Hartford Insurance Group Inc (HIG) 2004 Q4 法說會逐字稿

Good morning. My name is Julie and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Hartford fourth quarter conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number 1 on your telephone key pad. If you would like to withdraw your question, press star then the number 2 on your telephone key pad.

Thank you. Ms. Johnson You may begin your conference.

Thank you, Julie.

Good morning. Thank you for joining us today.

Please note that our earnings press release and a current report on form 8-K were issued last night. Our financial supplement and a complete slide presentation for today's call are available on our website, at thehartford.com.

Participating in this call will be Ramani Ayer, the Chairman and CEO; David Johnson, CFO; Dave Zwiener, Chief Operating Officer of our P&C Operations; Tom Marra, Chief Operation Officer of our Life Company; and Neal Wolin, General Counsel of The Hartford.

After the presentation we will go into the Q&A session.

As noted on slide two, we will make certain statements during the call that should be considered forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These include statements about 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 our earnings press release, our 8-K, filed yesterday, our 10-Q, filed on November 4th, 2004, and other publicly available documents filed with the SEC.

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 non-GAAP financial measures is provided in the investor financial supplement for the fourth quarter of 2004, which is available for review in the investor relations section of The Hartford website at thehartford.com.

Now moving on to our presentation, I would like to turn it over to Ramani Ayer.

Thank you, Kim. Good morning and thank you for joining us today.

Beginning on slide three and on the next few slides, I'm going to briefly cover the operating highlights of our quarter, and then I'll turn the call over to or CFO, David Johnson, for some financial comments on the quarter, our capital position and guidance for '05.

We had a great quarter, wrapping up a stong year for The Hartford. With excellent operating performance from both Property-Casualty and life, we achieved over 35 percent growth in both net and operating income in the fourth quarter.

Net income was up 37 percent to $620 million. That's $2.08 per diluted share.

This was up from $454 million last year fourth quarter, which is $1.59 per diluted share. And included in these amounts were net cap gains of $23 million this quarter and $29 million last year, fourth quarter.

Operating income rose 38 percent from last year to $596 million or $2 per diluted share. This is a non-GAAP measure, as you know. And last year's fourth quarter operating income was $433 million, which is $1.52 per diluted share.

For the full year, the Company had recorded a net income of $2.1 billion. This is $7.12 per diluted share.

With 17 percent growth in assets under management, we have momentum now going into '05. Our return on equity for 2004 was 16.3 percent, which exceeds our target of 13 to 15 percent.

And stockholders equity, excluding AOCI, reached $12.8 billion. Book value per share excluding AOCI now stands at $43.55, and that's up 19 percent over the fourth quarter of 2003.

Now, before we go into detail on the Property-Casualty and Life operating results, I want to give you a brief update on several regulatory matters. As you know, we filed our 8-K yesterday, which provides updated disclosure on litigation and regulatory developments. And we remain committed to cooperating fully with all our inquiries.

As you know we have also been conducting an extensive review, focusing on the issue of fictitious quotes as well as other issues raised by the New York. AG and other state regulators. I want to assure you that we're taking our internal review very seriously and have been cooperating fully with these inquiries. And our outside counsel, Morrison & Foerster, have made substantial progress to date.

I have to tell you, they have reviewed more than a million documents and e-mails and interviewed many of our employees.

But there is still more work to do. And as I've said before to you, we won't sacrifice thoroughness for speed. And even if this commitment to thoroughness may extend our process, I firmly believe that is what is most important is that this review is comprehensive and is conducted with the utmost care and integrity. So we don't intend to make any preliminary results public.

I believe this is the right way to approach this effort. All of us, including me, look forward to its conclusion.

Now I'm going to turn to the highlights for the quarter, beginning on page 4.

Property and Casualty operations had record operating income of $331 million in the fourth quarter. And this is up 47 percent above the fourth quarter of '03.

This performance was driven by strong earned premium growth. I also believe discipline, underwriting and expense management.

And the Property-Casualty combined ratio before catastrophes for the quarter was 89. That's more than 4 points better than than the fourth quarter of '03, and expenses for ongoing operations improved 2 points from the 4th quarter of '03.

Even with moderating prices, written premium for ongoing operations grew a healthy 11 percent over last year to $2.4 billion.

Business insurance grew 15 percent, and personal lines and specialty insurance each turned in 7 percent growth in written premium.

Small commercial was a primary Property-Casualty growth engine, with written premium up 21 percent. And pricing in Small Commercial was in the mid single digits.

And with favorable frequency, pricing remained ahead of lost cause in the quarter. And as long as we see competition being rational and margins profitable, we will focus on growth.

Broader distribution, our expand product, and enhance agency technology were all driving new business growth here. We now have 135 sales representatives focused on Small Commercial, which is up from an average of 104 last year.

And Expand is gaining momentum too. In the fourth quarter, nearly 1,000 agents wrote Expand business.

We also just completed successful rollout of our e-submission technology, and this technology make it is a lot easier to do business with the Hartford and it improves agency productivity.

So with investments like these and combined with service excellence, we expect to maintain profitable double digit growth in Small Commercial.

Now Middle Market premium grew 9 percent in the quarter, despite relatively flat pricing. Year written premium growth reflects renewal retention rates that are better than 19 -- better than 80 percent, increased local market presence, and a a flexible product portfolio.

Now, our products allow agents to tailor offerings for each customer.

Competition in Middle Market, though, is challenging, but still largely rational. Some classes of business are experiencing more aggressive price competition, like property.

We expect to achieve single digit growth in Middle Market by maintaining discipline on our underwriting of renewals as well as targeting new businesses in the most profitable classes and agencies.

Our personal lines distributed through independent agents continues to gain traction, with premiums up 18 percent over last year.

