Hartford Insurance Group Inc (HIG) 2005 Q1 法說會逐字稿

Good morning. My name is Amanda and I will be your conference facilitator. At this time, I would like to welcome everyone to the Hartford first quarter 2005 conference call. All lines have been place on mute to prevent any background noise. After the speakers' remarks there, will be a question and answer period. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to Kim Johnson, head of investor relations. Please go ahead, ma'am.

Thank you, Amanda. Good morning, and 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, Chairman and CEO; David Johnson, CFO; David Zwiener, Chief Operating Officer for our PC Company; Tom Marra, Chief Operating Officer for our Life company; and Neal Wolin, General Counsel of the Hartford. After the presentation, we'll go right into the question and answer session.

As noted on slide 2, we'll 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-K filed on February 28th, 2005 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 principals. Information regarding these non-GAAP financial measures is provided in the investor financial supplement for the first quarter of 2005, which is available for review at the investor relations section of the Hartford's website at thehartford.com.

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

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

Beginning on slide 3, I'm going to briefly cover some highlights of our quarter. Then before Q&A, I'll turn the call over to David Johnson, our CFO, for our revised outlook and guidance for 2005.

The strong momentum that we built in 2004 continued into 2005, as we experienced record net income in the quarter. We achieved over 17% growth in net income and 16% growth in operating income in the first quarter. Of course operating income is a non-GAAP measure. Both Life and Property-Casualty operations have posted strong returns.

Net income was $666 million, or $2.21 per diluted share. This was an increase from the $568 million, or $1.93 per diluted share in the first quarter of 2004.

As we noted in the press release, our first quarter results included charge of $66 million or $0.22 per share to establish a reserve for investigations related to market timing and direct brokage. This reserve is only an estimate. The final number may be higher or lower as discussions move closer to resolution. I want to be clear here. These investigations are ongoing and no formal action has been taken against the Company. As we have said before, we believe that full and complete cooperation is the only way to approach these issues. We're working to give regulators what they need to conclude their work so we can put these matters behind us. Our job every day is to live up to the highest standards of trust and integrity.

Our operating performance this quarter shows that our management team remains focused on building shareholder value. Operating income rose 16% from last year to $583 million, or $1.93 per diluted share. With growth in our asset accumulation businesses, assets under management grew 11% and our ROE for the 12 months ended March 31st was 16%. Even including the significant catastrophes of 2004, this ROE exceeds our long-term target of 13 to 15%.

Excluding AOCI, shareholders' equity reached $13.5 billion, and book value per share, also ex-AOCI, now stands at $45.60, which is up 17% over the past year.

Turning to slide 4, I'll briefly review the property-casualty highlights for the quarter. Our property and casualty operations posted 8% written premium growth and excellent underwriting results. Written premiums reached $2.6 billion for the quarter. Operating income of $386 million was up 30% over the first quarter a year ago. The combined ratio for ongoing operations was 88.6, 1.2 points below first quarter of last year. This improvement reflected continuing favorable lost cause trends and strong earned premium growth.

At our investor day, we told you that our goal here is to deliver attractive returns and grow the Company. As you look the at quarter, you will see our growth rates varied significantly by line, reflecting the current pricing and competitive environment.

Overall, Business Insurance reported an excellent combined ratio of 89.8, with written premiums up 9% over prior year. In the middle market, competition intensified during the quarter. Written pricing dropped almost 3%, but with favorable lost cost trends our margins remain more than adequate. With slower new business offset by good retention, net premiums in middle market were flat to a year ago.

In contrast, new business in Small Commercial was very strong. More agents began to sell The Hartford's Expand product. We were able to increase new business by 23% compared to last year's first quarter. This, combined with excellent retention rates, drove net written premium in small commercial up 18% and margins in this segment continued to expand during the quarter, driven by modest price increases and favorable lost cost trends.

In Personal lines, underwriting results were also very strong with a combined ratio of 85.8.

Competition, while intensifying in Auto, remained largely rational. As companies sought to retain their customers, Auto pricing was essentially flat and Homeowners had modest rate increases.

We had good growth in our AARP Personal lines, with net premiums up 5% from a year ago, and we achieved a double-digit growth in agency written premium.

A larger sales staff and our new agency quoting technology, called Expressway, is engaging more agents and increasing productivity.

Partially offsetting the growth in Agency and AARP was a reduction in net-written premiums from our non-standard segment, Omni, and our other affinity business. Overall, our personal lines written premium grew 3% in the quarter.

