Hartford Insurance Group Inc (HIG) 2005 Q4 法說會逐字稿

Good morning. My name is Kimberly and I will be your conference facilitator take. At this time I would like to welcome everyone to the Hartford fourth-quarter 2005 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Kim Johnson, Head of Investor Relations. Please go ahead.

Good morning and welcome to the Hartford's fourth-quarter conference call. Please note that our earnings press release and a Form 8-K were issued last night. Also, our financial supplement, financial analysis data 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; Dave Zwiener, Chief Operating Officer of our property and 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'll go right into the question-and-answer session.

As noted on the slide 2, we will make certain statements during the call that should be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These include statements about the Hartford's 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 defer, including those discussed in the Hartford's earnings press release issued on January 26, 2006; Form 8-K filed on January 26, 2006; our quarterly report on Form 10-Q filed for the quarter ended September 30, 2005; our annual report on Form 10-K filed for the year ended December 31, 2004; and other filings we make with the Securities and Exchange Commission.

We assume no obligation to update this presentation which speaks as of today's day. The discussion in this presentation of the Hartford's financial performance includes financial measures that are not derived from generally accepted accounting principles, or GAAP. Information regarding these non-GAAP and other financial measures is provided in the investor financial supplement for the fourth quarter of 2005 and in the Investor Relations section of the Hartford's website at www.TheHartford.com.

Now 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 our financial results for the fourth quarter and full year 2005. I'll also discuss our operating highlights and market outlook. Before moving to Q&A, David Johnson will cover the numbers in a bit more detail and update you on guidance for 2006.

Turning to slide 3, you will see our results for the full year 2005 and for the fourth quarter. The Hartford executed well in 2005. Net income of $2.3 billion was a record for the Company. Core earnings for the year were up 14% over 2004 at $2.2 billion or $7.36 per diluted share. Our book value excluding AOCI grew by 16% even in a year with significant catastrophes. And our return on equity was over 15% for the year. All at all we had a very strong year.

Fourth-quarter net income was $474 million or $1.53 per diluted share. This compares with net income per diluted share of $2.08 in the prior year. Core earnings in the fourth quarter were $505 million or $1.63 per diluted share. This compares to core earnings per share of $2 in the fourth quarter 2004. The results for the fourth quarter were impacted by hurricane Wilma and hurricane-related assessments. In a few minutes David Johnson will summarize other significant items that impacted our results for the fourth quarter.

Now I'd like to devote my time today to discuss the underlying performance of the Company in both property casualty and life. Turning to property casualty on slide 4, I'd like to start off with a couple of comments on the market. 2005 was a record year for catastrophes. These storms changed the lives of millions of Americans and will have a significant impact on certain lines and markets.

According to broker surveys, property reinsurance rates for national programs with coastal exposure have increased between 30 and 100%. New catastrophe models originating from cat modeling firms are under development to address storm frequency and severity. Older models underestimated losses due to storm surge, demand inflation and the impact of multiple storms in the same region. Even today key learnings from these storms are being incorporated into underwriting and rating agency capital models. The industry can be expected to reevaluate risk aggregations and reinsurance programs in cat prone areas.

Since the fall hurricane season the big debate has been the impact of these storms on pricing. To date we're definitely seeing property prices firming in the impacted areas. But we have not seen any significant changes to pricing in under lines in geographic areas. As we look to 2006 we anticipate that pricing outside of cat prone areas will stay rational. With few exceptions, we're still seeing signs of disciplined competition in both business insurance and personal lines.

Now what does this mean for The Hartford? We believe we're well positioned for 2006 and beyond. Like other companies, we are reexamining our underwriting guidelines and reinsurance programs. While we may make minor adjustments to capacity in some regions, we don't anticipate major changes. Our principal property cat treaty renewed on 1-1 and is now fully placed with terms and conditions similar to prior treaties.

We raised our retention from $125 million to $175 million and increased our limits by a similar amount. And we have the cat bond coverage in place for mega hurricane events. While our reinsurance costs for 2006 increased they were not out of line with our expectations. All additional costs were reflected in the earnings guidance we provided to you on December 12th.

Now turning to slide 5. Despite the large catastrophe impacts, our property and casualty business produced good results in the fourth quarter. Net written premium of $2.6 billion increased 6% from a year ago driven primarily by growth in business insurance, AARP and personal agency lines. Our ongoing combined ratio including cats and prior year development was 92.1%. Excluding cats and prior year development was 92.1%. This is higher than a year ago primarily due to the impact of citizens' assessments and reinstatement premiums.

Adjusting for hurricane-related assessments included in our underwriting expenses, our combined ratio would have been 1.9 points lower or 90.2%. Now there's another way to think about this. In our ongoing businesses with two of the toughest years on catastrophes the accident year combined ratios were 95.2 in '04 and 92.8 in '05, a solid result.

In business insurance we're continuing to see outstanding growth and good profitability. Net written premium reached $1.3 billion in the fourth quarter of 2005, a 12% increase over the fourth quarter of the prior year. With the product and sales initiatives we have in place, small commercial net written premium has grown by double digits in each of the past eight quarters. And in the fourth quarter we increased the sophistication of our pricing model. With these changes we expect to increase our competitiveness on the best risks.

In middle market net written premiums grew 11%. As we enter 2006 early indications are the primary pricing in this market should firm a bit as high reinsurance costs are incorporated into rates. Profitability in business insurance continues to be very strong. Our combined ratio of 91.9% ex catastrophes and prior year development was roughly 2 points higher than a year ago. Adjusting for the citizens' assessments our combined ratio would have been 89.9% or flat with a year ago.

