Hartford Insurance Group Inc (HIG) 2005 Q3 法說會逐字稿

Good morning. My name is Cynthia, I will be your conference facilitator. At this time I would like to welcome everyone to the Hartford third quarter 2005 conference call. (OPERATOR INSTRUCTIONS). At this time I would like to turn the call over to Kim Johnson, Vice President of Investor Relations.

Good morning. Thank you for joining us today. Please note that our earnings press release and our quarterly report on Form 10-Q were issued last night. Also our financial supplement and a complete slide presentation for today's call are available at our website at TheHartford.com.

Participating in this call will be Ramani Ayer, Chairman and CEO; David Johnson, CFO; Dave Zwiener; Chief Operating Officer of our Property & Casualty Company; Tom Marra, Chief Operating Officer of our Life Company; Neal Wolin, General Counsel of The Hartford and Liz Zlatkus, CFO of Hartford Life. After the presentation we will go right to the question and answer session.

As noted on slide two we will make certain statements during this call that should be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements 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 10-Q 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 principles. Information regarding these non-GAAP financial measures is provided in the investor financial supplement for the third quarter 2005, which is available for review in the investor relations section of The Hartford's website, again at TheHartford.com.

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

Good morning and thank you for joining us today. I'm going to briefly cover some highlights for the third quarter. Before going to Q&A I will turn it over to David Johnson, who will have some comments on our guidance for the remainder of 2005.

Turning to slide three, you'll see The Hartford delivered good results this quarter. Net income of $539 million was 9% higher than a year ago, while operating income of $560 million grew 20%. On a per diluted share basis, net income was $1.76, while operating income was $1.82.

Significant CAT losses in the third quarters of 2004 and 2005, and a 2004 tax benefit, make it difficult to evaluate underlying profit trends. But as you'll see in a moment, underlying profitability remained very strong in both the Property Casualty and Life operations.

Assets under management, a key driver of our earnings, reached $316 billion, 15% higher than last year. We're also generating growth in book value and strong ROEs for our shareholders. Excluding AOCI, shareholders' equity reached $14.7 billion.

Our book value of just over $49 per share increased by 18% over the last 12 months. Return on equity for the 12 months ended September 30th was 16.8%, well ahead of our long-term target of 13 to 15%.

Now let's move on to the Property Casualty highlights on slide four. Even with hurricane losses, Property & Casualty reported operating income of $232 million. Total cap costs from Katrina and Rita are estimated at $130 million, after-tax, and net of reinsurance. Our corporate catastrophe reinsurance program and facilitative (ph) reinsurance helped to mitigate our losses.

In addition, we had relatively low market share in the three impacted states. This was due in part to active management of our CAT exposures. The CAT exposures are only one of the factors we consider when we set underwriting capacity. Long-term rate adequacy and the competitive regulatory and judicial environment all influence our geographic mix.

While we don't anticipate major changes in our risk management strategies for 2006, we will continue to improve our risk management processes. These will include learnings on the use of CAT models, and our approaches to managing aggregate risk exposure, underwriting, pricing and risk transfer.

With the frequency of severe storms, we expect to see reinsurance pricing increases in 2006. If reinsurance rates rise and pricing in the primary markets fails to reflect the increase, we may modify underwriting guidelines or restrict capacity and reevaluate reinsurance structures.

I want to take a moment to comment on the impact of these devastating hurricanes on our customers and marketplace. The Hartford has already received over 15,000 claims from Katrina and Rita. When customers' lives and businesses are disrupted by storms, it's our job to help them get back on their feet by settling claims with speed and compassion.

Building on 200 years of tradition in meeting our obligations to customers, claims teams from across the country has stepped up to help. Through the dedicated work of these professionals, over 50% of the claims we've received on Katrina and Rita have already been settled. And our work will continue. We have CAT teams in place assisting customers with losses from Wilma.

Finally, many of you have asked questions related to the impact of the storm season on pricing and competition. Generally (ph) it's too early to tell. The availability and cost of reinsurance, individual company underwriting actions and the impact of the rating agencies will all influenced pricing and capacity in the most affected areas for sure.

Turning back to operations, excellent pre-CAT underwriting results and higher net investment income also drove operating income growth. The combined ratio for ongoing operations excluding CATs and prior year development was 89.8%. This was the fourth straight quarter with a combined under 90.

Reinstatement premiums and the 2004 sale of our crop business dampened the underlying growth trends in net written premium. If you exclude the impact of these two factors, net written premium grew 6% over the third quarter last year.

At today's underwriting margins we're very pleased with the growth we're seeing in business insurance, agency personal lines and AARP. In business insurance, net premiums were up 7% over the third quarter of 2004, driven by 11% growth in small commercial. In small commercial business, we're still seeing double-digit premium growth driven by the distribution, product and technology initiatives we have undertaken. Pricing was slightly positive in the quarter and customer retention remains strong.