So to sum up, pricing in Property-Casualty continued to slow during the quarter, but profitability remained quite strong. We're managing our growth in a disciplined way. Where pricing is adequate and competition rational, we will grow our top line. As competition heats up, we will remain selective and may need to sacrifice growth for profitability.

We have not changed our views on a soft landing for the cycle. Our ability to achieve targeted returns is clearly intact. We have revised our outlook, however. In a few minutes, I'm going call on David to cover those assumptions in detail.

Now, before we do that, I'd like to turn to the Life highlights on slide 5. Operating income for Life operations was $238 million, with sound strategies and good execution, each of our Life businesses reported operating income growth of 15% or more over prior year. And total assets under management reached $250 billion.

At our investor day, we covered the plans for each of the Life segments in detail, so this morning I'll only comment on a few highlights. This chart shows the power of our diversified retail asset businesses. As variable annuity sales in the U.S. leveled off in this quarter, our Japanese business and other retail products drove growth in global sales and deposits. Total retail sales and deposits reached a record $9.6 billion in the first quarter.

Japan sales growth even exceeded our expectations. Total annuity sales in Japan were $3.8 billion with $3.1 billion in variable annuities. Fixed annuities, which were launched late last year, reached 18% of total sales. I want to remind you that the first quarter was the end of Japan's fiscal year and competition is increasing every day. As such, we expect sales in the second quarter to be lower.

In the U.S., variable annuity sales were $3.1 billion for the quarter, and net flows came in at the high end of guidance at $412 million. 9% of new sales in the quarter selected -- I mean, 9% of new sales in the the quarter selected our Principal First Preferred Rider. Each month this rider is gradually gaining traction.

As we look to the second quarter, we're very excited about the early May launch of Director M. As we add Fidelity, Oppenheimer, Van Campen, Lord Abbott and Alliance Bernstein to our fund lineup, Director M now will offer 20 funds that currently have four or five-star Morningstar ratings.

We continue to drive industry-leading operating efficiency in individual annuities. Operating expenses for the quarter were less than 18 basis points and operating return on assets topped 48 basis points.

Going forward, we expect to maintain return on assets in the high 40s. As we discussed in March, our 401(k) and retail mutual funds are growth engines for life operations. Taken together, these two lines drove more that $1 billion in net flows for the quarter. With additional seasoning of our 401(k) retirement plan specialists and 90 dedicated Planco wholesalers, focused on mutual funds, we anticipate continued growth in these retail products.

Assets under management for the Institutional Solutions group topped $51 billion. And sales of our successful Income Notes product exceeded $800 million in the quarter. Group benefits recorded strong persistency and 10% sales growth in the quarter.

Sales of Group Disability increased 42% over last year, driven by improved sales productivity and a strong January first cycle for national accounts. Operating income for Group Benefits was up 26% to $59 million on fully insured premium of $912 million. Earnings were driven from disciplined underwriting, expense management, and higher net investment income.

Finally, Individual Life continued the momentum it established in 2004. Growth in Life Insurance end force and account values helped drive operating earnings up 15% over last year. With our balanced portfolio of Life products, we're well positioned for any market environment. Overall, we had a very strong quarter for Life operations. Our strategies are in place and we continue to execute well in every business.

So with that, I'm going to turn it over to David to review our revised guidance. David?

Thank you, Ramani. I'll start at slide 6.

First I'd like to confirm what's in and what's not in our guidance from the first quarter. The only thing excluded is realized gains and losses. Our 66 million regulatory cost accrual is included in the full year guidance. Any other unusual items of this sort that might arise in the future, of course, are not in our guidance.

I have just a few comments on our Life businesses. Our guidance change for Life operations reflects few changes in our outlook versus where it stood at the end of January. Obviously the big wild card is the equity market. Our call is based on U.S. market levels at the end of March and they clearly have been volatile ever since. If our assumptions do not hold and the U.S. market stalls out at current levels, we could have $0.5 to $0.10 of downside. Now, that in itself would probably not take us outside our guidance range, but it could, if combined with other things.

We think our VA sales and net flows have found support at the levels achieved in the first quarter. We believe we can produce performance consistent with those levels in the second quarter.

As we have mentioned before, we have roughly 2 billion of fixed annuity assets up for renewal in 2005. Unless interest rates rise, we do expect net outflows from fixed of approximately 500 million in the second quarter and another 500 million or so over the last six months of the year.

Final note on Life: the Institutional Solutions group segment is a little strong in first quarter versus our expected run rate for the rest of the year. We recognized $6 million after tax in deferred gains on two large case surrenders. So please do not move your models up to a higher run rate here.