We're gaining momentum as more independent agents offer our Dimensions products. Now, with Dimensions Home now approved in 28 states, we're also capturing a larger share of the auto/home market.

Now, our AARP franchise grew premiums by 6 percent in the quarter. Written premium growth in AARP was dampened somewhat, primarily by re-insurance premiums paid in the quarter.

If you exclude the reinsurance impact, AARP premium grew 8 percent, which is closer to our recent experience.

Personal lines pricing was in the low single digits for Auto and high single digits for Home. But favorable frequency kept loss cause in check.

And so, margins really remain attractive and new business competition is reasonable. But with lower rate increases, we believe that consumer shopping has definitely slowed and fewer customers are switching carriers. We expect to maintain personal lines growth in the high single digits. And to do this, we'll expand the number of agents offering our products and increase our direct marketing to the growing AARP membership base.

Now, let me turn to specialty lines, where we recorded written premium growth of 7 percent. Here, new business growth has slowed in most lines as we maintained our underwriting and pricing discipline in the face of an increasingly competitive market.

Now, with the sale of our CRA business completed and pricing declines in most markets, we anticipate negative premium growth in Specialty in 2005.

We will continue to write and renew business where pricing in terms and conditions are reasonable and acceptable to us.

Now on slide 5, you can see our combined ratio performance excluding catastrophes for each of our ongoing property casualty segments. The 4-point improvement in our combined ratio for ongoing operations was driven by solid performance from all segments.

On the bottom of the slide, you'll note that overall Cat ratios were not significant in either period.

Business Insurance had another good quarter with an Ex-Cat combined ratio of 93.4. And for the full year, Business Insurance produced an excellent 92.5 combined ratio, excluding CATs. That was .5 points better than 2003.

Personal Lines reported very profitable quarter. Our tiered pricing and underwriting models continue to perform well. And we had a combined ration of 89.6 before Cats for the quarter and 88.6 for the full year.

And the strong fourth quarter results reflect the strength of our AARP business and the continued growth of our Dimensions products in agency.

Specialties combined ratio at 77.6 excluding Cats, and that's an almost 15-point improvement over last year's ratio. This is because of excellent experience in the Property lines as well as improving current Accident year in the Bond lines.

Now, as we look into 2005, we're not assuming the favorable frequency trends we experienced in '04 will continue throughout the year. We expect Ex-Cat combined ratios from ongoing ratios to be in the low- to mid-90s. And at this level, we'll still be writing business at targeted returns.

So to wrap up my comments of Property Casualty, we're entering a softening market, we believe we have the ability to generate profitable growth. And I believe there are really three reasons for this.

First, we have disciplined underwriting, sophisticated pricing, and good expense management. And second, we have a good mix of business. As you know, we have over 80 percent of our premium now in Business Insurance and Personal lines. And in these businesses, we will pursue targeted growth strategies.

We can quickly adjust pricing for each risk, should loss trends shift.

And finally, as pricing slows, premium growth will depend even more on great products and service and expanding distribution.

We believe we're well positioned for growth here. We have leadership in Small Commercial, a strong AARP franchise, and a growing personal agency lines business.

So now let me turn to Life operations on slide 6. Quarterly operating income here from Life was $307 million in the fourth quarter, which is up 23 percent from 2003. And for the full year, operating income from Life exceeded $1 billion, a record I'm proud of. And with positive equity markets and strong net flows, total assets under management grew 18 percent to a new high of $249 billion. And each of our Life businesses executed extremely well.

The retail products grew for recorded sales $5.4 billion in the quarter. And total net flows from retail products remain strong at $1.1 billion.

Variable annuities sales came in at $3.2 billion, and with equity market growth, VA assets under management are now nearly $100 billion.

Now, while the industry numbers aren't yet published, we believe these results will keep us in the number one spot for the industry for the fourth quarter and the full year. We expect VA sales of $3 billion and net flows of 250 to $400 million in the first quarter of this year, with some upside potential later in the year.

The acquisition of London Pacific's fixed annuity block added approximately 500 billion -- million to net flows for the fourth quarter.

Surrenders increased in fixed annuities, because the business we wrote in '94 and '95 is coming up for renewal at rates significantly below the initial rates.

Approximately 2 billion of fixed annuity assets will be up for renewal in '05.

So, unless interest rates rise, we expect net outflows from fixed annuities of approximately $500 million per quarter in the first half of the year and we expect another 500 million or so in the second half of '05.

Mutual fund sales for the quarter were 1.3 billion, and through November, we ranked 12th for non-proprietary mutual fund sales.

We have great products. And 83 percent of our funds with at least a five-year track record exceed their Lipper group average since inception.

We want to increase our scale in this business. But in order to grow, we need broader distribution and so, to that end, we have made some changes at PLANCO.

We put in place a team of wholesalers, exclusively focused on marketing mutual funds through all channels; banks, regional brokers, independent firms and wirehouse.

This change should allow us to broaden our distribution of mutual funds while maintaining separate, dedicated wholesaling for leaders a director-variable annuities.

Let me turn to 401(k). We had great sales this quarter, with new sales up 34 percent over the fourth quarter of 2003. Now, here, success was driven by improved productivity of our 80 retirement plans specialists, and excellent service, and a successful third quarter launch of Aviator.

Now, this 401(k) product, the Aviator, is specifically designed for employers with more than $3 million in plan assets. So assets under management in 401(k) have had a great performance in '04.

Assets under management, Institutional Solutions, was up 10 percent over last year to $51 billion, driven by strong net flows and a a favorable market.

Turning to individual Life, we had an excellent quarter, recording the sixth consecutive quarter of double-digit year-over-year sales growth. With momentum from all major distribution channels and expanded product portfolio, total Life sales grew 13 percent to $79 million in the fourth quarter.