In October, we began to implement a more customized pricing solution for small commercial. This technology will increase our pricing segmentation and improve our competitive position on the best (ph) risks. With quicker response time and more accurate quoting, we expect to continue to drive double-digit growth in net written premium for the fourth quarter.

In middle market, competition intensified and pricing continued to soften in the quarter. Our business mix in middle market is shifting. By targeting growth by industry, state and line of business, we were able to grow net written premium by 3% over the third quarter of last year.

Profitability in business insurance continues to be very strong. Our combined ratio of 89%, ex-CATs and prior year development, was 1.7 points better than the year ago period.

In personal lines, net written premium grew 2% year-over-year. Here again, the increase in reinstatement premiums suppressed our growth, particularly in AARP and agency. Excluding the impact of reinstated premiums, overall written premium grew 4%, while AARP net written premium grew 6% and agency personal lines was up 7%.

Competition, while increasing, is still rational, and profitability is very strong. Favorable frequency trends in auto more than offset a slight increase in severity. The personal lines combined ratio before CATs and prior year development was an excellent 86.7%.

We're encouraged by our growth in agency appointments, which has helped generate an increase in quote volumes each month this year versus 2004. We also ramped up our AARP marketing. With these distribution initiatives, we expect that we can continue our growth momentum into 2006.

Our approach to specialty business remained disciplined in the third quarter. We pulled back as pricing and competitive forces impacted new business generation in specialty property. If we see this market starting to firm, we stand ready to increase our premium appetite.

Outside of the property market, we still see pockets of growth within certain specialty lines. As an example, we have a growing practice in middle market and private company D&O, where we view pricing is adequate. We're also retaining a higher portion of the gross written premium in this line.

Now turning to our Life businesses on slide five. Life operating income before tax-related items was $368 million, a 20% increase over a year ago. Significant asset growth in our investment products and strong sales growth and our individual Life and Group Benefits divisions provided momentum for the quarter.

We also had somewhat higher than usual partnership income this quarter. Total assets under management ended the quarter up 16% from a year ago.

Enterprise-wide variable annuity assets grew 22%, or $22 billion in the past twelve months, to reach $125 billion. This exceptional asset growth was driven by market appreciation and strong Japan net flows. Japan annuities continue to be our fastest-growing product line.

Assets intimate under management in Japan ended the quarter at $23 billion, more than double a year ago. And during the third quarter, Japan posted annuity sales of $3 billion, with $2.7 billion of net flows.

Japan is a different sales cycle than the US. The first and third quarters will generally have the highest sales. Thus, as we look towards the fourth quarter, we would expect variable annuity sales to be $2.5 billion or so, similar to second quarter of 2005.

With strong equity markets, US VA assets under management reached 104 billion dollars. Variable annuity sales declined slightly to $2.7 billion in the third quarter. Including death benefits, we had negative net flows of $348 million.

Looking to the fourth quarter, we expect variable annuity sales to be between $2.6 and $2.7 billion. Fourth quarter surrenders are likely to pick up slightly due to expected tax distributions on qualified plans. With that in mind, net outflows for VAs, variable annuities will likely increase to $600 to $800 million in the fourth quarter.

As we look to 2006, we're excited to announce the November 1st launch of our new Living Benefit option. Lifetime Income Builder is our first entry into a growing market for lifetime income protection. We believe it will improve our overall competitiveness, while again demonstrating our ability to design innovative products.

Lifetime Income Builder is a great value for investors aged 60 and older. It provides guaranteed lifetime benefit payments with full investment flexibility. In addition, there's an annual opportunity for benefits to increase by as much as 10% per year, dependent on market performance. This product meets our risk management objectives while maintaining investment flexibility and value for our customers. A win-win proposition.

Lifetime Income Builder was designed with several objectives in mind. First and foremost, it had to provide good consumer value. The price for the rider is very reasonable, only 40 basis points. A Hartford VA with Lifetime Income Builder provides very competitive guarantees at lower total cost than the vast majority of our competition.

Our scale and industry-leading expense structure allow us to provide low-cost solutions to our customers. The initial response from financial advisers has been positive. As is typical with other product launches, it will take time to gain market acceptance. We will provide guidance for our 2006 sales expectations during our December 12 investor meeting.

Turning to other retail products, which include mutual fund and 401(k), assets under management ended the quarter at $38 billion, up 27% over a year ago. Initiatives to increase distribution of these products are paying dividends, as sales and deposits were $2.2 billion in the quarter.

Looking to the fourth quarter, we expect 401(k) sales and deposits to be $800 million and net flows of approximately $400 million. And in mutual funds, we expect gross sales of $1.5 to $1.6 billion, and net sales between $400 and $500 million.

Our Institutional Solutions Group had an exceptional quarter. Sales and deposits exceeded $2 billion, coupled with double-digit growth in assets and earnings. Success in institutional market has been a function of our ratings, product development, investment flexibility and access to distribution partners.