Moving to Property-Casualty on slide 8, Business Insurance, as Ramani described, is a great story. In January, our guidance assumed that full-year combined ratios, ex-CAT and prior year development would be up slightly versus 2004. Today we would look for them to be essentially flat full year over full year, though sequentially the guidance does assume quarterly combined ratios in this segment rise through the balance of the year. Also, it is worth noting that the expense ratio in the first quarter is a point below normal. We released some contingent commissions we had previously accrued for.

At our investor day in March, I think the team did a fine job of articulating the strength of our small commercial franchise and our ability to source quality growth in a variety of market conditions. You certainly can see this in our first quarter written premiums. Based on our confidence in our Small Commercial business model, we are not backing away from our projection of double-digit 2005 written premium growth in the business insurance segment. Obviously this will be driven by Small Commercial. Middle market is clearly seeing cycle pressures.

Tallying it up, Business Insurance is a net contributor to our increased guidance, due both to first quarter results and to a lesser extent upside in the balance of the year.

Personal lines largely met our expectations in the first quarter, but for the balance of the year, we are slightly less bullish than before on written premium growth. We now see full year written premiums up mid single digits versus full year '04. Before we were high single-digits.

We're still pursuing solid high single digit growth in Agency and AARP, but now expect growth in the total segment, which includes nonstandard and the old Affinity block, to be more in the mid single digit range.

Our view of our underwriting profitability for the year is essentially unchanged. We're still calling for flat combined, ex-CATs, and prior year development versus full year '04. But slightly less growth in the top line means that personal lines is a minor negative to our outlook for the last nine months of the year, but not so much as to offset the increase from business insurance.

A range of minor upsides all contributed to a very good first quarter in specialty lines, but none of them are net contributors to our balance of the year outlook. Investment income was strong in the quarter, but about $14 million of that pretax came from irregularly occurring partnership and other income, so don't annualize that.

Finally, our runoff operations incurred losses below trend this quarter, but our guidance still incorporates an arbitrary $80 million full year assumption for prior year loss development. That's on top of our run rate assumption for expenses, which is also about 80 million pretax.

There's no science to the loss number. It's just like an assumed load for catastrophes. The only thing I can guarantee is that prior year development in this segment will be either more or less than 80 million. Over the past two years, we have worked very hard to develop deep and thorough grounds up tools to evaluate latent exposures. We now can and will thoroughly search our book every year, and if we find developments, we will address them. This is the only responsible way for us to protect this company and its shareholders from major capital challenging developments in the future.

Now, please don't take my remarks as signalling anything about the results, good or bad, of our second quarter studies, but do take my comments as indicative of our resolve to not allow major development in our runoff operations to surprise us.

Overall, a good quarter. We like our results; we have incorporated them in our full year guidance and even allowed for a little upside for the balance of the year. The stock market is a major risk but one that's very transparent for all of us.

One final note: we continue to work to make our disclosures useful to you and to make sure the financial targets we set as a company are those that our shareholders feel are most relevant. In the second quarter, we plan to reach out to our shareholders to look for input on these questions. If you have views on the relative value of operating income, ROE, net income, book value per share, tangible, no AOCI, yes FAS 115, whatever, and all the other ways that insurers keep score, please contact me via our Investor Relations department.

Ramani?

Thank you, David. Operator, I would like to open the call up for questions.

Thank you. [OPERATOR INSTRUCTIONS] Your first question is from Bob Glasspiegel with Langen McAlenney.

Good morning.

Good morning, Bob.

I'd like to make Tom work this morning. Why the upgraded sort of margin outlook for the annuity operation, in light of the sort of choppy start in the market? I did notice your DAC amortization as a percentage of pretax was back to sort of the 50% level and I think had you guided that it might be a little bit higher than it had been -- than the recent trend. So, was that a factor or was there some other reasons?

No, Bob, there's a lot there. I guess I am at the point of saying high 40s is probably where we ought to look at that, going forward. A few things. The expenses continue to be flat, absolutely, while the assets have grown over time. We're very confident that the tax rate that's built into the current quarter is a good run rate. The above-the-line withdrawal benefit is starting to influence the overall results and that's ticking it up a little bit.

And then I think there's one kind of nuance in the way we've had to shift the accounting due to the SOP, I think it's 3-1, for our market-value adjusted annuities, which actually hurt last year and is helping this year. So it produces some uneven results. But I guess, all-in, we're now at the point, I guess we've come from low -- low-40s guidance to mid-40s guidance, and now we're thinking high 40s guidance is reasonable to look at going forward.

Okay. Thank you very much.