What's more exciting is that variable Life sales grew -- had a great comeback, up 23 percent from the fourth quarter of '03. So individual Life has driven compound sales growth of 16 percent over the past two years, outpacing the industry.

I also want to mention that our annuity retirement plans and mutual funds teams were recently ranked number one in the Dow Barr rankings, recognizing industry leadership in customer service. And in addition, Individual Life won their fourth consecutive Dow Barr award.

So, with our scale, innovative products, broad distribution, and award-winning service, I believe that Life operations should continue to grow even in the face of increasing competition.

Finally turning to group benefits. Group benefits fully-insured premiums were 905 million, 55 percent above the fourth quarter of last year. This was driven by our acquisition of CNA's group operation, strong full year sales growth, and favorable persistency.

Now, sales were down somewhat from a particularly strong fourth quarter in '03. As you know, field integration activities earlier in the year impacted business with a fourth quarter effective date. New business quoting now, I believe, has regained momentum in the second half. And so the one, one cycle should be good, and we expect double-digit sales growth in '05.

The acquisition of CNA's group operations last January has really exceeded our expectations. We have a great group of talented people now, a loyal customer base, we have expanded distribution, and we're now in the number two position in Group Disability.

And after year end adjustments, we booked no goodwill or other intangibles from this transaction. So I believe we got very good value.

The Japan story continued to unfold in the fourth quarter, with sales at 2.5 billion. Variable annuities were up strongly, and our new fixed annuities generated over a half a billion dollars in sales.

As more distributors begin to sell these products, fixed annuities will fuel additional growth in 2005. I also want to remind that you assets under management in Japan reached $14.7 billion.

So turning to slide 7, you can see a breakdown of Operating income growth by segment. Each of our Life businesses performed very well. Only Individual Life had a small decrease in operating income. But Individual Life income was down slightly due to the unusually favorable mortality we experienced in the fourth quarter of '03.

And for the full year, operating income Individual Life was up 8 percent.

So, as stated in our press release, we had approximately $18 million of non-recurring operating income in the Life operations this quarter. And this amount was related to a change in estimate of the tax benefits for first three quarters of '04, and some final accounting adjustments for the CNA acquisition.

So to break it down, retail products benefited by $10 million after tax. And we also recorded $4 million each in Institutional Solutions and Group Benefits.

So given these unusual items, I want to provide you with some run-rate guidance. Going forward, we expect the effective tax rate for individual annuities to be between 18 and 22 percent. This may vary from year to year.

And with our current mix of business, I would say that the Group Benefits loss ratio is expected to be somewhere between 73 and 76 percent. And the expense ratio in Group will be between 27 and 29 percent.

So overall, we're quite happy with the growth and diversity of the businesses within our Life operations. And while retail products made up about 50 percent of our operating income, we're really seeing strong growth in segments such as Group Benefits and Individual Life. And so really this provides a balanced source of earnings.

Let me turn the call over to David for a discussion of our financials and capital. David?

Thank you, Ramani.

I'm pleased to report that despite a number of operating challenges in 2004, we ended the year with our capital position intact. Our capital cushion of 5 to 600 million over rating agency minimums is in place.

We also continued to build debt capacity. We focused on the Moody's debt-to-total capitalization ratio, which gives a 75 percent equity credit for our equity unit. We net ended the year at 23.5.

In 2005, we expect we will continue to invest in growth and financial strength, rather than buying back stock, but I also suspect we will revisit this tradeoff frequently throughout the year.

On page 9, we summarize a number of the adjustments for fourth quarter Operating income to demonstrate why multiplying the fourth quarter by four is not necessarily the best run rate base line for '05.

Most of these Ramani spoke to. But I would also highlight that the partnership and other investment income could be looked at as perhaps 18 million over trend line for the fourth quarter.

You turn to slide 17, we're pleased to be able to increase our guidance by $0.10. Wait, not slide 17, slide 10. By $0.10 at both the bottom and top of our range, driven primarily, as we've mentioned, by the higher year end stock market and our belief that some amount of favorable property loss frequency is likely to persist from the fourth quarter for at least a little bit of 2005.

Ramani?

Thank you, David.

Operator I would like to open it up for questions.

At this time, I would like to remind everyone; if you would like to ask a question, press star then the number 1 on your telephone keypad.

We'll pause for just a moment to compile the Q and A roster.

Thank you, Operator.

Your first question comes from Alain Karaoglan of Deutsche.

Good morning. I'll have a couple of questions, and then Vanessa Wilson will have some.

First, congratulations on these very solid results. And second, I really want to thank you for reporting so quickly after the close. It makes our life much easier and giving us all the information. And I hope other companies will do the same.

Thank you, Alain.

The question that I have is on -- the first one on the business insurance. You've had some adverse reserve development. This is the third quarter in a row that this is happening.

Could you give us some background on the reasons -- what lines of business, what years, and why we shouldn't be concerned about that going forward?

Let me turn it over to David. David?

Alain, good morning.

As you know, our approach to prior period is we do a normal quarterly actuarial review of all of our businesses, and in the case of business insurance, during the process of that quarterly review in the fourth quarter, we did determine that there was some prior period development. It pretty much in the general liability line of small commercial in this for the [inaudible] years, 2000 and 2001.

So I think on a -- on a base of over 5 billion that it's a small adjustment. And I think you'll see us make those adjustments from time to time. But I think we're very comfortable with where we ended the year, across all business lines.

Okay. In your guidance, what is -- you mentioned various changes in terms of the margins that will be stable or slightly down. Could you give us what the starting points, in terms of the margins that you're referring to, in terms of combined ratios, for specialty, for business, for personal lines, and what catastrophes are you assuming, on average?