Our Individual Life business continues to post very favorable results. Life sales reported double-digit growth from a year ago. Sales continue to be strong in the warehouse, bank and life professional channels. Account values reached a milestone of $10 billion this quarter, an increase of 12% from a year ago. For the fourth quarter, we are again targeting double-digit sales growth while maintaining a balanced mix of UL and VL products.

Our Group Benefits division reported after-tax margins of 7.2% of premium, driven by favorable mortality and morbidity. Fully insured sales of $157 million grew 47% in the third quarter. Both Group Disability and Group Life contributed to the strong sales growth. We're generating growth in all markets, small, mid and national account groups. Investments made during 2005 and our sales momentum bode well for 2006 premium growth.

So now let me turn it over to David Johnson, who will provide some comments and guidance for the remainder of 2005.

Turning to slide 6. We've lowered our guidance by $0.25 to $7.30 to $7.60. That includes everything through the end of October. Let me confirm, Wilma is in that number. Given the three months of catastrophes we've experienced since we last expressed guidance in early August, we feel quite fortunate that we only have to take the guidance down a quarter.

A note on the page, the weighted average share assumption of 305 million. For those of you who want the data to form your own estimate of weighted average shares outstanding, again, direct you to page C10 of our investor financial supplement, which has a helpful sensitivity table for 2005 and also for 2006.

Our capital margin remains a few hundred million lower than it would've been without the hurricanes. But still, offset by good performance, remains slightly above our previous $500 to $600 million target for our capital margin.

Other than that, there's little to say beyond the guidance assumptions that are outlined in the press release. We look forward to talking to you about our 2006 outlook and plans during our webcast investor day on December 12. As we told you last April, we will not be giving 2006 specific guidance on this call.

Operator, we're now ready to take questions from our investors.

(OPERATOR INSTRUCTIONS) Andrew Kligerman, UBS Securities.

Good morning. Two questions. First, on the variable annuity front. I thought I heard you mentioning about 2.5 to 2.7 billion sales next year. Is there any chance that you might get a surge from the 11/1 introduction of the lifetime product that you introduced, or do you think it's going to take a little bit too long? Maybe you're just being a little conservative in your assumptions to the Street.

I'm going to turn the call the question over to Tom, but Andrew, we did not make any assertions for '06.

I am sorry. I meant 4Q, I apologize.

Its 2.6 to 2.7. Product was just rolled out this week. So we -- I think the first day we recorded sales was yesterday. It's going to take time. I think that is good guidance. We're hoping the product will pick up some steam going into next year. But -- and we are real excited about it. But I think it's good guidance.

How did it go yesterday, and how does the product compare to the other products out there?

We like the product a lot. What we've tried to do is give the best possible consumer value, while optimizing our risk management position. I think from a risk management perspective, you might profile it in between Principal First and Principal First Preferred.

Excellent consumer value. They get the lifetime income after age 60. There's a full guarantee of principal. They do have the opportunity to have their benefits increase, though we cap those at 10%. But the consumer also gets to maintain investor flexibility. We think at 40 basis points, it's a good deal. So we're excited about it, we think it's going to do well. You just have to give it time as it hits the market.

Lastly, that surge in Universal Life sales, up 43% year-over-year. Does that have something to do with the secondary guarantee product requiring higher reserves and agents just getting anxious and selling it quickly, or was there something else there?

Nothing really unique there. Other than, I think as we've gone to a more balanced book, you seen Universal Life become a more meaningful part of our overall business. But we sell -- are bullish on variable life, but I think as you seen over time we've become more balanced between the two products.

So there was no odd dynamic going on in the industry that there is just this (ph) more of the improvements at Hartford, is that probably the right way to look at it?

I don't think there's anything in the market that caused us to get that result. There is a lot going on, as you know, and I do expect over time prices will increase. The full impact of these reserve guidelines go in, and as companies look at older age pricing, particularly the last assumption and just the interest rate environment generally. I think you probably will see some hardening of prices in the UL business.

Thanks a lot.

One more thing, these numbers do reflect a very good broadening of our distribution. I think Tom's team has really extended their distribution here, and it's starting to bear fruit.

Jimmy Bhullar, JP Morgan.

I have a couple questions. First, you mentioned your capital cushion of around 0.5 billion. I just want to get an idea of what your planned uses for excess capital would be, assuming you keep building up more over -- and at what point do you get comfortable that you have enough capital and you deleverage the balance sheet enough to where you maybe would consider share buybacks?

The second question for Tom, if you could just discussed the Europe variable annuity business and how that ramp-up is going?

Let me start with David Johnson on the capital question.

Our views on uses of capital haven't changed much from where we were on our last quarter call. We will be finalizing our view of our capital position in generation for next year as we finish our budgeting process, and we will report out to you where we came out in our December 12 meeting.

But as we look at it, we definitely need to have a capital margin slightly higher than where it is now. But not much higher. So I think we're quite close to getting to the sort of target that we would look at as sustainable in terms of appropriate balance of capital and risk. As we approach the end of the year.

