Hartford Insurance Group Inc (HIG) 2003 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to The Hartford's 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 the star followed by the zero on your touch-tone phone at this time, ladies and gentlemen. Today's conference call is being recorded by Intercall, this program is proprietary to and a copyright of the Hartford Financial Services Group Incorporated.

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 with these terms. I would now like to introduce your host for today's conference, Hans Miller, The Hartford's Director of Investor Relations. Please go ahead, sir. Good morning, thank you for joining us today

In our conference call on Monday, we reported the findings of our asbestos study and our capital and financial plans. A replay of that call is available on our website.

Today's call will focus on our 1st quarter earnings which were released last night. We hope you will benefit from the significantly increased disclosures in our 10Q as well as in our financial supplement available on our website at www.thehartford.com. In addition to our own ideas we incorporated a number of requests for new disclosures from the investment community. We expect to continue to enhance our disclosures in coming quarters and we appreciate your ongoing feedback.

For today's call, we will be referring to a slide presentation which you will also find on our website. Participating in this call will be Ramani Ayer, the Chairman and CEO, David Johnson, CFO, David K. Zwiener, Chief Operating Officer of our P&C Company, Tom Marra, Chief Operating Officer of the Life Company and Neal Wolin, General Counsel of The Hartford. After the presentation, we will go right into the question-and-answer session.

We will make certain statements during this call that should be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These include statements about the adequacy of our asbestos reserves, our capital raising plans and our future results of operations. We caution investors that these forward looking statements are not guarantees of future performance and actual results may differ materially.

Investors should consider the important risks and uncertainties that may cause actual results to differ including those discussed in a publicly available document filed with the S.E.C. including our first quarter 10-Q. We assume no obligation to update the forward-looking statements made during this call.

The discussion during this call of The Hartford's financial performance includes financial measures that are not derived from generally accepted accounting principles. Information regarding these nonGAAP financial measures, including reconciliations to the most directly comparable GAAP measures is available for review in the investor relations section of The Hartford's website at www.thehartford.com.

Now moving to our presentation, I would like to turn the call over to Ramani Ayer.

Thank you, Hans. Good morning and thank you all for joining us again this week. We have a lot of good things to talk about today.

Since we took so much of your time on Monday, my comments will be brief. I will focus on overall 1st quarter results, excluding the large asbestos charge we just announced. I'll set the stage for this call with a high-level summary of the actions we announced on Monday.

Please turn to slide three. We strengthened our asbestos reserves by $2.6 billion, bringing our three-year survival ratio to 37.2. We recorded a $1.7 billion after tax charge to 1st quarter earnings. We announced our intention to raise $1.85 billion in net capital. We're exiting the property and casualty assumed reinsurance market.

We're voluntarily adding $300 million to our employee pension plan. And we're reducing the cost of operations to increase after-tax earnings by about $130 million in 2004. I'm confident our actions remove the uncertainty around the Hartford. Now, investors can look to the future.

Please turn to slide four. In the 1st quarter, excluding the asbestos charge, operating income was up 16% to $340 million versus $293 million in the 1st quarter of '02. Diluted EPS on this basis was $1.33 per share, up 14%. 1st quarter results showed that the trends we saw in 2002 continued into the 1st quarter of '03.

A diversified portfolio worked to our advantage. We saw strong earnings in our property and casualty company and our group benefits division. Equity markets continue to be challenging, but results in our investment products in individual life divisions, continue to be solid.

In the first quarter, the S&P 500 was down almost 4% from the end of '02, after three consecutive years of double digit declines. In addition, the war in Iraq only added to investors jitters. Despite this, the business is most effective, continuing at full speed with product enhancements, distribution successes and excellent execution.

Revenues for our company as a whole grew 7% in the quarter and ROE, excluding all other comprehensive income and the charge, was 13.9% for the quarter.

Now, let us get specific. Slide 5 shows that Hartford Life contributed a healthy $157 million of operating income in the quarter. Another quarter of down markets did lower our assets in the management from the 1st quarter '02. Therefore, our results were affected by lower fee income,

Now, the S&P 500 dropped almost 4% in the first quarter, however, over the last 12 months, the average daily value of the S&P 500 had in fact dropped 23% compared to the 11% drop in Hartford Life's operating earnings. The almost unprecedented length of the market slump left its mark on our fee income. I would note that the S&P 500 at March 31st, was 848, and at the close of the markets on May 13th was 942. If this market improvement continues, the rebound in our profits will begin to come through.