Now in personal lines fourth-quarter growth in net written premiums was 5% over prior year. New business and AARP and agency is driving our premium growth. Competition in personal lines is intensifying especially in personal auto. Rather than competing on rates, many companies are advertising heavily to drive new business in attempting to retain profitable customers. Loss cost increases continue to be modest as lower frequency is partially offsetting higher severity.

Our personal lines combined ratio before cats and prior year development was 89.4%. This combined ratio included 24 million in hurricane-related assessments. Adjusting for these expenses our combined ratio would have been 86.8% for the quarter.

Now in our December investor day we highlighted our personal lines 2006 initiatives in pricing, product and distribution. These initiatives should enable us to continue to profitably grow in spite of increasing competition. In specialty commercial net written premiums declined 9% from a year ago. The lower written premium reflected the termination of a particular program in specialty casualty, our exit from crop insurance and lower new business growth in specialty property.

The combined ratio before catastrophes and prior year development was 99.2%. There were several onetime items affecting this combined ratio including reinstatement premiums. As we look toward 2006 we expect to be able to achieve a combined ratio excluding cats and prior year development in the low 90s.

So to summarize, property casualty results were excellent in 2005. We were able to grow the top line while achieving very strong profitability. As we look toward 2006 we believe our initiatives will sustain our top-line growth. While underwriting margins will likely compress, we expect returns will continue to exceed our long-term targets.

Now turning to life operations on slide 6. Life core earnings were at $326 million, up 6% over the fourth quarter of 2004. This includes all of the tax benefits and expense items highlighted in our press release. The underlying earnings momentum of life operations is even stronger. The bar chart shows growth in core earnings from the fourth quarter of 2004 to the fourth quarter of 2005. If you adjust for tax benefits in both periods, every reporting segment except individual life recorded year-over-year double-digit growth in core earnings and individual life core earnings were up by 8%. This is a very strong result in a competitive market.

Total assets under management ended the quarter up 11% to $277 billion. We're seeing AUM growth in every business including individual annuities. During the fourth quarter good equity markets more than made up for net outflows in U.S. variable annuities. VA assets rose $1.7 billion in the quarter to $105 billion.

The highly competitive U.S. variable annuity market continues to be feature driven, with more new products launched every month. With this competition variable annuity sales and deposits were $2.5 billion in the fourth quarter and net outflows were $880 million.

Lifetime Income Builder, which is our newest offering, is off to a good start. This guaranteed lifetime income rider elected on 20% of our new variable annuity sales in December while the proportion of sales electing principal first declined. David Johnson will provide guidance on first quarter in just a few minutes. But I can tell you that as we move forward into 2006 we believe Lifetime Income Builder will become an even larger proportion of our sales and should help stabilize our market share.

Now turning to slide 7, you will see that we are rapidly gaining scale in other life businesses. Our Japan variable annuity business continued to do very well in the fourth quarter with sales of $2.4 billion. In yen total annuity sales were up 14% while variable annuity sales were 37% higher than the fourth quarter of 2004. With very strong net flows Japan AUM topped $26 billion at year-end.

As you may recall, we dramatically increased PLANCO wholesaling support for mutual funds a year ago. With more seasoned wholesalers, strong mutual fund performance and increased brand awareness retail mutual fund sales rose to $1.7 billion in the quarter. That is 39% above the fourth quarter of last year.

Retirement plans is also a rising star for us with strong sales momentum especially in 401(k). Fourth-quarter sales and deposits of $1.1 billion were 31% higher than the year ago period. Each month more retail brokers are finding that the 401(k) sale supported by a Hartford retirement plan specialist is an easy way to build deeper relationships with their clients. As we look to next year we will broaden our 401(k) product offerings to meet the needs of slightly larger accounts as well as sole proprietors.

Taken together international mutual funds and retirement plans generated $3 billion in net flows in the fourth quarter. And at year-end 2005 assets under management in these rapidly growing businesses exceeded $75 billion. Group benefits in individual life also delivered strong sales growth in the quarter. In group benefits fully insured sales were up 70% over the fourth quarter of 2004 with strength in both group disability and group life. Excellent sales in the latter half of 2005 and strong retention should drive fully insured premiums up 8 to 10% in the coming year.

Individual life had record sales of $85 million in the fourth quarter, 8% over the prior year. And account values grew 9% to $10.3 billion. We're certainly carrying this momentum into 2006. So in summary, our life operations core earnings grew year-over-year even in light of some additional expense items. And as we head into 2006 our underlying momentum remains very strong.

Now let me turn it over to David Johnson who will cover the quarter in a bit more detail and update you on guidance. David?

Thank you, Ramani. I'll turn first to page 8. We will readily admit that events dealt us and thus you a very noisy fourth quarter. This slide highlights some of the unusual items that you might wish to consider in forming your own judgments on the earnings rate of the Company.

The first two expenses concern regulatory and related matters that we told you in December were coming but we couldn't yet estimate. In total they ended up aggregating to $0.15 per share. I would like to tell you that the $0.09 or 29 million accrual for regulatory concludes these matters, but it does not. We are still in active discussions with each of these regulators and the timing of the final resolution of any of these matters is substantially outside of our control. In fact, there is always the possibility that developments between now and the time we file our 10-K late in February could cause us to make a further accrual and thus alter our final 2005 earnings. I hope not, but until we close the books with the 10-K filings this could happen.