So going forward, to the extent that we are able to generate additional capital in excess of that need, we would balance four competing uses. Investment and long-term organic growth is always going to be the highest and best use, if it's at our targeted returns. Strategic investment continues to be an interesting industry with opportunities that we have to provision for, dividends and buybacks. And we will weigh those competing uses to the extent we have the capital.

Is the deleveraging done now, or do you have a little bit more to go there?

I would say it's substantially done. But we are doing some fine-tuning as to where we want to end up over the next couple years. Tom, you want to --

On the UK variable annuities, it started quite slow. We came out in the spring. What we did -- very pleased with the model. The team -- both the team in Ireland that is the hub of the operation, and the UK branch that does the sales, very bullish on those teams.

One of the things we found out is we needed to revamp the product, make it a little bit more competitive. We redid that in the beginning of September, and things have picked up. They're still at a slow pace, below what we would want them to be. But certainly the trend is in the right direction. I think this will be more of an '06, maybe even '07 story. But we are committed to building it.

Thomas Gallagher, CSFB.

First question is just on the new variable annuity product. I want to make sure I have it straight, then I've got a question on it. Tom, if I understand you right, it's starting at age 65, GMWB 5% per year withdrawal with annual step up. That's capped at 10%, all of this for 40 basis points. Is that correct?

That's essentially right. Actually the withdrawal can start at age 60, not 65. But they do have an opportunity for an annual benefit increase, but that would be capped at 10%. The other thing is if your account value has dropped, and it hasn't recovered to the maximum anniversary value, you would not get a step up in those years.

So if I'm age 60, I can take 5% a year out and it is guaranteed for life.

That's correct.

I guess if I sort of stack this up with my understanding of other companies' products I would agree with you. That seems like probably one of the better values out there. I guess the one thing that concerns me is the annual step up guarantee, when I speak to equity derivatives types (ph) seems like the hardest part to hedge. I know this is the first time you're going to be doing that. Can you just talk about the risk management there, how comfortable you are with hedging that part, and whether that creates a new type of risk for Hartford?

I'm going to turn it over to Liz. I think you'll find is that cap of 10% facilitates the hedge. I'll let Liz take it.

I will concur with Tom. The cap helps especially in the later years. Oftentimes equity markets do go up more than 10%, so you kind of build up a cushion. So particularly when we look at hedge cost as the product evolves or kind of ages, the cap really does help us significantly and how the cap is designed.

So we certainly have looked at this in the same manner we look at all of our products. We looked at the risk profile. It does fall, even with the annual step up, between the preferred product and Principal First. And correspondingly, the cost is between the two. We feel very comfortable with the ability to hedge that.

Liz, how does this new product fare under C3 Phase II? And just a related question, I guess for Tom. Do you think C3 Phase II is going to have any impact on the VA market in '06?

As far as how it works -- when we look at risk -- when we talk about the risk profile, we look at really four different ways. One is claims cost, one is the hedge cost, one is GAAP earnings volatility and then statutory distribute old earnings, which is really our primary measure. That measure is using C3 Phase II. So all of the statements I made is incorporating C3 Phase II into it.

I do think it will have impact on the market. You get credit for good hedging. Obviously product design is factored in, it will make a difference. I think the more discipline, the better your result will be. Going forward, it's not going to be just surplus, it will be in the reserve calculation as well. More to come, but I think your instincts are right. It will be an impact for people who write these kinds of products.

Alain Karaoglan, Deutsche Bank.

I have a couple questions, then Vanessa Wilson will have some on the Life side. Ramani, does this market, the fact that you had these significant catastrophes, is it going to create opportunities for The Hartford? You mentioned you were underweight in the markets that hit a lot. Do the prospects of significant pricing increases or significant dislocation give you new opportunities that you may not have had four or five months ago?

This is Dave Zwiener. Let me take a crack at that. I think there's been a lot of conversation and speculation in terms of the impact recent events are going to have, both for this year and more importantly perhaps for next year. I think our view at this point would be, one, we've seen very little impact to date, other than the affected areas and the E&S lines.

Going forward, it would be our view that it's probably going to be very product-specific, very geographic specific in terms of the impact in the property areas next year. And obviously to the extent we see those opportunities, we're going to move aggressively to capture them as best as we can. But we are as always poised to write profitable business regardless of the environment we're in next year.

I think the other impact that we'll be watching would be the impact on the reinsurance side. And whether or not that drives some changes. I think take we will know a lot more about that at 1/1. Our ability to push those prices through, obviously, is constrained in some regards. Both in terms of the filing activity and then actually implementing those. I think we would certainly drive as much of that through as we can. I think at a minimum, it's going to probably reverse or slow down some of the price deterioration we've seen, and may well present some real opportunities for us in selected lines and selected areas in '06.

What are you assuming in your pricing now in terms of loss cost assumption? Are you assuming that's going to continue to -- the frequency is going to continue to improve?

The frequency trends we have seen in the third quarter are characterized as follows. I think we continue to see negative frequency in the auto lines. And so I think we see a very favorable loss cost environment in the auto lines. I would say the frequency has gotten less favorable in the other lines.