More importantly, although assets in the management are down from a year ago, assets are up a respectable 2% sequentially, the second straight quarter of growth. The powerful sales growth of our annuity business in the quarter showed us that we have products that meet our customer needs. We continue to gain share in this market.

And finally on this slide, I would point out that excluding all other comprehensive income, our life operations produced a 15.2% ROE.

On slide six, I would like to share the highlights of our life business in the 1st quarter. We're very happy to maintain VA sales roughly at the level of the record 4th quarter of '02.. Our two main products, Director and Leader were number 1 and 2 in the industry. 401K sales and deposits were up 13% over prior year, and 47% sequentially. Individual life and group benefits earnings continue to grow.

Slide 7 shows the flight to quality and the ability to design and distribute products that people need which continues to benefit The Hartford. VA sales for the quarter came in just shy of the all-time record set last quarter. This represents a 59% increase over the 1st quarter of '02.

Also, you should note that we have seen a tremendous rebound in our net flows. Our net flows are over $1.3 billion posted in each of the last two quarters. Our wholesaling execution, product innovation and multiple product offerings compliment the flight to quality our distributors seek.

Most important to keep in mind is that we have accomplished this while getting full pricing for our products. Proof of this is that only 7% of our sales in the quarter were from fixed account options. As early as the 3rd quarter, we dropped the fixed account option from two of our product versions, where it was evident that spreads were not adequate.

Slide 8 shows us as importantly, the diversity of our product offerings, which when combined with our industry leading VA production, yielded meaningful overall packaged product sales for the company in the quarter. Japan continues its success with a solid $700 million in new sales, up 5 fold from last year. As we enter our third year of operation, we continue to build successful new distributor relationships, and we have high hopes for the future.

Slide 9 illustrates the positive story in our Japan AUM where assets under management have now reached $2.3 billion. This shows you our annuity products can be very relevant in international markets.

On page 10, we provide a recap of the loss ratios that our group benefits division has produced. These are amongst the best in the industry and we remain focused and committed to continually improving the economics of this business, for example, by using our abilities program to drive claims down.

Now, with asset based fees affecting overall income, slide 11 shows the positive results at the Life Company. We posted profitability in our group benefits division, improving 21% year-over-year, and individual life up 3% in a challenging sales environment for us.

So in summary, Hartford Life posted some impressive accomplishments in the quarter, posted its 6th straight month of $1 billion plus in variable annuity sales. Individual annuity first quarter net flows of $1.3 billion, including $600 million in March, the best results in five years. According to boards in the 1st quarter, the Hartford was number one in market share at 11.9% and for the first time, accomplishing the goal we discussed with you in the past, The Hartford was ranked number one in all four channels.

So, now let's move to our North American Property and Casualty Company. Slide 12 displays the very solid quarterly results, written premiums were up 18% to $2.4 billion. Operating income increased 45%, to $177 million as we produce a combined ratio of 97.7. Net investment income was up 12% as a result of excellent cash flow. Property and casualty produced 15.2%. Excluding all other comprehensive income. This is 3.3 points better than a year ago.

Turning to slide 13. I would like to summarize our P&C positions. Market trends are still very positive, particularly with respect to consolidation, flight to quality and pricing. Our P&C businesses are growing well, reducing the expense ratio, and operating at a combined ratio of 95.1, excluding catastrophes. Net investment income is also very strong.

Slide 14 represents the 5 sequential quarter trend in our P&C premiums. As you can see, we have posted a solid 18% growth quarter over quarter. This includes high teens to low twenties growth in small commercial and middle markets, driven by new business growth of approximately 20% and solid retention. Specialty was up 35% with mid double-digit growth in most lines while pricing increases and property have moderated. Casualty and professional liability premiums have been fueled by continued, very strong pricing, first in line premiums improved 6 %..

Slide 15 represents the five sequential quarter trend in P&C operating income. The 45% growth quarter-over-quarter is a result of Dave Zwiener's team's ongoing ability to execute and deliver their plans. Pricing is good and we remain disciplined underwriters.

Slide 16; to eliminate the volatility caused by catastrophes, we report that growth, excluding CATs, of very solid 59%. The only blemish in this quarter's results is the 35 million proprietary strengthening of our reinsurance code. Likewise, if we were to exclude CATs from our P&C underwriting income in the 1st quarter, we posted $77 million increase, well above the $1 million loss last year, and the 4th consecutive quarter of underwriting profit.

