wait and see what that sales will do. We're personally -- or I'm personally, and the team is, pleased that we've come up with a combination that limits our downside risk if reassurance is not available, but still provides attractive offering in the market. And finally, the ACLI did meet. It's expected -- it's ongoing and then a few of us from the industry might be able to join the ACLI and advance those discretions, but it's still in the early stages.

Thank you. And here's Mike Lewis.

Okay. I just have two very quick questions. Number one: With only 1.3 points of cap losses in the year, am I wrong in assuming that maybe a 3-point is a more normal run rate? And a 20 to 25 cents per share per -- per point in the combined, if you do it 3-point underwriting for catastrophes, that impacts earnings 40 to 50 cents a share. Is that a fair way to look at Hartford's normal exposure? Or am I wrong in that assumption? Number two: When you have your asbestos results done, are you going to do what Travelers did, have a break-in conference call or do we have to wait for the end of the second quarter? Are you also reserving anything for Western McArthur? And lastly, on the investment income, you had a real sharp jump on investment income results in the quarter. I understand you raised capital mid-quarter, but I can't understand, the sequential increase seems way out of line. Should I annualize the numbers in the fourth quarter?

Let me -- I'm going to turn all the questions over to David and come back on McArthur and investments and conference call and all of that.

Mike, I wouldn't disagree with the math. We had 1.3 points of cats in '02 and 1.7 in '01. A more normal run rate would be 3, 3.5 points. I can't argue with you there. Having said that, I think that our goal would be in a normal cat year in '03, we would still be able to achieve an improvement of the combined ratio of the organization. That's what we're shooting for.

Absolutely I guess you have to put that in the freight.

Absolutely. On your second question with regard to investment income, there was a bit of a jump in the fourth quarter. I would not draw a trend line off of that. I think that you can go to partnership income, which is fairly volatile and lumpy, accounting for most of the increase. I think the full year, year-over-year, is about 2% and think, frankly, that's a better run rate for '03 in terms of that income.

Can you break it out going forward? A lot of companies are doing that, breaking it out as a stand-alone item.

David, you want to take that.

We will consider.

Okay. Thanks. And going back to asbestos and how you're going handle the conference call and how Western McArthur fits?

Michael, one thing, you know, partnership stuff is on the other assets and -- and you do -- you do, when you look at investment income in the IFS, I think there is a breakout, even in today's IFS, so, you could get a sense of that. But let me go into the conference call issues. As soon as we're ready to share our findings, we will share our findings with investors. There is no confusion on that issue. You know, this is, as I said, a comprehensive analysis. We continue to maintain that a McArthur, our defenses are very, very strong and, you know, for the longest time, you know, 87 to almost 2000, McArthur has been asserting in various forms that, you know, their limits with The Hartford have been exhausted. You know, as far as I'm concerned, what we do now with respect to a comprehensive analysis, we will complete and will share that with you. And on the asbestos, I'm a little bit surprised that when everything was said and done and with all the changes you said and the settlements and everything that went in to add to the negativity of asbestos, you only took a $30 million reserve hit in the fourth quarter. Is it that you're so positive the way you reserved prior to this? Or saying why do anything until we get the results of a study?

As we shared with you on a continuing basis, as we have had developments in the quarter, which we have not contemplated, we flew them through. That's really what happened in the quarter. With respect to the paid losses in the quarter, you know, the last two or three quarters we have had successful settlements or resolutions on important cases that are all reflected in the numbers this year. But, you know, this -- it points to the fact that we are aggressively settling cases and we will continue to do so.

Thank you very much, Ramani.

Your next question is from Michael Lewis of UBS Warburg.

Michael? I thought you were done?

Mr. Lewis has withdrawn his question at this time. Your next question is from Tom Gallagher of Legg Mason.

Good morning, Tom.

Good morning. Two questions. The first is can you just tell us what the assumed equity market performance is embedded in your new guidance? And the second question relates to, again, the strong variable in the OD sales growth. We've been hearing from a number of brokers that the principal first rotter has really been catching on. I guess looking at the structure of that rotter, it seems fairly unique to me in terms of what else is in the market right now. Can you just comment on if there are pure companies that are offering similar guarantees? And if not, how sustainable do you think having sort of the first mover advantage is likely to be?