The catastrophe ratio that I would assume -- you're talking for '05 guidance?

Correct.

We're assuming, as we have in the past, what we would call a normal level of Cats, which roughly is about three points, for the entire Company.

In terms of guidance, from a combined ratio perspective, were you looking for? By line?

Yes. Because you refer to, in the guidance, that some of the lines -- some of the combined ratios will be stable, some will deteriorate slightly in business insurance. I want to make sure I'm starting with the right base.

Alain, the -- It's David. The comparison is against full year 2004 Ex-Cat, ex Prior year.

Okay. And in the runoff business, what is the assumption that you're making, in terms of underwriting losses from the runoff business?

Alain, this is Ramani. In runoff, you know, we have about $20 million a quarter of expenses to manage the runoff. And then, in our guidance, we have assumed another $20 million a quarter of likely development. It's very hard to estimate, but we thought it was appropriate for us to, given the volatility of what we have in the runoff, to maintain that sort of -- develop a notion in the guidance. That's what we have.

Naturally, as Johnson has cautioned in the press release, we could have ups or downs from that.

Yes, and on the -- the -- I would look at the 20 million a quarter of negative development, it's equivalent of a Cat load. Obviously, we have no idea what that will be, other than we always seem to have some negative development.

But the one thing I can assure you of, it won't be 80. And I can assure you, it will not be spread evenly across the quarters.

Let me turn this over to Vanessa.

Thank you. Thank you. On the Life side, could you give us an update on the 5 percent withdrawal product and the progress there? I know it was launched very recently, but just a sense of the market reception, since you have gone somewhat of a different direction than many of your peers who are offering much more souped-up, higher-fee products.

Hi, Vanessa. It's Tom.

We're getting there. Although, I will say the traction has taken a little longer than I had thought.

First, I just want to reiterate what I've said a couple of times before, that I really do think this 5 percent withdrawal product, which we call Principle First Preferred, is the right answer for the market.

I think it gives a good basic withdrawal protection at only 20 basis points. I think it will get the traction.

Obviously, it's also good for our risk and capital management. We're -- we would be pleased to see if grow from that perspective as well.

And it is -- it was not a material part of our sales in fourth quarter. It is starting to pick up now, however, and I'm getting encouraged. Very recently it's been running around 10 percent of total sales.

I'll also point out there are a few key states we don't have approval of the product in yet, so that should help. And I think just as it further gains traction, we'll see it continue to develop. I think it is the right answer and I think it will continue to grow.

The other thing I'd point out is that, while it takes -- while it's taking up traction, the regular Principle First is declining in its sales. So it truly is replacing the 7 percent product.

Thank you. And David Johnson, your comments that you had a 500 or $600 million capital cushion in place at year end. Could you integrate your comments about the Japan capital requirements going up? And how should we think about that? Will that erode that capital cushion?

No. We fully anticipate being able to meet the emerging definition of what the capital requirements are for Japan within our organic capital generation capacity for 2005.

So, we would hope to either maintain or enhance our capital cushion and meet Japanese capital needs in 2005.

Okay. And with respect to all the regulatory issues, I just wanted to clarify what I understood you to be saying.

It sounded to me like you're saying that the market timing and revenue sharing issues on the mutual funds and some of the Annuity and Life products can be packaged separately from the broker compensation issues and you could actually have a settlement with a number of constituencies at one time on those issues and then continue your Property-Casualty investigation separately?

Vanessa, I'm going to have Neil Wolen, our General Counsel, talk about this.

Vanessa, as you know, the SEC has been looking at our mutual fund and variable annuity issues with respect to market timing and directed brokerage, so that's a separate -- the New York Attorney General is also looking at our market timing issues, which we've been disclosing for some time now.

And I would say that the issues on the broker compensation side of things are on a separate track. So that's how I would think about.

Are you meeting with the New York. AG and the SEC together?

No. We have not been meeting with them together, in general. We've been cooperating fully with each of them, but separately.

Okay. Thank you.

Thank you, Vanessa.

Your next question comes from Andrew Kligerman of UBS Securities.

Thank you. Two questions. Just, first on the P&C side. If you could follow up a little -- actually it just seemed like such an excellent quarter just to sort of focus on these negatives --

Thank you, Andrew.

Not much more to talk about. But in any event, the runoff business had a negative 65 million in prior year adverse development. Now, I think that's predominantly the reinsurance business?

Yes, Andrew. Sorry -- this is Ramani. Yes, this is really the U.K. Casualty area in reinsurance that developed.

One of the challenges in estimating these developments is, to some extent because our U.K. Casualty book is excess of loss business, we depend somewhat on ceedence to let us know, and so part of the reason you're seeing later development is because we're seeing later reporting by some far ceedence. So, that is really principally the source of development in the runoff area.

And I think I heard David say a little bit earlier in the call that the 20 million is a good run rate. Any reason why you just have that confidence that the 20 would be a better --

Well, it's -- it's -- you know, as we mentioned, and this is important that you heard him right on this one. That's what we have in guidance.

And, clearly, as David said, it could be up or down. But, you know, we always like we do in all the areas, study what's going on and do the best we can to help guide you in terms of what to expect in '05.

Okay. So on this issue, bottom line, it doesn't look there was any reason to concern you, one way or the other?

Nothing unusual.

Okay.

Then on the Life insurance side. Again, just focusing on what was an excellence quarter.

One minor negative I'm hearing is, last quarter I think I asked Tom about the wholesaler account and what was going on, and it seems like we're getting to a point reminiscent of the 90s again, where some of your competitors might be paying up big dollars to get wholesalers, and I think they may have been able to successfully get some of yours. Could you give us a little color on your wholesaling team and your retention?

Andrew, hi. Tom.