Excluding CAT, the quarter-over-quarter improvement in the combined ratio, as I said, was four points to 95.1. This includes the reserve strengthening in reinsurance and the previous five quarters came in under 100, ranging from 99.2 to this quarter's strong results.

On slide 17, I invite you to review the expense component of our combined ratio, quarterly trend. While the 26.2 expense ratio number is a great number, we're seeing the impact both of premium growth and the attention to our call structure which we spoke to you about on Monday.

Now, I don't think that an expense ratio that low is sustainable for us quite yet, we will continue to manage our operations to deliver best in class expense ratios. We will also adhere to strict pricing and underwriting, to drive down our loss and loss adjustment expense ratios as well.

On the last slide, slight number 18, I just wanted to share with you the XCAT ratios by line of business. The improvements in each area were significant. First in lines, aided by favorable 1st quarter frequency delivered a 91.3 combined XCAT.

At this point I don't want to suggest to you that this level of frequency is a trend. Nonetheless, these results can mean some optimism that 2003 will be the turnaround year in personal lines, the time we've been -- I mean, the year we've been talking about during the past several calls. We've taken advantage of the firm market to steadily improve our current results, but more importantly, to strengthen our strategic position.

I will ask David Johnson to now make a few comments, specifically as it concerns our outlook.

Thanks, Ramani. First, we indicated on our call on Monday that based on positive trends in the 1st quarter, we were comfortable increasing our operating earnings guidance for 2003 by 25 cents from $4.75 to $5 for fully diluted share from $4.50 to $4.75 per share. That guidance change is intended to be apples to apples with our previous guidance. It obviously does not include our asbestos charge nor our suspected second quarter severance charge. It also does not give effect to issuing new capital nor any earnings positives or negatives that we described flowing from our capital plan in the next seven quarters.

We also said that based on the estimated impact of our capital plan and assuming a $43.60 stock issuing price, we would see the opportunity for relative accretion of 17 cents from our plan in both 2003 and 2004. Again, the calculation will change based on actual conditions when we issue capital. However, I am pleased to report that based on last night's close of $45.83, the calculated accretion would increase to 18 cents for '03 and 19 cents for '04.

Also, I wanted to elaborate on the topic of book value per share using actual data from our earnings release. As of March 31, our book value per share including the asbestos charge, was $36.97 including FAS 115 and other comprehensive income, and $32.05 including the asbestos charge but excluding FAS 115 and other AOCI.

We have been asked for the March 31 numbers proforma'd for the effect of our expected capital offerings. Using yesterday's closing price of $45.83, the book value per share including AOCI, goes from $36.97 to $37.50 and excluding AOCI goes from $32.05 to roughly $33 per share.

If you further pro forma that number for nine months of earnings using our guidance range, you get approximately $41 per share for the year end book value including AOCI and roughly $36.50 per share for the year end book value per share excluding AOCI. I hope that is helpful. Ramani?

Thank you, David

I just want to close by saying customers are choosing quality companies today, you are seeing that in the market. Across the entire portfolio, The Hartford is executing well. We have great partners and strong business distribution relationships.

In our property and casualty operations, we continue to take advantage of the hard market, and in our life operations we continue to innovate and are encouraged by the signs we see in the equity markets. So we are excited to share our future results with you as we fully implement the actions we announced on Monday. I am confident The Hartford is positioned well for the long term future of our company and we expect to grow this company very well for the next several years. I am going to turn it over to you, now, for questions and answers. Operator, we will be happy to take questions, now.

At this time I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Ahram Curogolin of Deutsche Banc.

Good morning, I have a question and Vanessa Wilson will have a question as well. I guess, one question is on the expense ratio, Ramani, the specialty business expense ratio went from 32.5% down to 22.6%, that is a big drop, anything unusual happening there?

Ahlan, hi, it is Dave Zwiener, let me take that one, if I may. Really, two things are happening there, one is as you probably noticed, the top line, it was a big quarter for us and I think that the top line was driving that, probably half of that.

I think, two, is as you will probably see on the following page a big part of that growth and a substantial change in the mix in specialty was 100% R&D business, and I think that too was an affecting it as well. And the last point I would just say that higher seeding commissions in the HFP our financial product and also on the properties side are driving that but I think the primary driver there really is the growth in the quarter.

Okay, and then if I look at the loss ratio on, for example the business insurance segment excluding catastrophes, we've had significant price increases, in the mid-teens each quarter for the past few quarters but the loss ratio hasn't moved that much since the 1st quarter of last year.

