Hartford Insurance Group Inc (HIG) 2006 Q1 法說會逐字稿

Good morning. My name is Dennis and I will be your conference operator. At this time, I would like to welcome everyone to the Hartford first-quarter 2006 earnings 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 will now turn the call over to Ms. Kimberly Johnson, head of Investor Relations. Please go ahead ma'am.

Thank you, Dennis. Good morning and thank you for joining us today. We waited a couple of minutes to make sure investors had a chance to get on this call with so many companies reporting. Please note that our earnings press release and the 10-Q were issued last night and our financial supplement and a complete slide presentation for today's call are available on our website at TheHartford.com.

Participating in the call will be Ramani Ayer, Chairman and CEO; David Johnson, CFO; Dave Zwiener, Chief Operating Officer for our Property and Casualty company; Tom Marra, Chief Operating Officer of our Life company, and Neal Wolin, General Counsel of The Hartford.

After the presentation, we will go right to the Q&A session. As noted on slide 2, we'll 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 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 differ, including those discussed in our quarterly report on Form 10-Q filed for the quarter ended March 31, 2006, our annual report on Form 10-K, and other filings we make with the Securities and Exchange Commission. We assume no obligation to update this information, which speaks as of today's date.

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 first quarter and also at the investor relations section of The Hartford's website at www.TheHartford.com. Now moving on to our presentation, I would like to turn it over to Ramani Ayer.

Thank you, Kim. Good morning and thank you for joining us. I know for some of you this is already your third call of the morning and we appreciate your participation. Today, I'm going to briefly cover our financial results for the first quarter of 2006. I will also review our operating highlights and current market environment.

Before moving to Q and A, David Johnson will update you on our guidance for second quarter and full year 2006.

Turning to slide 3, you'll see our results for the first quarter of 2006. We had a strong start to 2006. Net income and quarter earnings both set Company records. Net income was $728 million in the first quarter compared to $666 million in the first quarter of last year. Core earnings of $797 million or $2.56 per diluted share rose 37% over first quarter of 2005.

Core earnings were primarily driven by strong underwriting results in Property and Casualty, higher net investment income and a 16% increase in assets under management in our Life operations.

The Hartford continues to deliver significant shareholder value. Our book value, excluding AOCI, grew by 15% to $52.37. Return on equity was also strong at 16% for the last 12 months. Both Property and Casualty and Life operations are executing extremely well in a very competitive market. The product and distribution initiatives we put in place over the past few years are paying dividends today.

We are growing well in profitable markets while actively managing our risks. I'll comment further on these initiatives as I cover the highlights for each of our businesses.

Turning to slide 4, in our P&C business, strong fundamentals produced excellent results. In the first quarter, higher net investment income and underwriting profits drove core earnings of $421 million. This is 9% higher than a year ago. Net written premium of $2.6 billion in the first quarter increased 2% from a year ago.

As you can see on this slide, growth in business insurance and personal lines offset a decline in net written premium in specialty commercial. What is less clear on this chart is the underlying strength of our small commercial AARP and agency personal lines businesses. In small commercial, net written premium rose 10% while AARP and agency personal lines were up 7% and 8% respectively above the first quarter of 2005.

We have been able to maintain good growth in these profitable businesses by expanding distribution and continually enhancing our products and pricing sophistication.

In AARP Auto and Home, we're ramping up our marketing efforts through a growing membership base and expanding our product offerings. With a strong definitive relationship and excellent service, 90% of our AARP customers renew with us. And this bodes well for future growth.

In small commercial and agency personal lines we have 24% more sales reps in local markets than we did just one year ago. And each sales rep is tasked with the challenge of developing new agency relationships to represent The Hartford and deepening our relationships with our existing distribution partners. Both small commercial and personal lines have strong margins and a stable pricing outlook. Given this environment, growing in these markets makes sense.

But we're not only focusing on the top line because maintaining our pricing discipline is equally important. For example, in the competitive middle market, we're being selective on new business while working diligently to retain profitable customers. Net written premium in the middle market was flat compared to the first quarter of 2005.

Within Specialty insurance, we're stepping away from certain markets and risks. Late last year, we nonrenewed a sizable casualty program, and in Specialty Property, we are reducing our exposures in cat-prone markets. Net written premiums in Specialty declined 11% from a year ago.