Your next question comes from Andrew Kligerman with UBS securities

Good morning. First question, then a follow-up. With regard to the $0.22 charge concerning market timing and other reserves, I guess we've seen what's happened to companies like AIG that sort of fight the regulators and say they are not wrong, whether they are or not, and it seems like Hartford's taken the right strategy, but at what point does Hartford say, enough already. There are just too many people showing up on Halloween and asking for treats. When do you start shutting down some of the regulators and saying enough is enough here and we're not going to put up reserves? That's my first question.

Andrew, this is Ramani. The regulators conducting these investigations have had our full and complete cooperation and I believe they will continue to receive our full and complete cooperation. It's been an ongoing process. We are focused, though, on bringing these matters to a resolution and we will work cooperatively with them. That's just the way The Hartford works and that's our intent.

Okay. Variable annuities, I see things have stabilized. Do you think, given your restructured wholesaling and your new multimanager product, do you think you could start to get back to the levels that we saw a year or two ago? Is that within the realm of possibility?

Let me turn it over to Tom.

Andrew, I really think for now we should guide you to -- probably both gross and net, similar to the first quarter. I just think right now 3.1 billion is a good path for us. The -- not to diminish the enthusiasm we have for the new Director M product, I think that will really be a jump-start for that product, which actually on a relative basis has fallen off in terms of its percentage of our overall book.

So, we're doing everything we can. Obviously we're continuing to build the Principal First Preferred, following, and are encouraged there that we can continue to play in that game, and -- but, you know, this is-- there are a lot of great competitors out there and we just think for now this is about the range we expect. But I'd like to do better and we're doing everything we can to do better

Thanks a lot.

your next question is from Jimmy Bhullar with J.P. Morgan.

Hi, thank you. I just have a couple of questions. First, for Tom, if you could give us an update on your U.K. -- the launch of the U.K. annuity business. And secondly, on the P&C business, claims trends have been very positive for the last few quarters. At what point do you see competitors starting to build that into pricing, and -- which would sort of also add to the declining pricing and reduced margins in that business. Have you seen any evidence of that? Or --

Let me have-- Jimmy, let me have Tom address the U.K. opportunity and I'm going to then ask David Zweiner to talk about the Property-Casualty one.

Okay. Thank you.

Okay. Jimmy, we're optimistic, although it's going to take time. It -- we just opened both of our offices. We're going base our operations in Dublin and our sales branch will be in the U.K.. There's a lot of enthusiasm over there. I was just there a couple weeks ago to kick things off and I liked the energy.

I think our entry point might be a good one, given some of the problems the incumbents have had and I think we're going to try to lead with a good product and great service and, really, the Planco model, so try to replicate, at least in terms of the model, what we have done in Japan. But it's -- it's just beginning and it's going to take time, so we can't expect much for a year or so.

One thing, Jimmy, to keep in mind is if you were to think in terms of total retirement assets in the retiree base, the U.S. has something close to 34 trillion in retirement assets. Japan is somewhere around 11. And the U.K. is somewhere around 3.5. So in terms of market size and potential, there are definite distinctions between what's available to us in Japan and the U.S. versus what's available to us in the U.K..

Let me turn this over to David to talk about price competition.

Sure. Jimmy, good morning. I think with regard to your question on claims trends, certainly we and others have seen very favorable claims trends, but I would say with regard to your question, when or if do we see that in pricing, it's already started and I think you've seen that in some of the pricing trends.

And I would make note, going back to the investor day for -- I think an awful lot of people participated -- in the sweet spot of our product lineup, that being Personal line, Small Commercial, mid-market, I think that a handful of companies have really developed the pricing technology that allows them to maintain margins respond quickly to both claims trends and competitive changes, and so I think two points: one, those companies will move responsibly, but I think thoughtfully, with protected margins in mind at every change. But secondly, I think those companies -- and the Hartford is certainly on them -- will be able to respond the other way very, very quickly, if, in fact, we see those start to change. So at the point that claims trends maybe start to move back to more normal levels, I think you'll see The Hartford certainly respond very, very quickly.

So right now we're very pleased with the margins in the businesses. When you see a combined for the quarter 86.8, you know, obviously we've got margins that are very attractive.

I would also just make a note of the fact that, again, those who participated in the investor day heard us basically telegraph that we were confident we would be able to grow profitably, especially in the Personal lines and Small Commercial. And so you saw that in the first quarter, the Agency, Personal lines growing 10%, as Ramani mentioned, but the Small Commercial, very pleased with growing 18% in the quarter and, again, both with very good margins. So I think we feel very good about where we are right now in the cycle and going forward.