I am going to ask David to pick this one up, too.

Yeah, first quarter of BI, let me answer that question a little more broadly, but I will touch on the loss ratio. I think that we feel very good about the results of the 1st quarter, I think a couple of the highlights that we are encouraged by and point to improved performance in the future, you know, one is top line 20% up. But also included the expense ratio has improved, I think there will be more that we can do there in the future.

On the losses, as you mentioned, there was an impact on the CATS, about 4.6 points of CAP losses, but if you back those out and look at the combined, EXCATS were at 94.6 for the quarter, so a strong performance there.

I think what we have done this quarter, we have provided some more disclosure on paid and incurs, I think it is on page 46, and I just highlight two things there if you want to just flip back to that for those following along: One, the paid loss ratio continues to improve, 50.2, last year were at about 52-53, and the paid to incur ratio continues to trend very favorably. So, I think that we feel very good with the quarter, I think that we feel good that the growth and earnings momentum will continue in this market and we will look forward to that.

Sorry, last question on the P&C side, if we exclude those asbestos charges, I think the earnings on the P&C side were $1.91 instead of $1.77, is that correct and if we don't have the $35 million of reinsurance adverse development that is around $22 million after tax. Is a number of $213 million for the P&C operation, including FAS but excluding adverse development, is that we are seeing this quarter?

That, first, you have got all the numbers right, this is Ramani, the 177 in North American property/casualty, the other 14 million in other operations which as we indicated on Monday's call is an area where we will now see more earnings come through because we have conservatively posted our asbestos reserves and the likelihood of further drags is very low.

And thirdly, while the reinsurance business, you were right to back that out, I have been in this business thirty years, there is always some surprises at any point in time so I would suggest that there is some adverse development one must expect in numbers, it is not an unusual event for the property casualty business and I would urge you not to back that all out.

Thank you, I know Vanessa Wilson has a question.

David, you gave us your guidance of $4.75 to $5.00, could you talk a little bit about what your assumption about the equity market is in that number and just any sense of, you know, is there a more bullish outlook on the life side?

Do you want to take that, Dave Johnson?

Yeah, the assumption that we are using for the equity market is a 9% annual appreciation rate from March 31st to quarter end, so you know 9% on an annual basis for the balance of the year is what is in there and obviously if we do better, we will do better. This is Tom, obviously we have gotten some gain in the second quarter already, but in general I would say our position across the life company is extraordinary, so we are looking to continue to do good things. In terms of the guidance we put out, that is the 9% so we are a little ahead of that so far, we know the markets are going to do what they are going to do, so that gives you that guidance. But in terms of our positioning, as you see in the results, it is strong in many parts of the life company.

And, Tom, a question on the results, I am seeing assets flowing into the general account side of the variable annuities, running about a billion a quarter, could you talk about why that is happening and does that pose any kind of asset liability management challenge for you?

No, not really in terms of ALM challenge, but most of that is coming from in force and transfers, I think Ramani quoted that other than the DCA which gets out of the general account real quickly, we only had seven percent actually elect the general account option of new premium.

We are working on ways to encourage folks to get back in the market, we think that what they are doing is certainly just taking a breather and we expect that money to return to the market. So, I--in terms of the trends, I would expect that to decline as we go forward and hopefully that is the transfer into the general account and hopefully we can reverse that.

Okay, and Dave Johnson, you said you are going to put another $150 million, maybe $125 million into the life operations surplus, is that because of an increase in the fixed or is that because of a bullish outlook on potential for growth?

No, it is $150 million, Vanessa Wilson, and we really look at that as a down payment towards building capital cushion and that was based on calculations as of March 31, so obviously as the market continues to appreciate, we actually get capital lift there.

Okay, and what is your step surplus, is it 331 in the life?

I think it is about 3 billion.

Yeah, it is about 3 billion, Vanessa Wilson.

Thank you.

And Vanessa Wilson, we have those RBC ratios displayed, too, on one of those exhibits, I can't recall on which one, but there is also GAAP to GAAP reconciliation there as well. As a matter of fact--

I saw one for year end, I didn't see one for March, maybe I missed that, I wanted the March number.

Just over 3b.

Thank you.

Your next question comes from the line of Elizabeth A. Werner with Sandler O'Neal.

Good morning, I had a couple questions on the groups benefits business. I was wondering if you might be able to comment on the pricing environment, I think you mentioned aggressive pricing among larger cases, is that something that you are seeing across the board or is that something you are seeing with just one or two competitors?