And we started to see a tick up in the severity, particularly in some of the property lines. And you attribute that to any number of different factors, but I think some the demand surge issues and cost of materials and labor and so forth might be starting to bleed into those lines. I think going forward we will continue to build in I think a bit of a compression on the loss cost. I think that's the right thing to do, that was what we communicated our plans would be for '05. And I think that is pretty much the way it's worked out.

I would say on the pricing side it's been a fairly disciplined response to that. I think one of the things that we watch with interest, you and others may have taken a look at the Tillinghast report on commercial pricing that came out, reflecting the second quarter pricing trends. I know there have been some others that put out anecdotal bits of information in terms of what they thought the price movements were. But the Tillinghast report, pretty hard data indicated that commercial prices in total went down about 3% in the second quarter. I think it is less than what many people expected.

So I guess I would say, although the environment is tough from a competitive perspective, I think the pricing discipline has been pretty good. You see that in the profitability that we and a few other people put out there.

Let me turn it over to Vanessa.

Could you talk a little bit about what you generated in excess capital just this quarter, and how that looked relative to what you spent on the hurricane? I know we are jumping the gun here and you want to do this in your investor meeting.

I would say probably -- again, these are imprecise estimates, because they are formed largely from a view as to what the rating agencies may think our capital position should be at the end of 2005. So we're having to form both a projection of where we think we will end up and form of rejection of where they think we should end up.

But that being said, I would say we probably largely ran in place. We had outsized catastrophe losses versus historical average, but we also had outperformance on some of our other operations. Leaving us pretty much kind of where we were.

Thank you. Tom, you learned a lot I think from the preferred product, whip it out in the market and that was at affordable option. And you kind of went after the low-priced market. What is your sense now that you're coming out with another product that has more robust features, but again is really focused on customer value?

The Principal First Preferred product is still going to be available. It is still my favorite, as everyone knows. Basically I think it provides good value, good benefit at real low-cost. This is -- I said risk-wise, you have to look at it as between Principal First and preferred. And we think it responds to some of the things that have been attractive in the market.

The fact that we were able to have the opportunity for the annual increase, but that capping mechanism made it work within our risk management profile. So we think this is a good product, that it's going to work for us, and I think it will be attractive in the market. I think being in the middle right now probably make a lot of sense.

Dan Johnson, Citadel Investment Group.

I know you said it was a little too early to talk about pricing, but one market should have already seen some response would be the E&S market. Can you remind me, the companies you have that write in there? I think maybe Nutmeg and some others, generally the size of those? And obviously most importantly what are you seeing in those markets, mainly on the property side?

Two broad things. I would say that we're certainly seeing a capacity retrenchment in those markets as well as price increases in those markets. And the companies that we have in there is basically under the specialty segment, the property pieces of that is by and large aimed at E&S businesses.

In terms of -- obviously you would expect pretty severe price reaction in the Gulf-exposed properties. What are you seeing outside of areas that took major losses in the last few months?

Basically, I think it's really what's going to play out with respect to reinsurance and capacity. So CAT-prone areas will definitely see some correction. CAT-prone areas are not just in the Gulf, as you know.

Thank you very much.

I just wanted to remind you, maybe you know this. You can see the line -- I think we break it out in PC 11, it really represents that business on the property line, the businesses that Ramani just described. That's roughly about a $200 million a year business for us. It's a small part of our overall premium base, and it's run very opportunistically. So I think the folks up in Boston who run that business are going to take full advantage of where they see the opportunities, regardless of where they may be. I think in terms of the impact that may have in the short run or even the intermediate term of the total P&L will be somewhat muted.

Jay Cohen, Merrill Lynch.

I've got one question and Ed will have a question on the Life side. We hear from the auto companies that shopping behavior has decreased. People just are not shopping around. What are you seeing in your AARP book of business? And sort of related to that, what's the current penetration in that population right now?

Dave Zwiener. The penetration is right about the 10% level of eligible members. And we're working very hard to grow that as part of our contract to go through 2010 with AARP. I think the shopping phenomenon is an accurate one. It really is reflected both in terms of close (ph) and new business. I think agents on the agency side are working very hard to retain the profitable business, so the flow of new business to the market has gone down. And I think you see that reflected not only in our numbers but some other numbers.

I think too, everyone is fighting very hard on the retention side. I think you look at our renewal retentions, they've slipped a point or two, but still at very high levels. That's a very important measure for us. I think the growth numbers Ramani mentioned in his opening comments are somewhat muted by that reinstatement premium. But they're running at about that 5, 6, 7 growth rate, and I would expect that same sort of number in the fourth quarter.

Is the shopping phenomenon any different in your AARP business versus or agency business?

I don't think there's a discernible difference. Let me go back and check that, but I don't think we see a real significant difference in the shopping behavior, ARRP between the independent agents. But let me go back in check that.