Okay, and just one last question for Tom. In the VA business, you mentioned you expect sales roughly around the first quarter level and the second quarter also. It looks like the industry grew sequentially a little bit, so you're going to lose a little bit of share again in the first quarter of '05. When do you expect to start gaining share or growing at least in line with the rest of the industry? What needs to happen for that to -- for your sales to turn around in the VA business, domestically?

To do that, Jimmy, you really have to make a prediction on the overall industry and I don't expect huge gains, overall industry. So I really feel like the share we're coming in at now should be about what we would see as well. It's -- if someone comes out with some barnburner and tries to storm the market, that would change the dynamics, but I don't -- I think the erosion of share that we have seen as competitors have kind of caught up to our innovations, is really diminishing and probably will flatten out.

And you don't see anyone being too aggressive right now in the market? Generally, do you think competition is okay? Or --

Well, I think it's generally rational. I do think that, as we stated with our entry with Principal First Preferred, I still think the guaranteed benefits thing needs to come back to reasonableness so that the charges don't outrun the benefits of the -- the fancy benefit -- you know, product designs. So -- but I don't see anything that I would call outrageous in the market.

Okay, thank you.

Your next question is from Ronald Frank with Smith Barney.

Good morning, everyone.

Good morning

One for David and one for Tom, just to be -- to split it up.

David, based on the guidance, if I'm reading it all correctly for P&C, the -- all three operating segments for ongoing are going to have to come in on an ex-CAT Accident year basis significantly worse than they did in first quarter. I calculate the BI will need to come in at 90 versus 88 in the first quarter, that Personal lines will have to come in around 89 versus 85 for the first quarter, and that Specially Commercial will have to come in at 96 over the balance of the year versus 88 in the first quarter to make the guidance for the full year on an ex-CAT, ex-prior-year development basis.

My question is this: why seemingly are you booking the Accident year in the first quarter well below where you expect the year to come in, and if you aren't, is the increase in guidance, or the next increase in guidance basically in the mail?

And my question for Tom: Tom, in the past you were able to raise the charge for the Principal First rider significantly without meaningfully impairing sales. Now you're offering the cheaper, more restricted benefit alternative and it doesn't seem to be driving sales as fast as you expected. Is it legitimate at this point to question the price elasticity for the product and therefore your ability to drive sales toward the new rider?

Let me go first, because I'm sure Dave wants to get ready.

It's in the mail, Tom.

The -- actually, I think there is price elasticity. That's kind of why we think our benefit's going to work. I think what you've seen is the -- our 50-basis point, our increase from 35 to 50 I think has impacted our sales, is perhaps a delayed reaction as others went in with comparable benefits with, you know, different pricing structures, but I really do think that's part of the reason why our share has decreased, is the move we made. It just didn't happen right away.

Okay.

And, Ron, let me try and answer your question. I think in talking to the guidance, there really are some good and valid reasons not to try and annualize, obviously, the first quarter. I'm not sure all of that, though, should be reflected in the underwriting lines.

Let me try and break it down. I think, leaving the weather aside, and you mentioned the fact weather was light. I think it was a little less than two points CATs in the first quarter and I think we always guide people to assume something more normal would be 3, 3.5.

My numbers were ex-CAT.

Right. So leaving the weather aside, there are two points I would probably bring you to before we got to the underwriting line. One is, and I think Ramani and David both made reference to this, is net investment income. We had a good quarter relative to partnership income and so forth that drove the net investment income at about 8% for the quarter. If you look at the growth in the fixed income portion of that, which I think is that which you can probably annualize, it was closer to 5% So that would be my guidance in terms of how you would think about net investment income for the next three quarters.

On the expense line, here, too, I think it was mentioned, but the expense line benefited from some one-timers and some timing that probably made it look more favorable in the first quarter than you should expect to see it in the next three quarters. That said, we're still on track, we believe, to certainly achieve the Business Insurance objective. We said we were going to get at or below 30 for the year. We're confident we're going to get there. We targeted 22 or better in Personal lines. We're there for the quarter. It's going to be a dogfight to hold that for the full year, but we're certainly going make an improvement in '05 over '04.

Coming to the Underwriting line itself, we've been saying consistently that we expect that margin to compress over time and I that think our guidance has been for the full year that the combined ratio, ex-CATs, leaving those out for the moment, for the full year '05 should look very much like it looked in '04. The '04 number I think was about 90.2, so I think you can draw a trend line between that first quarter and full year to see what we're assuming, at least in our guidance in terms of what's going to happen on the Underwriting.