Let me have Tom pick up the principal first and I will come back to have Johnson respond to the guidance on equity markets.

While clearly we have enjoyed some first mover advantage, but as we understand it, there will be a few that come to market. We have had -- and it is a unique benefit because it differentiates from a -- a -- a living benefit or an income benefit. This is really withdrawl benefit, which is new -- a new to its kind. I think it has been, as you say, received very well. So, my sense is the competitors are coming with like offerings.

David, you want to take that?

Yeah, obviously while the equity market performance is one of the leading factors that does impact our earnings, there are a number of other variables, all of which kind of together help us populate the range of uncertainty, which, you know, allows us to -- or requires to us express an outlook in terms of a range. I think one of the early questioners said cats obviously is an area of extreme variability on the P&C side and that can drive it in addition to things like equity markets. With that being said, I would say that the lower end of expectations is equity markets kind of, you know, flattish. You know, to where we started out the year, maybe a little bit worse. And on the upside, you'd be looking at, you know, pretty good rally between now and the end of the year. Again, you know, we look at the level that the equity markets were in the first half of '02 is not a bad benchmark to have optimism that we can recover to at some point, get rid of a war and a few other uncertainties, but, you know, it's not just equity markets that could help us up to the higher end of the range or take us to the lower. You know, there are a number of different variables, but that's kind of the range of expectation.

Okay, and so in terms of the high end, keeping all other factors constant, the high end of the range you'd feel comfortable if we were up about 25, 30% in terms of where we're at now?

Well, Mike, another way of putting it, a rule of thumb of a 1% depreciation in the equity market produces $3 million of after-tax earnings is another good rule of thumb if you wanted to look at the -- look at the environment and any other factor changes. Tom, did you want to add?

Yeah, I want to point out that if the 1% is spread out over the year it -- if it happened all the day, we'd get the $3 million.

Right, if it was all in November it wouldn't be terribly satisfying.

Okay. Thanks.

Your next question is from Jeff Schuman of KBW.

Good morning. I have a couple of questions for David and then Tom will have a couple of questions on property casualty. First, in the individual life segment it appeared that death amortization was lighter than in many recent quarters. I wondered if there is anything unusual there. Secondly it appears on my calculations that the individual annuity interest spreads have been wider than usual in the last couple of quarters. Is that sustainable? And lastly, going back to the -- the favorable claim results in group benefits, if you look at the income statement it appears that the change in reserve is considerably smaller in the fourth quarter than in many other quarters. Was there any kind of a year-end reserves there that impacted the result?

Let's take them in order. The individual life amortization was lower this quarter because the mortality was a bit higher and because it -- sorry, my Mike didn't turn on there. Start over again. In the individual life DAK amortization that, was a bit lighter in the quarter because the mortality was a bit higher. Because the mortality came through on the FAS 97 type business or the universal life business, with a higher DAK amortization rate that, did dampen the DAK amortization in the quarter. The individual annuity spread has been strong. I think the key there there has been twofold. First off, we have dropped the credited rates for the fixed account of the variable business down to our statutory minimums of 3%. Pretty much across-the-board. And then we also lowered the DCA rates for new business that, was putting a drag on spread income. So, it may not stay at quite the robust level it was the past couple of quarters, I expect it to still be strong in future quarters. And then, finally, in the group benefits operations, really, the key driver for the positive change in reserve is we've had tremendous results in terms of getting people off claims and because of that, you know, you're holding a claim reserve for someone you might expect to be on claim 5, 10, 20 years and as those people come off claims, that does release those reserves and it's all part of the real favorable experience that we talked about earlier.

Okay. Thanks and Jeff --

Yes, I just had -- this is Jeff Thompson. Two quick questions on asbestos. The first is a numbers question. I think you paid $45 million in the fourth quarter. What did you pay in asbestos claims for the full year of 2002? And then the second question, your asbestos exposure is different than the Traveler's and other companies that added to reserves in that I think two-thirds is in excess and surplus lines and reinsurance and we all know there is a delay in reporting of claims and payments. How are you going to address that in this reserve charge? And what can we expect?