The second $0.06 or $18 million item does reflect finality. A group of holders of older variable annuity contracts that limited our ability to restrict fund transfers have agreed to surrender. This is a negative net flow we can live with. The third item closes out ongoing negotiations with a mutual fund distribution partner that have been going on for some time. We owed them a string of payments over time and with this payment we've ended that obligation. We think it's a fair trade for both of us. The go forward benefit is already in our guidance and the partner will continue to distribute our funds as before.

Next, we continue to benefit from our separate account dividends received deduction. While some of this benefit can be anticipated and is assumed in our guidance, some of it is unpredictable based on the actual investment and distribution activity of the underlying mutual funds, many of which are not Hartford funds.

I think all of us have been surprised by tax distributions and our own mutual fund investments that get served up to us unexpectedly in the fourth quarter. The Hartford has the same thing happen to us but obviously on a much larger scale. Fortunately the surprise this quarter was positive and we saw a favorable $0.10 variance. For 2006 we are expecting the individual annuity tax rate to be between 14 and 17%.

At our December investor day we told you we were heading for the upper end of the 150 to 170 million pretax fourth-quarter cat estimate that we gave you in early November. In the end we did come in slightly through that range ending up at 181 million pretax net total cat impact for the quarter. That includes reinstatement premiums and an estimate of what will be assessed by Citizens Insurance in Florida.

The Citizens assessment was in fact the source of the overage since the science of estimating what will be assessed by a government sponsored entity for their ultimate losses at an early time -- it is an evolving science to say the least. But we do the best we can. None of this is further deterioration on the third-quarter storm. Our picks there are holding. It's all Wilma.

A final note on the $31 million after-tax capital loss for the quarter. That's driven by the loss in our GMWB hedging program I highlighted for you at our December investor day. It's caused by an update of the modeling inputs and was anticipated. I'd also like to reiterate the other observation I made in December which is that you should expect to see more volatility in these hedging results going forward. The program is getting bigger and I really do feel that 2005 markets were quite benign compared to what we could see in the future.

Please turn to page 9. This page is for the reference of people who keep score on what was in and what was not in the guidance we gave you on December 12th. As we stated at the time, regulatory and related accruals were coming, but we couldn't calculate them at that time and we also said we were planning to recast our segments and reporting framework in early January. This trues up the guidance for those matters to let you see how we did apples-to-apples.

The bottom of the page trues up our 2006 guidance for our new performance measure of core earnings. Again, this reflects no change in fundamentals -- it's merely pro forma for moving the anticipated periodic net coupon settlement from gain/loss to inclusion in core earnings -- actually in candor we did give you $0.02, but that's mainly because we didn't want to have odd numbers bracketing the range.

Page 10 and page 11 are for your reference. Again, there is no change in fundamental guidance from December 12th. On page 11, we did add first-quarter views on sales and net flows for U.S. and Japanese VAs, mutual funds and retirement plans. I hope that's helpful. Page 12 reiterates our group and individualized guidance. Again, no change in our budgets and outlooks, but we have recast the group benefit sales growth to divide our unchanged 2006 outlook by our actual 2005 results. As opposed to using the slightly lower 2005 estimates that were in the denominator when we calculated this in December. And finally, no change in our capital outlook or plans since December. Ramani?

Thank you, David. Operator, I'd like to open the call for questions.

(OPERATOR INSTRUCTIONS). Alain Karaoglan, Deutsche Bank.

Good morning. I have a question on catastrophes and your catastrophe load going forward. You're still assuming it's around 3 points going forward. In the new reinsurance program you're increasing your retention by around $50 million. And if we assume a higher frequency and severity of losses, why isn't the cat load increasing? Are you planning o increase prices to offset some of the retention that you're keeping or to offset some of the additional frequency and severity that we should expect? Or are you having your customer keeping a higher deductible? Could you comment on that?

Good morning, it's Dave Zwiener. I think we continue to guide at 3 -- 3 points and I think that that's the right number going forward for '06. I think just looking back as sort of a reference point; clearly there's been some volatility around that number. But as you look at the last eight years or so it certainly incorporated a number of large events. It's averaged for us at about 3.1. So I think that that's the right number, but obviously there will be some variability around that.

I think although you do reference a change in the cat program with a slightly higher retention, I think too we've obviously been managing exposures in those cat prone areas. And so that I think that on balance, net of the reinsurance, net of the exposure management, and given the growing base that we have of business, we're still comfortable with that as being our guidance going forward.

Okay. And the second question that I have is on the reserve additions on the liability. could you tell us some of the adverse developments, what lines of business years and what do you see from loss cost trends generally speaking in the liability lines?

With regard to reserves, I think we've laid out the development on the supplement. On PC17 we've got the fourth quarter and then on PC18 obviously the full year. I'll just make a couple of points. First, as I think you and everyone else listening know, we perform quarterly reserve reviews and then adjust based upon those reviews every quarter. So what you're seeing in the reserve review and adjustments here reflects that review that we completed at the end of the third quarter.

I would also say for full year, which you see on PC18, it's a fairly de minimus number. You're looking at $36 million, less than half of a point total impact on prior year for the full year. So I think that we feel very good about that. To your specific point in the fourth quarter, there really were two items of note. One you've touched on which occurred in the business insurance line.

Within that line based upon the third-quarter review, we did make the decision to strengthen the general liability reserves in the business insurance and that relates specifically to business written in the '90's; so that goes back a fair ways. It really relates to a specific set of accounts where we viewed the reserve in need of some strengthening. And so that impacted the number for the quarter and the year.