So, David, is the disconnect that I perceive really a matter that you don't have the actuarial evidence to bake into -- to bake into your current loss ratio pick, an expectation of deterioration for the full year, but at the same time, you don't have the conviction that it will stay the same to bake that into guidance.

No, I think we're certainly watching the loss cost trends here, Ron, and I think it's been well discussed here and I know on other calls as well, but our assumption continues to be that the loss cost should start trending to something more historically normal, and I don't think we or anyone is prepared to say that what we'ree seeing here in the last three, four, five quarters is sustainable. So our guidance would assume that it is not sustainable.

If in fact we're wrong, then it's in the mail. But I think that would be a risk.

Okay. Thanks.

These are unusually low loss costs that we have seen, Ron. I agree with David 100%. We just can't trend that forward.

Okay. Okay. Thank you.

Operator?

One moment, sir.

Operator?

Your next question is from Nigel Dally with Morgan Stanley.

Great. Thank you.

Good morning, Nigel.

Two questions on Japan. First, you mentioned competition is picking up. Is this from domestic or foreign companies? And are there any significant differences in the products they are offering?

Second, any thoughts on potentially changing your pricing in Japan? Or are you comfortable that the business being written today is meeting your ROA goals? Thanks.

Nigel, it's Tom. Competition is forming I would say from three sources. There are U.S. companies, there are European companies, and there are the Japanese domestic. And I think everyone is getting into the act one way or another. So I do think competition is real and getting better.

I also see that the product development cycles are going to shorten there and there will be -- we're going to be looking at continued product activity, primarily on the variable side or -- the fixed annuities probably are -- have a little more shelf life in terms of their pricing. But we're actively looking at new product, similar to what we would be doing here.

But it's a very active market now. I tell you, it's really hit its stride and I just want to underscore what Ramani said in his remarks. The 3.8 billion, as great as that was, was the end of their fiscal year and we have to expect considerably lower results going forward. Still excellent results, but not at that toward pace

Okay. Then on the pricing and ROE?

We're looking at ROAs in the 45, 50 basis points, even this year, and ROEs are creeping up and sometime next year we'll hit the range we look to.

13 to 15.

Okay. Thanks.

Your next question is from Michael Lewis with UBS Securities.

Good morning. I understand why you're assuming some poorer development in the Property-Casualty area going forward. What's interesting, though, is the pricing matrix, especially on the Business Insurance. What I'm trying to understand is, I guess you said that the Middle Market pricing was down 3% and Small Commercial was up modestly. Another major west coast company, writing comparable business, traded over at the Nasdaq, their assessment of the market was that the Middle Market was down 5 to 15% and Small Commercial was flat to down 5%.

Now, what I'm really trying to figure out here, how do we assess what the differences could be in such a wide range in market conditions and how do we assess the trend going forward? Again, this seems to be major differences and maybe you can help me understand why there would be such a different interpretation of the market. And when you're doing that, just can you give me some idea about the velocity of how rates are changing? Thank you.

Sure. Michael, Dave. I -- couple of comments.

It's tough to compare to us whatever company you're referring to, but I would imagine there are going to be some substantial change -- differences in mix and geographies and classes and so forth. But having said that, we've been saying for some time that what we have really been focused on, particular -- let's talk about small commercial because I think that's where the real difference is spiking out between us and others, both in terms of growth and pricing, is that we've been say for a long time we believe that service is a big element of that product, as it is with Personal lines. And we believe that successfully implemented service can drive retentions.

At this point in the cycle, retention becomes incredibly important. What you're hearing from a lot of companies, regardless of what product you're asking about, is that people are fighting very hard to retain the attractively priced business, and we're certainly there as well. But we're using the service element to really drive that and so -- I know in our investor supplement we show the retention for BI in total, Business Insurance at 84, but if you break that down and you look at just a small commercial portion of that, it's almost 90 and that's the highest quarter in the last five.

So the retention levels in our business, I suspect, are going to be higher than that West Coast company and I think that that's really helping us not only to grow, but retain the attractively priced business and that combined with the mix change in geography and all the other things I mentioned I think might account for the differences you're seeing in the pricing levels

Thanks very much.

Sure. Thanks.

Your next question is from Vanessa Wilson with Deutsche Bank.

Thank you very much. I'm here with Alain Karaoglan.

My question just really relates to the capital position. Could you just update us on where you are in terms of overall capital for the corporation and also if the capital needs in Japan are exceeding your expectations. And Alain has a question.

Hi. I'll take that. The -- it really hasn't changed from what we talked about at our investor day last month. In Japan, we are completely on track to implement the program to respond to the new FSA regulations. We believe that that will result in a net capital requirement, you know, all things being equal versus what it would have been otherwise, of about $100 million. We briefed the FSA on our plans and we're putting them in place and expect that all to be operational right in line with the -- in the -- coming into force of the regulations in the -- over the balance of the year.