And how does it affect your view of the growth of that business going forward if you assume that your benefit ratio remains stable, right where we are right now?

Vanessa Wilson, I am going to have Tom answer that question for you. Liz, I'm sorry

Hi, Liz.

Hi, Tom.

It-- clearly we have had times where we have grown tremendously in that business, I think you recall in '02, the premiums in group benefits grew by about 14%. Our disciplined approach is just what it is, we price consistently, our underwriting stays consistent and disciplined and our claims practices are really industry leading.

So, what we have seen here is just a slow down as we think the markets are starting to get a little bit better, we are seeing signs of that. I was just with the sales team from group benefits last week and I can tell you they are excited about the rest of the year.

So, I don't think that you should read that the pricing environment has totally loosened up but there clearly are signs and I expect our disciplined approach, I think we will continue to get the good results or loss ratios that you have seen have stayed steady and in a good range and I expect we will get our premium growth back when the market conditions are ready for us.

It is typical in terms of any of our risk businesses, we move in when we think the opportunities from both a pricing and return standpoint are ripe and when they are not, we are disciplined and you will see us flex that across the board.

Okay, great, thank you.

Your next question comes from Alfred M. Capra with Putnam Royal NDL.

Thank you, I had a three part question on the principle first variable annuity product and that is, if you do choose to self insure this product, I was curious to know if the current fee structure that you have in place is sufficient to meet your profitability targets?

And, I guess the second part is, if not, would you have to refile to get a higher fee and then lastly, what would be the transition what impact do you seen on production if in fact you have to make some changes on the product?

Al, this is Tom, the hedging that we are working at getting into and we are just getting up to speed, hope to be--have that capability in the near future, would be similar to what the reinsurer is using already, so our 35 basis points is obviously based on the charge that the reinsurers are levying to us on a pay basis.

So, my expectation is when we do hedging we should be able to stay in the same range from a standpoint of the 35 basis point charge to the customer. Just as a follow-up, do you have a high level of confidence that the reinsurer is making any money on the product or is more a question of at which cycle in the market turn, you know that the product is selling or is it that you have a certain level of understanding that they are making a profit at 35 bits?

Al, this is Ramani, we shouldn't be commenting on reinsurers profits and profit margins but we know that they are a disciplined organization and they are doing the right thing.

Okay, that is helpful, thank you.

Your next question comes from Michael A. Lewis with UBS Warburg.

Good morning, I have a few questions, on the net investment income, you said the 12% growth was due to cash flow, in the last quarter you said, excluding significant partnershipping you could expect about 2% investment income growth.

My question is, how much investment income growth was there from partnership income and also what happens to the 410 to 540 million in realized gains from the partnership you are going to realize by divesting it over the next 18 months, how is that going to be treated?

That is my first question, my other question--

Why don't we answer that one and then move on to the next question?

Okay, thank you.

First on the investment income, I am going to turn that over to Dave Zwiener and while Dave Johnson is going to react to the partnership issue.

Well, two things, in terms of the 12% growth , one is clearly the cash flow, I think when you look at the change in the invested assets at the first quarter and year end you can see about a $650 million increase, I think it is pretty good proxy for the cash flow in the quarter, that is all going into fixed income.

Secondly, we are shifting the portfolio mix as David indicated on Monday and you see some of that effect in the first quarter which is to your second part of that question, the equities and partnerships that are being liquidated are also being vested in fixed income as well. We saw some part of that in the first quarter results, so I think that gave us a little lift. And I think you also asked on the partnership part of the income, 1st quarter over 1st quarter last year, in terms of the impact that had?

Exactly.

I will put a number out and somebody will correct me, here we go, partnership income in the quarter was 3 million less than 4th quarter last year, and 5 million more than 1st quarter last year. Now, let me turn it over to David.

I would just like to clarify that we are not getting any gain or loss, material gain or loss on the liquidation of those partnership positions, they are pretty much going out at carried value. The benefit to our capital there arises solely from relief from the high capital charge that the ratings agencies levy our a liquid or higher risk security..

The go-forward kind of run rate estimation of the impact of moving from hedge funds to high grade corporates on a full year run rate, say for '04, and this is actually incorporated in the slides we showed you on Monday, is about a negative 12 million arbitrage from moving the assumed investment yield on the partnership to the assumed investment yield on the high grade corporates that it would be invested in.