There's -- obviously, there is always going to be turnover at some level. But we're pleased with the stability of the group.

I think the other thing is, as we really make our full force effort on mutual funds, we have created now, as Ramani mentioned in the beginning, the dedicated team for just mutual fund wholesaling. And then we have two other teams, one for the director variable annuity product and then the leaders team that has done so well.

We've got lots of opportunity. So, one of the things that this arrangement has done is it's created management opportunities. So more and more I'm seeing that these wholesalers have a career path as we continue to expand our offerings and give them management opportunities in addition to wholesaling. But all in, I've been pleased with our ability to retain people.

What kind of annual retention do you have? And -- and is your compensation competitive with most of your competitors?

I think we are a competitive. We're on commission only. And that may be a difference. We tend to pay for what they produce. But that -- for the good ones, that's an upside.

I don't have exact retention rates. I can say that the turnover is -- it runs a little high. But most of those are first-year churn. That's folks that just -- maybe just this wasn't the right career choice.

I think what you were alluding too earlier and what you were really concerned about was the taking of the seasoned --

Yes. Precisely. You're just not seeing a lot of that?

We see some. But nothing that has me alarmed.

Okay. Thanks a lot.

Your next question from Dan Johnson of Citadel.

Thank you very much. Good morning.

In terms of your discussion on kind of price change within the business insurance segment. Obviously when you are renewing contracts year-over-year it makes it a lot easier to make assessments of what the real price change is. But, what do you do, especially given your good growth in some of these segments, what do you do to make any sort of assessment of the actual price change you're offering to new customers? Is there any way for you to get that data?

Well, you know, price change on new customers, we don't always have access to incumbents' prices. But you know, as you have heard us say very often, we have price level monitoring. So we have the same monitoring rigor on price levels on new business as we do renewal business.

Let me try to drill in a little bit more.

Feel free.

I guess we just hear a lot of folks talk about the price ad -- or price monitoring. Just to be clear, this is only on the piece of the business that you renew.

No, no, Dan, that's not true. We monitor prices on the new business too.

We have a way of looking at what the particular account and its exposure would need. And so we can do just as rigorous a monitoring of the account's new price and its adequacy.

We always think of it that way, but we don't always have access to the incumbent's expiring price. That's not always available to us. It is available some of the time, but not always available to us.

Okay. Maybe I will -- I'll come back at a little -- later date for more detail.

That's all I had. Thank you very much.

Thank you.

Your next question from Tom Gallagher of CSFB.

Hi. First question is on disclosuring your AK, where you commented on the possibility of a reinsurance deal potentially lowering the amount of cash infusion necessary into Japan.

Can you just comment on, I guess what affect this may or may not have on your capital cushion? I guess the first question's for Dave Johnson.

I guess the way I was thinking about it was, the last disclosure you gave on that would imply sort of the capital hit that you would take by putting money in there would be about 250 million, worst case. Can you just comment on, you know, how that sort of may play out?

Okay. The -- yes, the 250 was a net up impact of the 400 to 600 gross injection. Of the opportunity to reduce the gross, the 400 to 600 is to reduce that to 100. If then there was a net further impact on actual capital flexibility, that could reduce the 100 lower or not, depending exactly on how it's structured.

But I guess the way to look at it is, if we were estimating before the 250 net impact on capital flexibility, this could take this down to 100 or lower. So, if we are able to successfully execute the reinsurance approach, it would be a net benefit to our capital flexibility.

That being said, we had anticipated the higher capital impact in our capital planning for '05. So this would be -- and we're expecting to be able to maintain our cushion even with the higher net capital impact. So this would be a minor upside.

Okay. And have you had discussions yet with the FSA in Japan on this? And when would we expect to get an answer?

Well, we have ongoing discussions with the FSA. So it's kind of no start or stop. It's an ongoing process.

But I would expect we'll have, by the time -- next quarter, a fairly firm view about our likelihood to be able to execute this approach.

Okay. Then just another question on Japan. Just about the sales levels.

Can you just comment on, I guess, what direction those are likely to take? I guess there was a sequential decline on variable sales, but obviously the pickup in fixed more than made up for it.

Do you see variable sales leveling off here and maybe fixed picking up some of the slack? Or is this more of a -- sort of a seasonal issue in terms of the decline on the variable sales? Maybe just give a little bit more commentary on the -- I know you commented on the fixed side where you see those trending, but how about on the variable side in Japan. Do you think those are still going to be going up, year-over-year?

Hi, Tom. It's Tom Marra.

I'm hesitant to give real, you know, precise guidance here because I think it's such a new market. We know new competitors are coming into it. Obviously we're thrilled with the results we've had and particularly the fourth quarter results was good. Not only because of the number, but also that we have established the fixed annuity as really a second line of business for us.

But I think with competitive forces coming on, I just would hesitate to think that we'll be able to bang out quarters like this, you know, all year in '05. But we are well positioned.

So, I hate to be evasive, but I just see this changing. Frankly, we were surprised on the upside this quarter. And I'm just hesitant to -- to really give a specific forecast at this point.

And Tom, could you elaborate a little bit on the competition? Have you seen kind of a very recent slug of new competitors into the business? Is that affecting pricing at all? Or is it really a volume issue that maybe could dampen the growth anyway?

Well, it's -- I continue to think we're going to do extraordinarily well. But obviously we have attracted players, many of whom were already there. But I would say we're redoubling their efforts and looking at products that we've done, and as we do here, try to do a little bit better.

I also think the fixed annuity is going to see new entrance, because it's got -- the barrier to entry on the fixed side is considerably less than the variable. So we're going to be joined by a few. I don't think it will be dampen our ability to succeed, but it -- and I also think the market could grow. But we won't have it to ourselves, that's for sure.