Our overall capital position is, again, very little changed versus where we were calling it a month ago. We are maintaining our 5 to $600 million capital cushion. We're achieving our delevering targets. We are using our incremental capital generation to fund growth, particularly Japan, which is-- I think we he enunciated that it was 100 for the new FSA regs and 350 just for growth through the balance of the year, and that seems to be the best use of our capital right now.

So it's no change. We were pleased where we are, and we're pleased that we have the opportunity to invest our funds in growth.

So if the Japan growth were to continue at current levels, I mean, you're expecting it to taper off, and you've been surprised there continuously. So, that would really be where you would put the capital? You have the capacity for that?

The estimates we made for capital a month ago obviously incorporated --

The first quarter.

-- a lot of knowledge of the first quarter that -- so we think they are appropriate for what we have announced today and what we see for the balance of the year.

Okay. And Alain?

Good morning. I guess, David, that's the first suggestion in terms of guidance. One, I think you guys do a great job, both in disclosure and guidance. The one thing I would add though, is from a -- what is the catastrophe load that you're assuming for the full year, 3, 3.5. But what is it for each of the segments on a full-year basis and what are you assuming for the next nine months? Are you assuming that you got lucky in the first quarter and the next few quarters are going to be -- bring you back to the average?

Well, we're definitely assuming that we -- well, we're assuming -- we're booking what we saw in the first quarter, and that was, I guess versus our assumptions, lucky. We're assuming that the balance of the year will be in line with normal assumptions, which as you said, were kind of in the 3 area in terms of what we call for our CAT load, and it will be either more or less.

And as far as breakout by segment, Alain, that's a level of refinement we have not chosen to go to. There's so much volatility in CATs, that's -- a level of refinement we have not gone to yet.

And thank you for the compliment on disclosure.

You're welcome. Thank you.

Your next question is from Jason Zucker with Fox-Pitt Kelton.

Thank you, and good morning. First, on the fixed annuities that you guys expect to run off in 2005, could you tell us what the current crediting rate on those annuities are, and with the runoff, do you expect any DAC acceleration?

Jason, it's Tom. We're looking at each other. The -- it's going to be a drop because the new rates are a lot lower. These were sold ten years ago. I don't remember what they are, but consistent with what we have seen, you know, it is a considerable drop and that contributes to the lapsation [ph].

Having said that, we're holding on to a little better than 50% of it, so I think we're holding our own, but you have to expect that with that kind of a decrease and in some cases, they have had ten years of accumulation and then it may have already achieved their funding need and maybe using the funds for other purposes. But it is -- it is a considerable drop. As you know, ten years ago rates were a lot higher than they are now.

And Tom, has the DAC all been written down?

The DAC --

This is Liz.

I would use the guidance in the 50 to 51% range overall. Lots of different moving pieces. We do write off, if there is any extra DAC, if we're wrong in our assumptions, it does get written off, but as Tom said, it's been running better than pricing in terms of how much we're keeping at the window.

Thanks. And if I could just follow up on the Group Disability side, is there any particular reason why Group Life sales would be down in a quarter where Group Disability sales were up so strong? And just looking at the LTD sales growth, do you expect that you're going to take share over the course of the year?

Well, we think we're well positioned to take share. I think our group disability operation and our position in the market would indicate that we have everything it takes to do that. I think just relative, quarter to quarter, it's really national accounts on both sides. You really had a strong national accounts Disability quarter this year and a strong Life national accounts quarter last year. And so that's the essence of it. I wouldn't read too much into the difference quarter over quarter.

Great. Thank you.

your next question is from Paul Newsom with AG Edwards.

Thank you, and good morning. The -- I was hoping we could just dip a little bit into detail on the nonstandard business and what's going on there. It seems to be a fair number of your competitors are seeing declines, as you did, in their premium growth there and I was wondering what you think from a competitive standpoint might be happening in that narrow market.

Well, I think part of it is moving into Standard, and so I think that would account for some of what we're seeing and maybe others are as well. And I think that Hartford specific -- as you know, we did roll out in our agency business, what we call our Dimensions class plan. And so I think that we were able to go a little bit lower with that, and more effectively, and so I think you see some of that coming through the agency personal lines with that increased pricing ability and out of Omni.