While I'm there, let me just touch on the second one which people may have an interest in, and that is in the personal lines area. You see there that we strengthened 15 in the quarter. That does not reflect any change in our view of the underlying trends in the book of business, but rather that was in response to desire to strengthen a handful of specific case reserves during the quarter and that would impact almost entirely -- I think entirely the auto lines. So you'll see about 3.5 points of that development coming through the combined and the auto line in the quarter. So those are really the two noteworthy items on the reserve development in the quarter.

And in terms of trends on the liability side?

Again, I wouldn't attribute this to any changes to trends in liability. This is really more of a specific account or case that led us to change the reserve position.

Okay, thank you very much.

Andrew Kligerman, UBS.

Can you give us a little update on your excess capital position?

Andrew, you're not coming through clearly.

I'm sorry. Can you give us an update on your excess capital position, where you are right now?

We're going much exactly where we expected to be based on the comments we made to you in early December. We've achieved the capital margin target of 1 billion and we, based on three weeks, are on track to produce hopefully about half a billion in excess of our needs over the course of 2006. So still planning to increase the dividend 150 million this year and really nothing else to report.

Okay, good. With respect to your UK initiative, any update there with the annuity business and how's that going?

Let me give it to Tom. Tom, do you want to take that?

First of all the UK is essentially taking from the success of Japan, so we're kind of looking at the international business in total. Having said that, I will offer that the results so far have been slower than we would have hoped-for. We operate mainly through independent financial planners which is a good source of business, but I think the real breakthroughs will come when we tap some of the larger banks that control most of the investment bond activity. So we're still aggressively pursuing at, but it's obviously early innings insofar we haven't scored any runs.

Do you think the banks are far off in terms of getting those arrangements moved here?

Tough to say. I think that will be our best opportunity and it's hard to predict right now. I think this guy could well say discussions are active, but it's hard to predict that we'll have shelf space within the next month or two.

Okay. And while I've got you there, any thoughts on -- I read that Hartford was interested in putting out an equity indexed annuity. Is that anywhere on the near-term slate?

I think what we really said is the equity index annuity is worth looking at. Clearly it may have some appeal, particularly for our distribution, the banks and to some degree the financial planners. But if we did that we would do it at a much lower commission level, more in line with those distribution channels' expectations and therefore the consumer value would be much greater than some of the leading selling [EIAs] today.

As there's been a lot of criticism on EIAs, I think to some degree that's misdirected. Indicting the EIAs in total, it's really if you put a 15% commission on any annuity product the resultant consumer value is not going to be good. So if we did it we would do it on a much more consumer friendly basis in line with commissions that our distribution expects.

And Tom, would you characterize your interest in doing that as strong?

Not super strong, Andrew. I think banks are a leading source of variable annuity production, so it's not as if it's a must for us. So -- but it might be an opportunity. So I wouldn't set your watch to it, but we will give it a good, hard look.

Jimmy Bhullar, JPMorgan Chase.

Just a couple of questions. First, for Dave, just your view on the outlook for frequency and severity in 2006. And then second for Tom. If I look at the guidance you're giving for variable annuity sales in the U.S., I think you're implying a sequential increase. You've had seven quarters of sequential decreases in domestic annuity sales. What's giving you the confidence now to assume that sales will recover from these levels? And that's it.

On frequency of severity trends I think -- let me, if I may, go back to our investor meeting in Boston where I think we spent a good bit of time reviewing what our thoughts were on '06. And I would say at this point I have no reason to adjust any of those trends. I think that we continue to see favorable frequency trends particularly in auto, but our assumption is that those are probably going to flatten out during the course of '06. I think on the severity trends, I think we gave guidance there that we're probably going to set mid single digit sorts of severities in most lines and I don't see anything in the last month and a half that would cause me to change that view.

Have you seen a pickup in frequency yet, or are you just assuming that will happen later in the year?

We're assuming it's going to happen later in the year as I think many others are. As I admitted candidly at the meeting in December and prior, we've fortunately been wrong on that assessment. I think we would have expected to see that occur in '05 or late '05, but as yet we have not. But I think it would be prudent for us and others to guide based on the assumption that that's probably going to flatten out and that's what's based in our assumption.

And on variable annuities we do expect a sequential increase for first-quarter VA sales. I think I'd point to two things, Jimmy. One, the Lifetime Income Builder rider which we have said, we think that's the right place for us to be playing the withdrawal benefits right now. I think that is holding to be true and it seems to be working as we had expected.

The second thing I'd point to is on a director side of our VA business, two things there. One, it's been a year now since we broke that sales force into two, half mutual funds and half for the director of variable annuity. They're now -- so both on the mutual fund side, which is a huge story for us right now, and on the director M side, I think they're each finding their stride.

And secondly, I would point to the fact that midyear we added a bunch of great fund families by making director M -- M standing for multi managers. So I think that change to the product plus the wholesalers hitting their stride is helping the director series quite a bit.

Okay, thank you.

Tom Gallagher, Credit Suisse.

I have a couple and then Charlie is going to have one on property casualty. The first one I had is yesterday Met Life announced a GMDB reinsurance deal. I guess that's the first I've heard on that front in a while. I guess Tom, do you think there's actually capacity opening up here, or do you think maybe that's just a one off? And if so, would you see any chance for GMWB reinsurance on top of that? That's my first question.

I'm going to turn that to Liz because she's been right in the middle of these discussions. I will say that we have had in the recent past GMDB reinsurance on our APB rider and we continue with discussions both on the death benefit and living benefit side. I think Liz will have better color than I.