The market really has enormous potential in terms of aggregate size, because unlike the U.S., this is still a fledgling market in the variable annuity area. So Tom, I got to let others get on the horn and ask questions, but I appreciate your questions.

Okay.

Your next question comes from Ron Frank of Smith Barney.

Yes, good morning. A few things, if I could.

One is, I was interested in Tom's response to Vanessa's question in that the sales seem thus far on the 5 percent writer product have essentially replaced, in his view, 7 percent sales. And I was wondering, Tom, if that continues, does that mean that the main benefit of the exercise ends up being risk management after all? Or do you ultimately expect it to be additive to overall sales?

Ron, I think -- I've tried to convey, I want both. I think it's a better solution for the customer. A better deal for the customer. I think there has been -- while we've been going this way, there have been other players who have been making the benefits, you know, more powerful and raising the price. So I think -- while it's taking some time for our side to catch on, I think it's something I still believe in and I think will still work and it's going to give us risk management, capital management advantages as well.

So I really do look as it as achieving both objectives.

But so far it seems only to be achieving one. So my question is, do you ultimately expect it to be additive to sales as opposed to replacing sales of the existing product?

Yeah, I do. And, you know, that's the goal. It may take a while, as Ramani said before, we're guiding 3 billion, which actually is a little bit of a decline from fourth quarter.

So it's taking time. It may be a little longer than I had expected initially. But I think ultimately it's going to be perceived as the better way to go for withdrawal benefit protection.

Okay. Two quick ones on the P&C side. One, can you give us a feel for what small business growth might be running, had you not introduced the expand product? What the growth would have -- is in sort of the original offering, if you will.

And also, the lowering of catastrophe loss estimates, did that relate to reinsurance? I know -- you mentioned that it was a net change.

The select pure growth rate, if you will, or what we call traditional, it would be probably in the area of a 10 to 12 percent growth rate. XP expand.

Okay.

I don't follow your second question, Ron.

Well, there was a mention of a reduction in the loss estimates the for the third quarter hurricanes. And I was wondering, it just surprised me, given that most companies are complaining about, you know, not being able to get through the claims process fast enough and raising numbers. I was wondering if it related to reinsurance, since you mentioned that it was a net change.

In our case, the net for us is pretty stable now, because our Cat programs are in place. And really I don't see much change in our net as far as hurricane losses are concerned

So the reduction was in the gross estimate?

The reduction was really a switch down in Personal, up in Specialty. That's just loss adjustment on a day to day basis. There's nothing there that is unusual.

Okay. Okay. Thanks very much.

Your next question comes from Jay Cohen of Merrill Lynch.

Good morning. I've just got a couple of quick ones and Ed Spehar will jump in.

Just on the pricing issue, Ramani and Dave, I guess, you suggest in the business insurance that your price increases, actually on renewal, accelerated at least a little bit from the third quarter when everything we're hearing in the market suggests things are going the the other way. And I'm wondering if you can you explain that.

The second question on the property casualty investment portfolio, what kind of spread are you seeing between new money yields in the market and your portfolio right now?

The new money yield right now I think is probably in the neighborhood of 4.5 percent. And -- somebody help me with the portfolio yield right now.

Portfolio yield's about -- after tax, about 3.9 I think, isn't it? The 4.5 you quoted is before tax.

That's pretax, yes. We'll check on that number for you right now.

On the pricing issue, I think, you know, it's a little bit of a mix between the small commercial and the mid market that I think is the answer when you look at our total BI, our business insurance pricing.

I think as we look at the full year written pricing, what we saw was for '04, pretty much flat in the mid market, which is something we would expect to continue into '05. Whereas we saw on the small commercial, which was growing faster, rates probably in the low- to mid-single digits. And I think that we'll continue to see low single digits into '05. So I think that probably would account for maybe the disparity from what you're hearing from others.

And maybe we have the -- here we are. The investment portfolio yield, again, I'll give you after tax. After tax was 4.21? That was the fourth quarter? New money rate pretax is 4.47. So we have to do it after tax and I have to get the delta you're looking for.

Okay. I just want --

The other way to think, Jay, just to interrupt, the pricing is, as we grow faster in the small business, so you saw a pick-up on fourth quarter. That's why you saw a sequential increase. Because our growth in small business in the fourth quarter was excellent.

It sounds as if you're expecting fairly stable prices in '05, relative to your guidance?

I think our assessment hasn't changed I think since the last time we chatted, which is, I think prices are trending down, fairly rational behavior in the markets that we're focused on, in the business insurance and personal lines.

But I think that we're looking for flat to positive pricing in most of our core businesses in '05.

This is Ed with one question on the annuities.

If the guidance is still 40 to 45 basis point after tax margin on annuities, which I think it is. I guess, I'm wondering why wouldn't that gravitate maybe more toward a 45 to 50 range? Given that you've had a consistently lower tax rate than I think what you've assumed for pricing. If you look at your DAK amortization this year, you've been at higher levels. Your expense deferral seems to be at lower levels.

I guess, it doesn't seem like it's too difficult to report 45 basis point margins, and I'm wondering, is there some point where we might see that gravitate upward?

Ed, this is Ramani. That is Bob Glasspiegel's question. I'm surprised you asked it this quarter. But let me turn it over to Tom.

Ed, yes, I think mid-40s would be a better way to look at it. I think -- you're right on the -- the tax rate, although I don't think you should expect to see further expanded benefit from that. And DAK amortization will be pretty stable.

But you put that all in and the expense efficiencies we've had, I'm comfortable at this point keeping that guidance into the mid-40 range.

If you looked at just fourth quarter Ex, the one-time tax benefit was about 47 basis points. But I'm more comfortable with using mid-40s for guidance.

Is there something that you expect to change then, in terms of the mix of business that you're selling, the margins on the new products, or --?