The other thing is on the Omni line, our nonstandard business, we have chosen over the last year or so to refocus the business in a fewer number of states where we think we can really drive some scale and so I think that's also impacting the top line. So, that's how I would characterize it from our perspective

Did I hear you right, that you may be essentially -- cannibalize your own business by, with the -- your new pricing tier, or did I just mishear you there?

No, I wouldn't characterize it as cannibalize. I think going back three, four, five years ago, when you looked at our pricing capability with an agency personal line, it was purely a preferred and standard type market and so we were really not competitive and didn't really compete. And so we really had a gap between what Omni was able to do and what our agency standard was able to do. What we've been able to do is fill that spectrum with the pricing technology and capabilities we now have in agency personal lines.

Okay. Thank you very much.

Sure.

[OPERATOR INSTRUCTIONS] Your next question is from Eric Berg with Lehman Brothers.

Thanks very much. Good morning to everyone. I want to return, as I did last quarter, I guess to the group benefits area and once again, it seems to be kind of the same story: really strong sales this quarter, but there's just no growth in premium in this division. I'm looking at the fully-insured, ongoing premium. It's basically unchanged from a year ago. Given the strong sales, why aren't we seeing premium growth?

Okay. Tom -- and I think I'll ask Liz to jump in here too, given her experience with group benefits operational. Some of it is the fact that the second half of last year wasn't that great with sales, so that impacts the flows. We do think this is going to pick up. It has been a challenge for us. We do look to about a 6% total year increase in premium, but, there are a number of factors, including some -- influenced by persistency, and sales in the latter part of last year. And I'll just let Liz, given her experience, expound more, if you care to.

Yes, Eric, I'd start with just the fundamentals. When we brough CNA on the business, if you think about just the size of in-force premium we bought, it was 50% of our total premium. So when you think of that number, but then when you look at sales as a percentage of premium, they're much lower. So any time you bring in a big block of business like that, you're going to have a push for growth on the premium side for a year or so.

On top of that, as Tom said, last year's premium -- sales were a little anemic. But if you just do the math, in terms of -- you're getting $50 million of additional sales on a base of premium of an extra billion dollars, that's where you're seeing that shortfall. And I'd say we stick with our guidance in that mid-single digit range for the year, and then we should see a return to more normalized double-digit premium in the following years.

Also, I noticed there was a very, very significant increase in sales and that's a great thing, but I notice that commissions were down. I wonder why would that be? Given the sharp increase in production, one would think commissions would be up.

Yes, in terms of that, that actually has to do with our -- we have a financial institution block that is really -- it's done on an experience-rated basis. You may remember that the fourth quarter was a little noisy. That produced a higher expense ratio and lower loss ratio in that particular piece of business and that trended the opposite way in the first quarter. So you're just seeing a little noise on that.

Other than that, you're right. Commissions would have been up relative to the sales number.

Thank you very much.

your next question is from Scott Cavanagh with Merrill Lynch.

Yes, good morning. Would you please comment on the current asbestos legislation, kind of what your thoughts are on the viability and where you see it going forward?

This is Ramani. You know, we believe that the bill that is being considered in Congress right now, in the Senate, is very, very problematic for the insurance industry. Our concern -- deep concern -- about what's going on is the fact that the start-up provisions in the bill, if you will, preserve a big chunk of claimants in the tort system and consequently, one way to think about this is that it will be double taxation in a sense. There will be monies going into the fund while simultaneously you will also have claimants outside the fund, who will take up a big chunk of money. And more specific to the insurance industry, the joint and several type provisions embedded in the bill are also problematic.

So when it comes to The Hartford, we feel that the current bill is a problem. We don't like it, and we are joining the coalition that is opposing the bill that is currently being considered in the current form. So that's where we come out on the whole thing.

Thank you very much.

At this time, there are no further questions. I will turn the conference back over to the Chairman, Ramani Ayer, for any further comments

Well, I thank you very much. This has been an excellent quarter. I want to bring this conference call to a close. Our first quarter growth and profitability was very strong across the board, as you noticed, in Life and Property-Casualty. And as we stated on investor day, we have sound strategies in place to continue this profitable growth, so our focus today, as always, is on solid, consistent execution of our plans.

I look forward to speaking with you again in August, and I want to thank you for participating in today's call.

Thank you for participating in today's Hartford first quarter 2005 conference call. This call will be available for replay beginning at 1:00 p.m. Eastern time today through 11:59:00 p.m. Eastern Standard time on May 6, 2005. The conference ID number for the replay is 5451764. Again, the conference ID number for the replay is 5451764.

The number to dial for the replay is 1-800-642-1687. Again, 1-800-642-1687 or 706-645-9291 internationally.

This concludes the conference. You may now disconnect.