Thank you very much, I have just one more quick follow-up. Ramani, this is an assumption, so again, anything you say here we're not taking to the hard facts, but Hank Greenberg did a conference yesterday and he came up with some numbers for the trust fund, he said he expected the trust fund to be 90-100 billion with the insurance industry contributing 28 billion, some it I think 7-11 coming from the reinsurers.

If this proves to be accurate, what does that mean about the reserves you are setting aside for asbestos in such a scenario?

Michael, this is Ramani, here is how I would answer the question, first of all, Hank's outline of the numbers are fairly sound, the only area where I would offer a different range is the allocation within the insurance community between insurers and reinsurers, but Hank would be saying the same thing as I am about to say which is this about to be worked out.

Now, having said that I am going to lead you to a slightly complicated point here, so I am going to do it a bit slowly. The insurance industry's $28 billion assumption here is against the insurance industries total contribution of $45 billion which the insurance industry as such will have to put up over time or in whatever manner they choose to depending on the individual players.

Having said that, now moving to our reserves, there are three points I would make vis-a-vis our returns, first, they have been set conservatively and comprehensively, second, they have been set assuming no legislative relief, and as I have mentioned on the call on Monday, you know clearly our assumptions therefore in our reserves.

There are frictional costs, meaning litigation costs plaintiff side and defense side will continue, and, therefore, whatever relief we get as a result of legislation will naturally benefit our shareholders; too early to tell how that will all play out. Thank you so much.

Your next question comes from Jeff Shuman with KAB.

Jeff?

Jeffrey Thompson from Property Casualty. On the life side, I was wondering if you have any updated thoughts about the individual life business, given historical reliance on the variable market which really hasn't come back. Any ideas where you want to take that business going-forward?

This is Tom. Clearly we -- over the last six months, needed to reposition, to have both a variable life and universal life presence. That is now complete, so we have much more balanced book of business, and I think we've already seen it as the UL is beginning to pick up. It's going to take a little while for us to get back in a mode where we're playing with both products.

Remember, we ran almost solely with variable life for many years, and it did it quite successfully, so, with a little time, I expect that this balanced portfolio is going to get us back the numbers that we'd like to see in that business.

Going-forward, do you see yourself maybe having the ability to respond a little more quickly to shift some product preferences, or are you satisfied with the time it took this time?

No, I'm not satisfied with the time it took. We -- in part, felt that variable life would not fall as quick as it did. I will admit personally, I was fooled on that one. But there's no problem in our machinery in terms of our ability to execute, in terms of speed to market. We just didn't make the call as early as we would like to have.

Okay, and it's Jeffrey Thompson, I had a question on personal lines underwriting results. Maybe you can be more specific with personal auto but the underwriting improvement was more dramatic. I was wondering you could quantify how much came from setting the 2003 accident year lower, and how much was from prior year releases?

We don't intentionally set an accident year lower other than intent to make a very fair and rigorous estimate of the accident year. So I'm going to say that, you know, we saw in frequency decline, fairly dramatic frequency decline in the first quarter, so let me have Dave pick it up.

We do show on page 46 the prior year development, and it was a zero for personal lines, on the 1st quarter, we're pleased with the results, I'd say probably a function of three things, one of which I'm confident will continue, the other two I'm less confident.

One, as Ramani mentioned, we, like many of the other big auto players, we saw negative frequency in the quarter. It's unclear what may have caused that from people watching television to a slow economy and so forth. We're reasonably confident that's not going to continue forever.

So I think that was a short term positive too.

It was a light cash quarter for us and for others, and obviously, the second quarter started off differently with the hail storms in Texas, the tornadoes in the mid part of the country, so I think you're going to see a more normal, even slightly higher than normal CATS expenses in the 2nd and 3rd quarter’s so those two things I think are going to dampen the performance in the 2nd and 3rd quarter.

The one thing that did close better in the 1st quarter is execution. We've been talking for some time in terms of what we're doing and getting rate from the state. What we're doing in terms of moving to a state management program. We're now 85% rate adequate. And the stakes we operate will be 100 this year, and I'm very pleased with the kind of rates we've been getting.

You're seeing that coming through. And I think that that's going to continue to show some improvement for us quarter-to-quarter, along with the next year XCAT's.

You said that the change in prior years was zero, is that true individually for personal and homeowners, personal auto and homeowners?

Yes.

And so thinking about it going-forward, the best way is to try to normalize what was unusually beneficial this quarter, and then incorporate what you're doing on the ratings sides, which probably likely will show a number, maybe 95, 96%, isn't an unreasonable assumption going-forward?