We're certainly very well aware of what's going on in the marketplace in terms of reinsurance transactions and different structures. So you can really count on The Hartford, we're always talking to reinsurers. I wouldn't say that the GMWB -- I wouldn't automatically say that it necessarily works for that, but we're certainly looking into structures like that for both GMDB and GMWB. And as Tom said though, specifically on the death benefit, we do have heavy reinsurance so we feel pretty well protected on that end.

And Liz, would you think that that's a possibility for '06 in terms of something you're looking into or is it a little bit further out than that?

I would say that the GMWB is just a lot more complex. It's a longer horizon, so we think it may take a little bit longer. But we're always looking into structures like that.

Got it. And then just my only other question was I guess the Japanese annuity ROA guidance is 55 to 57. And I just want to make sure I'm thinking apples-to-apples here. Because I know now you're including I think it's 12 million of after-tax costs related to hedging from Japan in your earnings guidance. If I add that back to the Japanese ROA I get north of 60. I just want to make sure I'm thinking about this on an apples-to-apples basis. If I use the old metric to calculate the ROA -- Japanese annuity ROA that is, I would get north of 60 basis points. Am I doing the math here or am I mixing something up?

First of all, yes, if you take the old way we did it the ROAs were over stated. And now with our new core earnings, the 55 to 57 takes into account that negative coupon swap. So the 55 to 57 guidance is including the negative effect of that CRC -- I mean off of that fixed annuity periodic coupon swap. So I would say -- and if you look at this particular quarter you're going to see a slightly high ROA, but that was due to a DAC adjustment. So after adjusting for that you're in that range for the quarter.

Okay, thanks. And then I think Charlie has property casualty.

I have two questions. My first, could one of you elaborate on how you see the commercial lines property casualty pricing cycle evolving in '06, speaking specifically both to small and middle market cases?

I think the trends that we've seen in '05 we probably expect to see continuing for us. What that meant is you see in our disclosure we talk about business insurance price changes in the quarter down 3, but it continues to be a tale of two cities for us which is small commercial actually experienced a small increase, about a point whereas the midmarket was down about 6.

I think going into the '06 arena we are seeing the same signs of competition we've seen in the latter part of '05, particularly in the midmarket, area and that would extend down into the higher end of our small commercial -- what we call our expand product where there tends to be a fair amount of competition as well. So our view of prices is there will continue to be pressure primarily at that end, the higher end. We could see low single digit types of decreases.

My guess is though, the impact of Katrina and reinsurance and so forth is probably going to play out in that higher end, it may take some time, and my view is it's probably going to moderate what would have been perhaps a more accelerating deterioration. So think we should see some flattening in that area, but still very, very competitive. In small commercial we continue to see opportunities to write with moderate increases or prices at about where they are.

How do you define middle market?

The way we come at the market, Charlie, is the small commercial we break really into two pieces. Our traditional small commercial would be for companies really with revenues of about 5 million. Expand, which is the higher end of our small commercial, would be revenues probably in the 5 to 15 million and then midmarket would be above that.

My only other question, one of you I believe indicated that the combined ratio for personal auto increased during the quarter by some, I believe, 3.5 points by additions to reserves for all your losses. Given the short tail character of that line, could one of you elaborate as to the character of those additions to reserves?

Sure, Charlie. What I made reference to was during in the fourth quarter we had strengthening in the personal lines area and that was a few specific cases and these go back to 2000, 2003 years and they are in the auto line. So what I mentioned was that would have added 3.5 points to the combined in the fourth quarter auto results, so we reported 99.3. If you were to back that out you'd be looking at a combined closer to 95.8.

Wouldn't it have to be more than a few though given the amount of monies involved?

These are very specific case situations, and I don't want to go into a lot more detail, but I think based upon that just the actuarial, but in this case legal review we felt it appropriate to add to those reserves for those specific cases. And I want to emphasize what I said earlier, in no way does this reflect any sort of change in trends to the basic underlying book of business. And so I think that we feel very good and have no reason to change guidance going forward in the auto loan.

Thank you.

Nigel Dally, Morgan Stanley.

Good morning. Firstly, the variable annuity (indiscernible). I know there's a lot of focus on gross sales given the introduction of your new products. But when we look at the numbers, withdrawal seems to be the bigger problem. So Tom, I was hoping you could discuss what's driving the increased withdrawals. Is it a (indiscernible)? Is most of it 1035 exchange activity? And if so where are you losing that money?

Equally as important, are you making any changes to your attention programs and trying to stay (indiscernible)? Second, with your new product launch, you mentioned that it represented 20% of sales. Can you discuss how that compared to your expectations and just a raw comparison as to how the acceptance of the product compares to your prior introduction of principal first preferred.

It's more than double principal first preferred. So we were in the single digits this time last year about -- with principal first preferred and about 20 as Ramani mentioned for LIB. Thinking about the redemptions, I think the number one thing is just the competitive environment. And I think vintage businesses getting courted for replacement to more the newer version product with the living benefits -- about half of our outflows are DAC 1035 exchanges.

The quarter was certainly within line of what we had guided about a month ago. Needless to say, we're not happy about the level of surrenders. We are doing things we can. We've activity conservation programs. But I also want to just reiterate that in a broker oriented world that we have to respect the role of the broker in giving advice to the client.

So the expectations of what we can do for conservation have to factor that in. So we're doing what we can. We've guided as we think is appropriate. And obviously we're working both sides of the equation, both growth sales and surrenders, again, reflected in our guidance. And hopefully on the growth sales side we can provide some upward surprise this year; we're certainly working towards that end.