Some of the new products are lower drain. They spread commissions out more. And therefore, the ROAs might be a little bit lower.

But I -- you know, I've probably said this a few times and I think we continue to creep into the mid-40s. But there are multiple dynamics going on when you try to come to a single number. But I -- you know, looking ahead a little bit, I am comfortable mid-40s.

All right. Thank you.

Your next question from Nigel Dally of Morgan Stanley.

Great. Thank you. Good morning. Three quick questions.

First, as to guidance. David, I take it from your comments that we shouldn't be incorporating stock repurchases into your guidance numbers? Just wanted to clarify that.

Second, on the Japanese annuities. Hoping you can discuss how the potential reinsurance transaction impacts the ROE of that block of business.

And third, with the withdrawal benefit. Now that this product has been out for awhile, hoping you can give us an update on the current rate of utilization for the withdrawal benefit feature and how that actually compares to your regional expectations when you're pricing the products. Thanks

Nigel, I agree. I would not incorporate that in your models. Go ahead.

I was going to -- first on the withdrawal rate, we haven't seen anything abnormal. It's within line of what we had originally expected and has not really moved much over time.

And relative to the Japan reinsurance deal and what that will do, obviously I don't think given -- if we pull that -- if we're able to execute that, I don't think it would have a material impact on ROEs. We still can look at Japan as an ROE within the target Company range of 13 to 15 percent. And ROAs, we're comfortable guiding at 45 to 50 basis points

Okay. Just on the withdrawal benefit utilization, is that a number you're willing to provide to us?

I am willing to. I -- I don't have it at the tip of my -- Liz Lakis might know.

It's on the 70 percent.

70 percent take rate, but of the ones who take, how many take withdrawals?

It's about in the 2 to 3 percent range.

That's great. Thank you.

Your next question from Tom Cholnoky of Goldman Sachs.

Good morning. I know we're running late, so I've got just two quick questions. Or just one quick question and I'll give it over to Joan.

Number one, or just -- if, David, if you can give us a little bit more insight on the Specialty business, in particular, lines of business where you're seeing the most amount of competition. Just to give us a sense for where the premium volume decline will come from.

Yes, Tom. It's a liner here. Premium volume decline going into '05 really is going to come, first of all, from a couple of transactions. One is, as you know, we exited the crop business. And so so that's going to flow through the results in '05.

And secondly, we got off a particularly large account that also is going to play out in '05.

But that aside, I think we're probably going to see the price competition really heat up, is where you've seen already it in '04, continue in '05, obviously in the D&O area. I think that -- it's somewhat mitigated in the '04 results, given the fact that we've changed some reinsurance arrangements so we have higher nets.

But also, as you know, we have made a real push in the D&O area, in the mid-market area. We're getting good growth there, where we've actually gotten price increases in that segment. And then, the mix of business, we've mixed down much more into the private market area.

But, that said, I think the large cap, you know, public D&O is still a very competitive market, one that we're seeing our retentions go down, new business going down as a result, and that will probably continue to play out in '05.

Okay. And then, Joan?

Great. Thank you. I just have two questions.

The first is on the Group side. Do you think you could give us some insight as to how pricing is going for the first quarter of renewal season? And do you see any structural changes in the group disability market that might explain why the loss ratios are in the mid- to low-70s, relative to where they've been historically and if you think that there is some structural going on that will allow those types of loss ratios to persist?

My second question is, can you just explain a little bit more about this investigation relative to group annuities? Exactly what part of the group annuity business is being investigated?

Let me first have Neal -- Joan, I don't know if you're on a cell phone, you're sort of cutting out, but let me have Neal address the question on group annuities, and then I'll have Liz talk to you about the two things. One is the pricing change in group disability and whether or not our guidance on loss ration improvement is because of some structural changes in the industry. Okay?

I repeated your question, only because I sensed you were cutting out.

That's fine.

Joan, it's not clear to us what the New York Attorney General's office is really interested in on the group annuity issue. They've asked us for a range of information on the group annuity business and we're providing it and cooperating fully, but it's really not clear to us what they're after.

Liz, you want --

Yes. Good morning, Joan. In terms of the loss ratio for the fourth quarter, it is unusually low. You had the $4 million adjustment related to the CNA acquisition that we talked about, so that depressed it a bit. We also had very favorable mortality, primarily related to a particular association business where there's a sharing of revenue, and that gets offset in expense ratio.

So we stand by our guidance of 73 to 76 percent loss ratio for next year.

In terms of the competitive market place, as you know, it's always competitive. I wouldn't see any structural changes, you know, the small case market continues to be price competitive and the large case is more selective, less carriers in there. A little more spotty where we can pick and choose our cases.

So, I would continue to say it's somewhat similar to what we've been seeing.

So you don't think that there's anything going on that would cause the loss ratios to stay here in the mid to low 70s relative to loss ratios not that long ago that were really in the low 80s?

Joan, remember, there has been up to this point with the CNA acquisition, we did have some change in mix. So we had some more small business come on the books and that has lower loss rations and higher [inaudible] ratios. So if you're looking at historical times, you would have had more national account large cases in our book. Which, you know, when you add in the small cases, you get a different loss ratio versus expense ratio.

One way to really look at our business is to look at the after-tax margins overall on the business and you'll see that those have continued to rise.

Thank you.

Your next question comes from Liz Werner of Sandler O'Neill.

Good morning. Thank you.

I just wanted to get a quick update on your outlook for variable annuity tax legislation. I heard that there was some positive movement there.

And then, secondly, are there any changes to your sales practices that have-- that have or will impact variable annuity sales trends given the scrutiny that business has received?