Most of our AARP business is direct-mail, so it's a little different -- metrics are different. Response and conversion rates are what we measure there, as opposed to the agency business.

It's Ed Spehar. I had a question on the new product in the VA. If we look at the expected returns, and statutory or GAAP or both, how would the Lifetime Income Builder compare to both Principal First and Principal First Preferred?

And a related question, if you look at those three products, and you think about the distribution of expected returns, I'm wondering if you could give us some sense of the probability that returns would be below cost of capital in those three products? Just some rough sense of what kind of standard deviation of expected returns you see by these different products.

I'm going to turn this over to Liz in a second. Obviously we look at these stochastically so the returns are in a stochastic portrayal. But the goal is, we price everything for 13 to 15%. So if one product has more risk than the other, and that can be verified stochastically, it is going to have to contribute for that risk.

So in essence, we don't really from my perspective wouldn't have one that we would think would be higher return than the other. They're all attempted to be within some kind of a neutral zone accounting for the risk.

I would agree with Tom; I would just make a few extra comments. Principal First would probably have overall, over a long period of time, higher margins, but then it's a higher risk product. We look at everything because we do hedge -- we look at the hedging also. I would say LIB or Lifetime Income Benefit and Principal First Preferred would have slightly overall net margins, but then you have lower risk. So you have a narrower distribution.

But we feel very comfortable these products are in our targeted returns. And obviously we look at the extreme tales, you get -- you wouldn't, but we think that's a very low percentage.

One thing I would add to Liz's comment, if you look at a distribution as you were trying to reach for -- most of the scenarios that they model, our returns are actually much better than the targets for those riders that we talk about.

Can I ask one follow-up on that? If you looked at the returns for these three products, and you thought about them in a risk-adjusted way, so taking into account obviously the various risk factors of the three, which -- is your choice to (technical difficulty) Principal First Preferred would be number one, if you had your choice? And who would be -- which product is number two? Is it Lifetime Income Builder or is it Principal First?

That is how we look at everything on a risk-adjusted basis. But I would put Preferred First and then probably Lifetime and Principal First following that.

Ron Frank, Citigroup.

A few things. First, Ramani, you have predicted the combined ratios underlying would deteriorate in business insurance and personal lines for sometime now. And so far it hasn't happened to any great degree. Now you're getting a lot more specific about it. You're saying it is going to happen in the fourth quarter and it's already November. I guess my question on that is -- you must really be seeing it real-time now to the point where you're going out with a projection like that, and I wanted to just get a little clearer on that.

Second, with regard to your core small and midsize commercial markets, Cincinnati Financial in discussing the market -- and their observation is similar to yours, speculated we might even see a reverse effect occur, where those with coastal exposures accelerate their efforts to rush into the non-exposed markets and make them more competitive. I was wondering on your view on that.

And finally, the Q made reference to some COLI gains in the institutional business, and I was wondering if you could quantify those on surrenders of some contract (ph).

I hope I remember all the questions. I'm going to have David first talk about the commercial and personal lines forecast. But the fact the we've done better than our outlook shows that David is doing a good job. But David, would you want to comment on the --

I don't to screw that up, but if I may, let me start with the small commercial question because I think it's a good one. And I wouldn't necessarily disagree with those comments that folks are going to try and shift their geographic footprint. Having said that, that's something we've been doing for quite some time now.

And a big part of the reason that we're building some confidence in the growth, particularly in small commercial but also in the agency personal lines, has to do with what we've been doing on the agency side. We've been appointing new agents. And obviously we're targeting the non-coastal areas and going deep into the heartland.

And I think the latest count as of September, we've appointed over 1000 new agents this year. About 600 of those are personal lines only, 300 would be small commercial only, and about 150 are both. You wouldn't expect to see a lot of traction in '05 from those appointments, but those are the appointments that we would be expecting to see some real traction on in '06. And as I said, the geographic footprint of those, are going to look decidedly different than the ones we have now. So I would agree, but I think we're well positioned to get our share of that market even though it may become somewhat more competitive.

On the combined ratios, I think what we have -- somebody here will correct me if I'm wrong, but I think we've guided for a full year on the business insurance that we're going to show a combined ratio ex-CAT and prior period will be better in '05 than '04. I think the '04 number was about 89.7, so I think there were still confident we're going to come in ahead of that all-in. For the year '05.

On the personal lines side, I think we said the same thing. We're going to come in slightly better than the '04 number, again ex-CAT, ex-prior year. That was 88.2. We will look to come in better than that.

My comment or question, and maybe I'm just trying to split hairs too much here, the comment seemed to imply or state outright that we're going to see those ratios pull up some in the fourth quarter. And my question was very simply, given that it's November already, is that something you're actually definitely seeing now, or is that still a forecast?

It's too early of to really comment on that. Here in November we're just starting to observe October results. When we get to you in December, we will be able to give you much better guidance on fourth quarter.