That's what we're driving for in a normal XCAT environment. We're driving for sort of a mid-90 performance on the personal lines, we've been very pleased with that here in 2003.

Great. Thank you.

You bet.

Your next question comes from Robert Siegel with Langan McGallity.

I'd like to talk about the basis points you have been running. You take beginning and ending averages, it was actually up sequentially. I was wondering if we could get in what may be behind that. What the trend is in margins, and specifically your a.m. or the race rate sped up even though your surrenders were the lowest level in 5 quarters. So that could be a piece to it, but if you could explain that as well?

Thomas?

Yes. Hi, Bob. What happened, you can attribute it really to the amortization rate being up, which is essentially as the profits came in lower, in the 1st quarter, that did cause a true up of prior years that ended up with a little higher amortization. In terms of my--

Sir, if I could just cut you off on that --

Yeah.

How much was that true of?

About 16 1/2 million.

Okay.

And so essentially, I look at the margins, I'm still comfortable with the 40, clearly what we're -- as Ramani mentioned in the talk, we're pricing at our required return on equity, I still feel pretty good with the 40 basis point margin.

Well, it seems pretty good. I mean, we have 11% bounce in the market this quarter, and average assets should be on the lot. About 16 1/2 as a one-timer, why shouldn't it be feeling we're doing very good.

We'll take that little pocket in the market. If we get it, we'll take more.

I can't tell if you're low balling or --

We've been saying 35 to 40 for a long time, and since we've consistently hit the 40 the last few years, I'm very comfortable with that.

Thank you.

Your next question comes from Ira Zuckerman with Nutmeg Securities.

Ramani, a couple questions. On the proposed offering, can you give us a little better picture on what type of convertible or equity link product you're planning to offer?

Let me turn that over to David Johnson, Ira.

Yeah. I'm sorry, we're really not able to talk in any detail about our capital raising plans, we're not offering securities.

We'll, you know, have a equity link security in the capital plan for about $600 million of the total $1.6 billion raise of equity and equity linked. And, you know, that's the little detail we're able to give today.

And I have another question. Can you give us an idea what kind of experience you've had since the end of the quarter, both in terms of cap losses and in terms of variable product sales?

Let me turn it over to David to talk about CAT losses, and then well will talk to you about variable annuities too.

Ira, at this point I would estimate total CAT losses, net CAT losses after tax probably in the range of $30 million so far. That would include the storms in Texas, hail, and the tornado impact. But it's early days, that would be a good estimate right now.

Okay. Thank you, David. Tom?

Annuity sales stayed very strong. In fact, net sales even improved further from the $617 million that Ramani had mentioned. I think that's going to be a growing story for us. But we're now adding to the asset base that -- where we earn our revenue, because we're having the best net sales in over 5 years, I think that's a real growing story for us.

Thank you.

Your next question comes from Tom Gallagher with Legg Mason.

Good morning, Tom.

A few questions on annuities also. The first one is, can you comment on whether you had seen spreads compression based on -- or the trend for activity moving out of the separate to the general account within your VA products.

The reason I ask, simply thinking about the math here, I presume you're investing in short term assets and also looking at probably 3% minimums there, I would expect there to be some compression.

Do you want to take that question?

Yes. Well, they actually reduced credit rates, pretty much we're down at the minimum. Our spreads in fact have held up quite well. I just want to comment going-forward, doing a few things, we've closed our fixed account and in two of our products, and with our new product that comes out next month, in 40 states which represents about 75% of our premium volume, we will be going down to 1 1/2%.

So on the in force, I would say we're clearly holding our own, where we're -- we're in the range where we want to be. Going with some of these newer changes to the product and ability to go down 1 1/2, I think we'll be in good shape.

Just a follow-up on that. If people on older contracts continue to move money to the fixed pocket. I appreciate that you're trying to -- hoping to have that shift in the other direction, but if that does continue, would you expect there to be some margin pressure in looking at the next few quarters?

Yes. On that end force, the spreads tighten a little bit. Again, I don't think it will be in the -- in the size that would cause us great concern, but if we get that trend that doesn't go the other way, and we're moving -- we can't go below the 3% end force, we would see a little spread compression.

Okay. And then just a follow-up -- or rather, a question on the actual structure, the commissions that you mentioned that you're seeing now for variable annuities. I've been hearing from a number of distributors that they're selling L share products? I guess moving to a lower up front, higher trail product that has a 3-year surrender, have you all been experiencing that and can you just comment on what percent of sales are L share?