The one thing, Nigel, that we keep emphasizing with our distributors is customer value. And a lot of this the Hartford has historically done a terrific job on investment management and the long-term investment yields to customers have been outstanding. So we keep reemphasizing that, and there are other points that we use with our distributors. And so it's every day blocking and tackling on this issue.

Okay, great. Thank you.

Bob Glasspiegel, Langen McAlenney.

Just following up a little on Tom's question on the Met transaction. To what extent have you been held back at all from marketing from concerns about non economic hedging volatility on SOP3-1 in both the life and the annuity area? Has that at all been an impact on either product, design or marketing emphasis for the Company?

I'll turn it to Liz, but absolutely. We build products with the requirements in mind and I think our hedging program to boot. I think it's an advantage to us and I would say that anyone in this business should not turn a blind eye to those requirements because they make a big difference in how you price and manage your risk.

Non economic earnings volatility impact how you price products? That was the question I was asking.

I was thinking not just the SOP, Bob, but also the statutory requirements. You have to look at all those things as you price product -- particularly on the staff side.

You were answering a different question I think from what I was driving at, Tom. My question is Met has said at their analyst meeting that they're paying a small economic cost with this transaction to get the negatives of non economic earnings volatility out of their income statement. And as your hedging gets bigger and your volatility gets bigger, there may be a point where Ramani says to you "I'm nervous having that much non economic earnings volatility in my numbers. Are you at that point? Would reinsurance be a solution?

The way we think about it, and we have always articulated this and I believe Tom has spoken to this and I have spoken to this, is we always look at three things. We look at the economic cost of hedging. We also look at statutory tail risk and capital call related to that and we are very mindful of GAAP too. So it's a three prong examination of how we approach all of this. And the balancing act is first to make sure that the tail risk is properly addressed. And then to make sure that we are, from an economic standpoint, putting a product out there that we can economically support. And then GAAP concerns are the third element of how we look at these things. Liz, you want to add anything to that?

I think everybody covered it, but to your particular point, when we price we look at really claims cost and statutory. We do factor in GAAP. And as you know, some of the products are under FAS 133 and some of them are in SOP3-1, so obviously we have to consider that when we're structuring a deal on which accounting treatment it is, because in one case everything is mark to market and the other it's not. So it's one of the many things we evaluate when we're looking at a transaction. But I still think economics drive first, that's our primary objective. Economics which we do consider both at claims cost and statutory.

I applaud that emphasis. On personal lines, you waited a little bit relative to Safeco's press release and conference call, which I think was more strident on an irrational competitor out there in a few areas. And Ramani, your comments were it's been advertising and pricing has been irrational. So would you disagree with the characterization that you're starting to see some players out there disrupting segments of the personal lines marketplace?

First of all, Bob, I'd rather not comment on individual competitors and their market behavior. The personal lines market is huge.

Exactly.

And so from our standpoint the principal area that we continue to believe is a major impact on what's going on out there is the investment in advertising and other media-related activities to generate flow in personal lines business on the part of a lot of companies. At the same time, a couple of points on personal auto itself. Our own experience of business -- let me look to David to comment on that.

Okay. I think, Bob, we've heard some of the comments on the Safeco call and I would agree with Ramani. I think by and large the market continues to be behaving in a fairly disciplined fashion. But I would say -- underscore what we and others have said, that certainly on the auto side it has become more competitive and people are reacting in different ways to that intensity.

I think those that have have pushed the media button or the marketing button and we've been doing that certainly on the AARP side and I think you've seen a bit of a lift in the growth rates we've shown on the fourth quarter. That's been directly attributable to some of the marketing efforts we've had there.

I think too on our side, as we've communicated in the past, Dimensions for us is a well tested new class [plan]. We're in our fourth release of that, performing very well. And so we're very comfortable that that is serving us well on the product side. Our real growth focus has been on extending distribution in that regard -- we talked a little bit in December about our strategy there. But it's about adding sales reps on our side and it's also about adding new agencies.

And I think we're off to a good start in January where we've already, for the first two or three weeks of January, added almost 100 new agencies. We've also added to our sales reps and so forth. So our growth I think is based on a solid product capability, but it's really now pushing hard on media where it makes a difference for us which is on the (indiscernible) side and on the agent expansion side for the independent agents.

Okay, thank you very much.

Ron Frank, Citigroup.

I wanted to zero in on the middle market PNC -- middle market business insurance in particular, and bringing some things together. David, you observed that the middle market as we stand today I think is still pretty competitive, certainly more so than small business. And I note at the same time that fourth-quarter growth in middle market picked up pretty noticeably from the nine months. And it appears, although you don't break that piece of it out, it appears on the surface to be retention driven. And I was wondering if you could position that against your current market observation from midmarket? And then I have a follow up.

I think in the quarter, as you saw in the disclosure, midmarket in total grew about 11%. I think breaking that down, obviously the retention was a good story across the board, not just in midmarket. I think the first line is the small commercial. But within midmarket, retention moved in the quarter from 81 to 85%. And if you adjust for the price difference, albeit a declining price environment, the retention moved from 83 to 90. So there was -- obviously, I think the benefits of fighting hard to keep the renewals which we are not alone in doing, but I think this is a good scorecard of how we are doing; shows that we are doing a good job of keeping the business we want to keep, because I think that is a big part of what we are doing.

Having said that, I don't think I would take the fourth quarter as good as it was and use that as an indication for the future or change guidance. I think given the competitiveness of the market, we would continue to feel more comfortable guiding you and others to sort of a low single digit top-line growth rate in that business. It is a business we are extraordinarily focused on the profitability of during this period of time, and that is where the focus is going to continue to be. I think when we add all that up, I think that low single digit growth rate for '06 is the right one.