Liz, it's Tom. First on the tax legislation. The Americans for Secure Retirement Act was proposed in the House last summer. Then a similar bill went through the Senate, or is being proposed in the Senate. They're largely similar.

What's happening now is they need to do the revenue scoring as to just how much this would cost. My gut tells me that it's going to be a pretty low score in the big schemes of things. Having said that, we're in a period where the whole issue of the budget deficit is going to be -- it's going to make it tough to do anything that's going to cost revenue.

So -- but we remain optimistic. I'm very active personally in this and I think it would a real boon to the business, because essentially it would mean that half of the taxes that otherwise would be paid out, would not -- would be exempt for those that are taking lifetime payouts.

So, I'm encouraged by the opportunity, although it's hard to prognosticate.

On the second issue, which is the business model in the VA, I have not seen a material change to date. I think disclosures are -- have been enhanced. I think there is a general tenor of awareness and readiness for changes in the model that might come forth. But we haven't seen anything per se.

Okay. Great. Thank you.

Operator, I would like to take two to three more questions. I think we are past our time but I do want to give people a chance.

Certainly. Your next question comes from Michael Lewis of UBS.

Good morning, Michael.

Good morning. Good morning. Real quickly, because I know it's late.

Maybe you can touch on your compensation. It seems to me the independent agent market has been moved more aggressively later by incentive programs. What is your compensation on the Small Commercial book of business, new and renewals, what's your compensation on homeowners, what's you compensation on auto. And do you give -- do you have any promotions or anything else that can put overrides on this that would make the business, you know, particularly appealing to an independent agent?

Well, Michael, as you know on comp, what we outlined for you on the last call is substantially the same. With respect to comp there is several large brokers who have asked us not to pay them contingent comp any more and we have respected and abided by that.

On the smaller agent and regional agent, as you know, the NAIC is currently meeting to address the issue of contingent comp and how to provide and what it is that they should provide by way of guidelines for companies. And we are awaiting that earnestly and we have alerted our agents, once the guidelines are in place, we will address our comp scheme in accordance with those guidelines.

So, that's what I would suggest is -- is our position at the present time.

No, but I'm really asking -- I'll give you an example. I mean, Hartford may -- not Hartford, Travelers may pay 15 for new, 15 for renewals on auto. Safeco talks about a 13.5 blended rate, 17 for new and X for renewals. --

I'm trying to get an understanding how you comp your independent agent and how your compensation varies from some of the key players in the business insurance marketplace, and in the personal lines marketplace when you're dealing through the independent agent to see if you're aggressive or conservative in your comp to the agents?

It's so hard, Michael, to give you sort of a general answer to that question, because direct compensation, which is what you're addressing, varies so much by product line, by state. For me to give you one generalization is very tough.

I would stay on the notion that I mentioned to you, which is we are in small business. Which is one area you're focused on. You know, we are a leader in that marketplace. It's less a function of our comp and more a function of our product service and distribution. That's my conviction.

Thanks very much.

Thank you, Michael.

Your next comes from Jeff Schuman of KBW

Hi. It's actually Jeff Thompson. I needed a -- just quickly, first, a clarification on your guidance. You had said the combined ratio for P&C would be in the low to mid-90s in '05. Was that including Cats? Your 3 point low?

Yes.

Okay. Just wanted to be clear.

And then, secondly, on something you just touched on Ramani, the point on contingent commissions. What should we expect in '05 in your expense ratio from not paying contingent commissions to some large brokers. Is it going to be replaced soon or later in the year? Might we see a lower expense ratio trending up? How could that play out?

Well, you know, with respect to broker comp, that's still under negotiations, so I really -- much as I would like to, I really -- I'm unable to give you guidance as to exactly where that compensation is likely to go, Jeff. So --

But by the end of the first quarter we should have a better idea of where compensation is going. We'll also have a better of idea of where the regulators might be going. So I suspect on the first quarter conference call we should be able to guide you much better on that question.

Okay, and Jeff Schuman has a follow-up.

Yes, I'm just curious, as we head into '05, I think most of us probably are expecting a lot of dramatic market growth in some of the core life lines, life insurance and annuities, sort of industry-wide, you know, got a lot of capital capacity, a lot of operating capacity. What's your outlook for consolidation in the Life space this year?

Boy, it's hard to call. This is Tom. There's still too many companies, if you ask me. And I think the technology and the scale that's required to be in the, you know, in the upper tier is expensive. So I think there's reason that there should be consolidation.

I think from our standpoint, if bolt-ons came around similar for what we've done in the past, we'd certainly be looking, and I just get the feeling, and from what I've read, that there don't appear to be any kind of blockbuster deals that are in the immediate offing. But I think there's still room to go in terms of overall consolidation.

My impression, Jeff, is that there are more buyers than sellers, if I could kind of summarize that for you. That's how we see the market.

So is it your sense that we would have to go through another cycle of maybe some capital duress to stimulate activity? Or could there be other catalysts?

None that we see at the present time.

Although, you know, just ongoing, continued competitive forces will nip at the edges for some who were probably having a hard time competing without the scale.

Okay. Terrific. Thanks a lot.

Thank you, Jeff. So let me bring this call to a close. We have extended the time here. I apologize for keeping you on the line.

I want to close by saying we had a strong quarter. We are capping a great year for The Hartford. Most importantly, I believe we're growing in businesses we like. We're also maintaining our financial discipline in an increasingly competitive environment, for both Property Casualty and Life.

And as I have said before, we believe we have the strategies and talent and the technology in place to continue to do well.

And or March 28, we have scheduled an investor day in New York, where you'll get a chance to meet the management team. You'll not only meet Tom and Dave, but you'll also be able to see their key managers. And this will give you an opportunity to better understand our outlook for the future. So I'd sure hope to see you there.

I want to thank you for participating on this call.

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