We do have that product. We're actually moving it from a three-year to a four-year surrender charge next year. I believe the utilization is in the mid-30s. So it has been a popular option, the other one is the -- the other one that's a popular choice for us is the B-share structure or the traditional 7-year surrender charge program. One that's growing is an A share, we think may grow in the industry, perhaps, and that's where the loan is actually paid up front.

And one more question on that. That's it. The -- is this for the industry and for yourself, is this potential persistency problem down the road? And just curious, based on -- I guess you could use different assumptions, if there is only a three-year surrender.

Or maybe to ask it a different way, what gets you comfortable that the DAK carried with that, and, you know, how long you expect those products to stay on the books, where there won't be a DAK or a persistency problem down the road?

Well, our persistency, the way these fr designed is after the surrender charge expires, in our case, in our four-year surrender charge product, we'll even start -- the basic thing is a 1% trail that goes with it at the end of the period. That helps persistency a lot. We've seen a little more higher surrenders in our core product and that is all reflected in the DAK..

We do expect that persistency is going to be quite strong. This is what a lot of brokers are looking for, they're looking for a way to get fee income on their book of business. And 1% is a very healthy trail.

Thanks a lot.

Thank you.

Your next question comes from Gail Golightly with Wachovia Securities.

Thank you.

Thank you. Could you please tell us what the dividend capacity looks like for this year from the insurance companies?

We're quite comfortable that we have more than adequate dividend capacity to cover all our company holding needs.

All right. Does that mean that there's not a negative --

I'm sorry, could you speak up a little bit -- I just missed, you were cutting out?

Okay. Does that mean that there is not a negative unassigned surplus in any of the companies as a result of the surcharge?

No, there will be that condition in the fire company, but we're comfortable that we'll have the appropriate approvals for the -- so that that will not be an issue on dividend capacity.

So the dividend capacity will require regulatory approval, is that correct?

Yes. But we're come that that will -- comfortable that that will not be an issue.

Thank you.

One last question, operator?

Okay. Your last question comes from Joan Zief with Goldman Sachs.

Thank you. I was wondering if we could just go back to the investment area, the annuity area. Could you talk about what type of growth you think there is in the variable annuity business. I know you've had very, very strong sales and it looks like you're growing significantly faster than the industry. I'm just curious what you think the industry growth rate is of the market in variable annuities.

My second question is, could you give us a split in your sales between director, leaders, Putnam? And then my final question is, if you could talk a little bit about the GIC market, your group annuity area, are you seeing opportunities there as other companies have stepped back? And was there -- is there anything, any trend that you either like or dislike in that area?

Okay. Joan, hi it's Tom. Going in reverse order, the institutional investment market is one we'd like, we're good at it, we have good risk parameters and we've had good results from that operation, so I look for that to grow.

In terms of the first quarter sales, Leaders was almost 1.8 billion, Director 1.6 billion. Putnam would round up to 100 million. But we are pleases with what's happening with the Putnam product. It's clearly still small, but turning the corner, and we think the Putnam business will rebound nicely. We're particularly pleased all around. The Leaders, obviously, they're now number one in the industry, with Director being number two. So we couldn't be more pleased with the position of those two products and Putnam only makes better.

In terms of the industry growth, clearly, I think variable annuities are getting another look by the individual investor, so I would expect the industry to, perhaps it get back to double-digit growth again, and I think the --if this market continues to improve, we do expect the industry to do quite well.

I caution a little bit, our current sales, while as good as they are, you know, competitors are coming in with some of the features we've been using, there are several good competitors, so what I'm expecting as the overall industry grows, we're going to do everything we can to keep up the pace we set for ourselves.

Thank you. On the GIC business, are you seeing spreads compress a bit?

Not for us, because the business doesn't meet our spread requirement, we simply don't get it.

Okay. Thank you.

Thank you, Joan. I want to bring this call to a close. I really appreciate your participation on the call. And your participation on Monday.

Once again, I want to close by saying we have really cleared the principle issues off the table and I believe this gives investors a real chance to focus on our execution and our future. And I do want to re-emphasize that both operations, Life and Property Casualty are doing an outstanding job in the market. I thank you, and I look forward to continuing conversations with you.

Operator, this concludes our call. Thank you very much.

Okay. This concludes today's Hartford conference call. You may now disconnect.