That really leads to the next question, which is the '06 outlook. I'm trying to make sure I understand what you're saying there. Currently you are observing no impacts of Katrina outside of the affected lines and territories, basically property in the Gulf per se. But you made a reference to modest firming or perhaps a decrease in the rate of decline. I want to better understand exactly what you're saying about middle market for next year. It doesn't like you're wildly optimistic. I'm just trying to get a sense for what the real shift if any in tone is there.

The shift in tone would be this; I think that we would expect there to be a dampening of what probably would have been a more dramatic rate decrease environment. And how that plays out, where and when, I don't know, but I am assuming it will play out. So whereas in the past, I probably would have been guiding for price decreases in total mid single digits or perhaps more, my guess is that probably starts to moderate as people have to reflect the increased reinsurance costs, and if not raise prices, at least not decrease them as fast.

The aggressiveness, particularly in the new business, where you see the biggest price changes I think should start to moderate a bit. But I don't think it is going to lessen the intensity to renew the good business. So, therefore, I think this is still going to be an increasingly competitive market, maybe just a little less so than we would have assumed, but that will play out. We have not seen that yet, just to be perfectly blunt, we have not seen that. I just think it stands to reason we will see that as '06 unfolds.

It doesn't sound like you're anticipating the kind of shift that would meaningfully affect your risk appetite or that guidance you just mentioned. Is that a fair assessment?

Yes, that is completely fair, Ron.

Thanks very much for that.

[Alan Strauss], Lord Abbett.

On page 11, you guys put down the ROA. Could you let us know what the ROE of these businesses are, especially the mutual fund business, because ROA doesn't make a lot of sense to me in that business?

We don't provide ROA by lines of business. It has been kind of a long-standing practice for us. Obviously, ROAs for mutual funds are going to be very high, which is probably why you're seeing --.

And ROE.

ROE, yes, I did -- sorry about that -- which is probably why you're saying they're not very meaningful to you, but we are not in the practice of giving ROE by segment.

Okay, thanks anyway.

Eric Berg, Lehman Brothers.

Thanks very much. Tom Marra, I was hoping I could follow up and sort of get a deeper understanding of your comment earlier about retention and respecting the broker's advice. I'm thinking that if the Hartford is offering a competitive product, if you have the features that the customers want, the good investment performance, the brand, the financial strength, the recognition, the service, why are you getting the -- I still don't understand why you are getting what would appear to be a growing level of attrition, and what do you mean when you say you have to respect -- could you elaborate on what you meant before -- I'm rephasing now -- when you said something about you have to respect the broker's advice?

Certainly, I think respecting the broker is just recognizing that that customer is the broker's customer, and it is the broker giving the advice. His advice may say you have a vintage Hartford Life business, so in this instance it would not have the latest features. It is done well. We -- you, customer, and I both love the Hartford; they have done their job, but it may be for time for us to move that and take your profits and move to something else.

I think the flip side is they have done well with us. They have gotten great service and they continue to like the investments that they are in and they get the tax deferral, and they have freedom because there is no surrender charge on the product going forward. And that's why the vast majority of the business stays. There are times when the broker may want to move. The other thing I've mentioned in addition to the other positives of staying are oftentimes the lead means you're going to pay more; you're going to suffer new surrender charges and you're going to pay more.

So it's not a black and white choice, but in some cases an adviser might say they pay the higher cost and they go through surrender charges, I want that benefit. Like I said, more often than not, the vast majority stay because they love being with the Hartford, but some are going to leave and that's what we're seeing. And I just want to point out that we're still within pricing, albeit at this point probably at the high end of our pricing. Overall over our history our persistency has been quite good.

Can you review with us what your procedure or policy is regarding paying a fresh commission to an agent or to an adviser who agrees to stay with the Hartford and move the business to one of your newer higher quality products from the older products?

We don't pay commission. It's pretty simple -- due to SEC rules we can't reload the customer who's in force. But given that we can't reload, obviously we're not in a position to pay commission again.

By reload you mean (multiple speakers)?

Have them go back through the surrender charges if they do an internal exchange.

I guess my final question will be as a follow-up. Is there any way that you can provide a financial incentive -- I'm sure you've thought about this -- to the producers to keep the business with you if you're offering a generally competitive product?

Well, 99% of the in force has trail commission, so they have -- that is an incentive to keep the business. I think their bigger incentive though, given that the trail is going to be a lot lower than a first-year commission for someone else, is just customer service and their own advice and that their customers have done well, they're enjoying low costs. They've got great funds. They've got the Hartford backing it up, and therefore there are guarantees. And as I said, that's why the vast majority of advisers choose to keep their customers play.

Thank you.

Jay Cohen, Merrill Lynch.

I've got one question and Ed has one. Most of my questions have been answered, but just a bigger picture on the property casualty. Ramani, I think you suggested that in 2006 you felt the returns there would still be above your long-term target, which is good but it certainly suggests beyond '06 that they might be coming down. I guess the question is are you changing your long-term target at all given changes in the business that you've seen over the past 5 to 10 years?

When you say changes you mean with respect to natural disasters or you mean with respect to longtail liabilities or both?

I was thinking more the positive changes such as more rational competition, smarter competition, some consolidation in the business.

Let me take a shot at it. I'm going to also invite David, since he's principal steward of this, to comment on it. But first and foremost, Jay, consolidation is definitely a help in this regard in that we are definitely seeing more rational pricing than less. I believe also all the total disclosure obligations of companies keeps them right on their toes with respect to how the markets discipline them. When I say markets I mean investors will discipline them should their discipline really fail. That's two.