Well, you know, part of our approach here is going to be a fully detailed analysis. When it comes to excess claims, it doesn't matter with respect to delays and so on, we can still address all of that in our study. That should not be a problem. When it comes to the most recent four quarters, I think our pay out was $102 million, Hans?

126.

126. I apologize, that's the number.

For 2002?

That was 2002.

Thanks. Yeah.

Your next question is from Jay Cohen of Merrill Lynch.

Good morning, Jay.

Good morning. I've got a couple of questions and Ned's going to follow up. On the asbestos issue, when was the last time you did a ground-up analysis on the asbestos reserves?

Well, Jay, as you know, we've been studying reserves for a long time, but a very, very comprehensive ground-up study was down in 1996 and then following that, you know, we tonight follow cases as we looked at cases year-over-year and so on, but this is going to be a fairly comprehensive study of both primary excess as well as assumed and seated reinsurances.

Okay, I got two more simple questions. The first is a pension expense in the income statement. Where do you show that in the numbers? Is it allocated in the segments or in corporate?

No, it's allocated. Basically allocated to all of the businesses as part of their employee compensation expense.

Great. And then the last one, I think Tom [INAUDIBLE] has a question, not sure if I caught the answer, but the paid losses in North American property casualty?

David, your mic is not on, please.

Yeah, for the full year?

For the fourth quarter, please.

Paid loss ratio?

Just, you know, after paid losses.

I'll tell you what, I will come back in a minute with the absolute dollar amounts. The paid loss ratio is 53-1.25 and paid loss expense ratio is 9.8. Let me come back to you in a minute to give you the absolute dollars.

Okay, and that includes LIA, I assume. Yes.

Okay.

And while we're waiting, if I could follow up with a life question.

Yes.

Tom, you -- you said -- I think you said you'd like to see VA sales up a little bit in 2003 and so if I -- if I sort of put words in your mouth and call a little bit 5%, the -- that would sort of suggest a quarterly run rate of like $2.7 billion or down $750, $800 million from the fourth quarter. So, it seems to me like your comments are suggesting that there is something unusual about 4Q sales. Could you talk a little bit about that?

Well, that's a fair question. I probably won't be able to give you much more than I already said. I think fourth quarter was just extremely well. As I mentioned, a lot of our competitors are going to respond in kind with the type of benefit that we've offered. I just expect -- this is a competitive industry and a lot of the ones who lost share are going to come -- come fighting back. So, we're hoping to -- to do better on what was a great year. I probably can't give you more than that, other than I think you know us and we're going to slug it out to get all the gain we can.

You know, one thing I'd like to add, Tom, I believe this is true for us, you know, as investor risk started to diminish, I really think our life operations came up a product just in time that was -- that really responded to the needs of investors and I'm talking about annuity buyers and contract holders and I really think this points to the fact that we were just in time in the market with a very good product and -- and as Tom pointed out, the takeup rates of about 50%, would suggest to you that we were just in time there, providing what our -- what our customers needed. Yeah, and it's David Foy.

Also, I'd say that sales have continued pretty strongly into early 2003 and I think that adds credibility to Tom's comment earlier that, you know, there wasn't a fire sale in the fourth quarter and, you know, this is, you know, going very well.

Great, thanks a lot.

Your next question is from Joan Seats of Goldman Sachs.

Good morning, Joan.

Joan as withdrawn her question. Next is Greg Lowcraft of [INAUDIBLE].

Hi, guys.

Hi, Greg.

Can you give us cash flow ops for the quarter and for the year, please?

Cash flow from ops? We don't provide those numbers really.

No -- I need to wait for the Q.

Yeah.

Okay. Great, thanks.

Thank you, Greg. I believe we're going to have to wrap it up now. We've gone over our allotted time.

Thank you, Hans. Once again, I really want to thank you for your patience throughout this call. We really feel very strongly about our ability to exploit the opportunities that we see in the market in '03. The Hartford should do very well in all of our business segments and secondly, as soon as we are complete in our analysis and ground-up work with respect to our asbestos studies, we will be back to you and share with you our learnings from all of this. Thank you again.

Thank you for your participation in today's teleconference.