The other point about the people attempting to redistribute their portfolio away from the coastal areas, I would remind you of one thing. That while you have hurricane-oriented CAT exposures in the coastal area, you have earthquake-driven exposures in the Midwest, and tornadoes and other things. So catastrophe modeling has got to be at the core of everything that you do. This is something we spend a lot of energy on as we pursue profitable growth around the country. I would expect that that is something that has got to be core to your business discipline.

Let me look to Tom, or Liz, would you take the question on COLI?

That is a nine-month number. There was a 6 million after-tax gain. We did lose three COLI cases. As you know, the leverage COLI is writing off, the variable COLI is what we're selling today. That was in the nine-month number.

Jason Zucker, Fox-Pitt Kelton.

I was hoping that we could talk a little bit about ROAs on the annuity lines. First question was in the US, there was a pretty big number. What do you think it should be normalized? And then the second question has to do with Japan, where the ROAs there are looking like they're running -- just depending on how you calculate it, anywhere between 65 and 70 basis points annualized. Much higher than the US. And I was hoping that maybe you could make a comment there.

First in the US I continue to guide in the low 50s for the return on assets. During the quarter there was some of the catch-up on the lower tax rate. One thing that is contributing is that our revenue is going up as we have higher rider adoption. Some more people are taking the riders and our expense control continues to be good. I still think low 50s is where you ought to be targeting that.

When you say rider adoption, when I look to the big sequential jump in fees, that's where that ends up?

That's a big piece of it. More of our in force now has the withdrawal benefit, where they're paying 50 or that kind of extra basis points. So in Japan, first thing you need to do is we look at it net of the periodic settlements, the footnote in the Q. We guide that to the mid-'50s.

But even with that, the quarter itself was higher than that, even when you get do net out the net periodic settlements. A lot of that was due to the higher surrenders in the quarter. People taking their gains. And we've probably got a good 6 basis points of additional ROA margin because of that one factor. I think the other factor was a real good market in Japan, so that helped as well. But I would really stay in the mid '50s there.

Eric Berg, Lehman Brothers.

My question is for either Tom or Liz. It concerns your Individual Life Insurance business. I'm hoping you can characterize the state of the business. By that I mean is it moving forward really smartly, is it in neutral, or what?

The reason I don't think it's obvious is that while sales growth was clearly strong, going through the supplement I noticed that by many indicators the business seemed to be struggling a little bit. I'm referencing the fact that the cash flow was very, very modest. Earnings growth was essentially zero or very modest, I think $1 million year-over-year. The net amount at risk seems to be shrinking. I'm not quite sure what to think about the Life business. Are we moving forward here at a good clip, or where do we stand?

It's Tom. First of all, we love the business, and we're doing everything we can to get it to grow. And best way to do that is through our sales efforts. Because retention is really good on that business. I think you have to realize we have a very large installed book. That was -- that installed book got even bigger with the Fortis acquisition back in '01. Keep in mind they were mainly a variable life player, so we took over that book as well. It just means it's harder to move the overall equation.

I think we're playing the right approaches to growing the business. The other thing I would say, this is part of the reason -- what I like about the business is its consistency. I think the mortality will be better in some quarters, not so strong in other quarters. If you just look at it historically, its ability to produce earnings at good returns I think makes it a real strong contributor for us. And we will do what we can to get the growth. But it will take time, I will say that, given the installed book.

If I could follow up with a separate but related question. In a number of conference calls, I don't remember how many this quarter, management teams have mentioned issues with respect to old age mortality and pricing. In summary, what is that all about?

In the guaranteed UL, business, the older -- they're (ph) fairly lapse supported products. So what has happened with older age, some of it is underwriting. Some of it is just probably underestimating the last assumption. Because it's lapse supported, the fewer people lapse, the worse the profitability is going to be. Because you're paying a level premium for what's really an increasing risk, given that mortality increases with age.

That's what's happening. I think some people maybe just went too far with underwriting and underestimated that some of these older policyholders were buying the products in life insurance trust with no intention to ever surrender. And probably that created (ph) for some underpricing that's being remedied right now in the market.

Thank you.

Tom Marra I hope that helps.

It does indeed and I will certainly follow up.

Nigel Dally, Morgan Stanley.

This is (indiscernible) annuities. You continue to deliver exceptional net flows. In analyzing the future prospects, how do you think about the potential size of the overall Japanese annuity market? And how comfortable are you that you can continue to post net flows like (ph) what we're seeing year-to-date in 2006 and beyond?

Second, drilling into the stock repurchase plan a little more, how should we be thinking about the roughly 1 billion coming in from the mandatory conversion of the equity units next year, given your leverage ratio has current excess capital and capital generation and it seems like (multiple speakers) these prices (ph) would likely be redundant capital?

On the Japanese outlook one thing -- let me just start by saying the market size, we have often communicated as potentially being somewhere between $250 to $400 billion. It's about 40 to 50% of what we perceive as being the size of the US market. Clearly competition is increasing. This is one that you know Tom has spoken to several times before, on how -- why we really were a major player in a major force in the market and our market share was substantial.