Three, I also believe that today, from reinsurance volatility and those kinds of things, give us confidence that markets understand that you can't just keep generating very, very low returns for a very long time and really survive because capital comes into the business very easily. So those are three what I would call restraining forces. But on the other hand we do have mutual companies in our industry who are not regulated the same way we are in terms of disclosure and other things. We do have regional companies who are not in the same structure as far as behaving with respect to pricing and underwriting discipline. So our market is still a very competitive market.

But all in, I would say we look forward to a more rational market in this business and Dave Zwiener, in his December presentation, suggested that we expect a soft landing and we still believe a soft landing is a reasonable assumption. David, do you want to add any thoughts to that?

Just two quick things. I think, one, in answer to your question are we adjusting targets? The answer is obviously, no. And I think we still have strong confidence not only to exceed those targets in '06, but in '07 as well. I think, two, building on everything Ramani said, I'd also add that the portfolio of businesses within property and casualty at the Hartford has shifted meaningfully over the last several years to the businesses where we think you can sustain a higher level of profitability at lower volatility around that, that being the first lines of business insurance. So I think that the combination of the environmental factors along with where we've chosen to play gives us a higher degree of confidence that we can make or beat our targeted returns throughout the cycle.

This is Ed, I just have one question. David, you had made some comment about the benefit of the benign market environment for hedging, and I was wondering if you could give us any potential below the line dollar impact of the hedge program let's say based on the current size of the WB exposure with a less benign market environment? Is this something that would cause a $0 to $50 million fluctuation let's say realized loss or is it a 50 to 100 million? Could you bracket it for us maybe a little bit?

I think you just did it. That's in line with -- if you just look at the kind of market environments we've had over the last 10 or 20 years, I think there have been quarters that those of us that have been around for a while have lived through that could take our below the line impact into the $50 to $100 million range in terms of volatility you'd see. That's obviously not an every quarter event.

I guess the comment I was making in my remarks was not thinking what might happen in a 1987 event or an Asian flu event, but thinking about more kind of ordinary course quarters where we've been very lucky to have quarters where there's only $1 or $2 million net impact plus or minus in the GMWB hedging program. I just don't think that's going to continue.

I could easily see kind of a still relatively calm, but maybe a little bit more choppy markets where that's in the 5, 10, 15 plus or minus range. We just were very fortunate in terms of our hedges working very well and not having even minor shocks over the course of the last year. But the big numbers, I think that's for the -- hopefully one out of every 40, one out of every 50 quarter type events.

One other point I would make, Ed, is the only perfect hedge is in a Japanese garden and hedge effectiveness in these markets for us is high, meaning stable markets is high. But as the markets get more volatile that hedge effectiveness will decline and that's what would generate these kinds of volatilities. So that's the point behind this.

Thank you. And I'm going to use that, by the way. Do I need to footnote you on that?

No, I'm sure mine was a borrowed statement, too. Operator, we have time for one last question.

Brian Meredith, Banc of America.

Good morning, everybody. I've got one quick question and then Tamara is going to follow up. This is for I think Dave and Dave. As the rating agencies continue to evolve their models here and as they look at the property markets and the capital requirements, I'm just curious, has that changed your return on equity assumptions for your homeowners business or some of your more heavily property focused commercial markets products?

Certainly not in the short-term. I think the two that have been most public in terms of changing their evaluations are A.M. Best and S&P. A.M. Best I don't see any change in our capital adequacy needs there. We've always done quite well in their formulas. S&P is in the early stages of evaluating changes to their capital model, and some of the things they're doing they're actually moving towards ways we've modeled in our own internal benchmarks for many years. So we're actually quite positive on some of the things they're doing.

Could that on the margin have some impact on our S&P capital ratio? Yes, but it's difficult to say because they're changing the loads that they already had in their models for property that included implicitly a load for cat activity. So they're going to be adjusting that down at the same time that they adjust other loads up. I think it's going to be a multi month process for them and they've indicated willingness to work with companies to the extent it creates a gapping in terms of their capital adequacy desires. But I have no reason to think that that's going to have that sort of impact on us.

And my question is just back on the income builder product. Are you concerned at all that at a 20% take great that this is cannibalizing your principal first series of products or does that not concern you as this product grows to be a higher percentage of new sales?

Actually we want it to take, which it is doing, the original principal first series which was the 7%. It's the highest risk product we have. It's actually a good thing that we can replace those sales with LIB or some are still taking -- about 10% are still taking the principal first preferred, the 5% product. So this is what we wanted and hopefully it now leads to increased sales in addition to redistributing the existing flow.

Okay. And then last quarter you had said that you were expecting to see some intensifying competition in the Japanese VA market. Did you see that in the fourth quarter, is it really intensifying? Your sales still seem to be pretty robust there.

They are pretty strong in Japan. But competition is there, it's probably a slow build. Remember, you have to build your distribution one firm at a time, one bank at a time. So they're there, though. We know that they are knocking on doors and getting shelf space and over time we're going to see the effects of increased competition. Hopefully in the backdrop of an increasing overall market so that our results are still going to end up very good.

Okay, thank you.

I'm now going to bring this call to a close. I think we have overshot our time here. Once again, I want to just conclude by saying 2005 was a very good year for the Company, record earnings for the year drove book value per share excluding AOCI up 16%. We have strengthened our balance sheet this year and we are executing very well on both property casualty and life operations. And more importantly as we look ahead we anticipate another good year in 2006. So I want to thank you for joining us on the call today.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.