We do to see the entree of several competitors in that marketplace. So those are two things I would anticipate. And I sure hope that we're going to be able to continue to innovate on products here. Tom, if you want to add anything to that.

On the overall market, I agree with Ramani. It's going to continue to grow. We will keep adapting product as it make sense. We will -- we're introducing a new product in Japan as well, and we're excited about that. We think in terms of flows it's been pretty strong, so I hate to project big increases. And they do that seasonality where the first and third quarters will tend to have a little hop because of their fiscal half years.

But just in -- in terms of how we guide, we like to look at it one quarter at a time. And right now I'm looking for fourth quarter at about 2.5 billion gross, 2.2 billion net, that's just VA. For fixed annuities, probably add another 100 million or so we'll sell in the fourth quarter.

David, you want to take the question --

On the mandatory units. It's a good question, and we're still evaluating exactly our capital plans for next year. But the issuance of securities associated with the mandatory -- the equity units, certainly one of the things that's in the mix. But I will make two or three observations.

First, for those who are not aware of exactly how the units work, there's a good description in the Q. Page C10 of the IFS provides helpful information for understanding the impact of the issuances of shares pursuant those that happens in the second half of '06.

Second observation I would make is that you cannot look at the money that will be -- that it will come in there as free. It does come -- the way the rating agencies look at it, or particularly Moody's, who is probably the one that has the most on the margin impact in thinking about that is the issuance comes largely with the impact of increasing debt. In our debt to capitalization ratio.

So to the extent we're trying to manage to a particular debt to cap ratio, it's not free money. It's money that comes with an increase in leverage. So any use of proceeds has to be looked at the context of trying to maintain a leverage target.

And third, another note is that -- hard to remember at this point, but when we issued those, I think our stock price was about 47. Even though they have a capping feature which gives us some of the benefit of the upside, which in hindsight obviously was -- made them a real suitable form of capital for the time, that cap still resulted in effective issuance price of about 57.

So even if we were able to just turn that money around and repurchase stock, which the comments I just made it's not quite that simple or straightforward, you couldn't neutralize. Because our stock now, happily, is higher than 57. So a lot of things in the mix, it's a very good question, and that's one of the things that we're working through as we evolve our capital plans for next year.

I would suggest we take one last question.

Bob Glassspiegel, Langen McAlenney.

You may regret that decision. You have been -- you and I know each other for 20 years, and I found you to be about the best of the industry at recognizing inflection points. And given that, I am amazed that you don't think Katrina is a bigger deal.

What I sort of hear you saying is we may have to cut back our market posture if our competitors don't raise rates to embed (ph) in higher reinsurance costs. Even you that got it right on underallocating the regency (ph) says that you're looking at your models. What about the couple of competitors that didn't get it right and overweighted?

A long way of saying that I'm amazed you aren't more optimistic on the '06 environment. And in my view providing a much more cautious outlook than your competitors. Maybe you could amplify why you're not more positive.

David is waving at me and saying I should take this question. So I will take the question. First and foremost, I believe in all honesty the way to think about the market is it is a lot more heterogeneous than what we've seen markets at historical turning points.

What do I mean by that? I mean there's focused mono-line players, say for instance in automobile insurance, who don't have anywhere near the challenging exposures that some others might face, or more multi-line with respect to auto, home and so on.

Two, I believe a big chunk of this loss has also fallen on the backs of specialty markets, both in terms of large risk specialty markets as well as offshore markets. So therefore, to assume this will create a secular shift in markets it is not a safe assumption. One could assume that, but we certainly are not feeling that's a safe assumption.

We believe you entered this period with accident-geared combined ratios for the industries that were excellent. And what you're going to see is an industry adjustment, both with respect to capital allocations to risking the territories as well as which product lines on a risk-adjusted basis are making good returns. Therefore, the industry is going to attempt to reposition this book.

But underlying it all, you will definitely see significant firming of reinsurance markets, specialty insurance markets as well as coastal property markets. The question for us, which is still open, is how does the rest of the marketplace play out? We will have a better sense of that as we go into December. We don't want to hazard a guess on that prematurely. So that's my answer to your question.

I'm going to bring this conference call to a close. I just wanted to remind investors that our third quarter growth and profitability was very good in both Life and Property Casualty. And in Property Casualty we had excellent underwriting performance, excluding catastrophes. And in small commercial, personal lines and AARP our distribution marketing technology initiatives are driving growth.

I'm excited about the launch of our Lifetime Income Builder product, which as Tom and Liz repeated several times, is a good balance between customer value and risk management. And it's the right placement from a risk standpoint as a Company. We feel that's a good thing. I believe that the growth in mutual funds, 401(k)s, are going to be a positive indicator for the balance of '05.

So one last thing as a reminder, I want to remind investors we have an investor day in Boston on December 12. Where we will cover our outlook for '06 in detail, including all our capital plans and everything else that you would want to know. I want to thank you for participating in today's call.

This concludes today's Hartford third quarter 2005 conference call. You may now disconnect.