We are picking our spots and profitability and returns have been strong. Underwriting profits in ongoing operations were excellent this quarter as lost costs remained benign and cat losses were mild. The combined ratio, excluding cats and prior year development, was 87.4%, comparable to a year ago.

Now as we look forward to the rest of the year, we expect only modest deterioration in our margins, and part of the reason for our optimism for sustained profitability is written pricing trends. As you can see on slide 5, The Hartford's written pricing over the past three years shows the traditional signs of the early stages of the soft market. What we have not seen is a dramatic decline in pricing, particularly since last year's storms. Competition, while increasing, remains rational. Competitors continue to focus on maintaining profitability and investing in renewals.

Now in the graph on the left side of the slide, you can see that pricing in small commercial was flat in the first quarter. For the remainder of 2006, we expect written pricing in this business to be flat to down slightly. Declines in middle market pricing moderated in the quarter due to rising reinsurance costs.

On the right side of the slide, you can see our pricing trends in Auto and Home. Overall, we expect these trends to continue for the remainder of the year.

The other part of the story for sustained profitability is loss cost. Over the past several years, frequency has been at historically low levels, while severity has been rising modestly. While favorable frequency continued in the early part of this year, we really can't expect long-term sustainability of this trend.

Now for full-year 2006, our expectation is for modest margin compression. Our guidance is for the combined ratio to be in the low 90s for ongoing operations, excluding cats and prior year development.

To summarize, Property Casualty results were excellent in first quarter 2006. We were able to grow the top line while maintaining very strong profitability and for the remainder of 2006, returns are expected to remain ahead of our long-term targets, even as underwriting profits slow.

Now let me turn to Life operations' highlights on slide 6. Life operations had record core earnings of $418 million in the first quarter of 2006. As noted in our press release, we had some unusual benefits and charges in Life Other in the first quarter of 2005 and in the first quarter of 2006. These items make year-over-year comparisons a little challenging.

On the left side of this slide, we have a year-over-year look at Life core earnings growth for each of the Company's business segments, excluding Life Other. As you can see, The Hartford's Life company is growing well in all areas and our strategy to diversify Life operations is clearly beginning to bear fruit.

Now, we are known as a market leader in domestic variable annuities, variable life and group benefits. But really The Hartford is much more. With the rapid growth of 401(k)s, mutual funds and Japan annuities, we are diversifying our sources of earnings and positioning the Company to be a leader in the retirement market.

And to that end, 2005 was a year of transition. We have made a number of significant changes to our wholesaling and products. Our results this quarter confirm that we made the right choices and we effectively managed the transition. Total assets under management in Life operations rose 16% to $290 billion. With innovative products and broad distribution, we added over $3.6 billion of net flows this quarter in our asset accumulation businesses. These flows were fairly evenly split between the U.S. and Japan.

Let me first discuss the domestic market and then make some comments on Japan. In the U.S., we're pleased with the trends we see on sales in all products and channels. With the completion of our launch of Lifetime Income Builder, U.S. variable annuity sales rebounded to $3.1 billion this quarter. Sequentially, sales rose 24%, supported by growth in all distribution channels. Net outflows were better than expected at $828 million, even with an uptick in surrender activity.

Now we feel very good about these results, but the competition is not standing still. New products and features are constantly being introduced. With Lifetime Income Builder and new product ideas of our own, we are cautiously optimistic that we have hit a new run rate for 2006 quarterly sales and net flows.

Importantly, given our scale, positive equity markets can more than make up for modest net outflows. For example, variable annuity assets grew by over $3 billion this quarter to $109 billion. And just since March 31, assets under management have increased another $1.5 billion. Asset growth, higher fee income and continuing low tax rates bode well for future earnings. We are raising our guidance for individual annuity return on assets to 53 to 55 basis points in 2006.

As you saw in the press release, retail mutual funds had an excellent quarter. More experienced wholesalers, strong investment performance and attractive fixed-income funds helped to drive sales to $2.7 billion. Net sales this quarter topped $1.5 billion. As we build out our track record in mutual funds, our goal is to break into the top 10 nonproprietary fund families.

In our retirement plan business, 401(k) is also off to a great start. With $1.2 billion in sales and deposits this quarter, 401(k) assets under management reached $11 billion, a 41% increase over the prior year. First-quarter sales are seasonally high. As we look ahead, however, we should continue to see strong double-digit year-over-year growth in 401(k).

In Individual Life, we had a record first quarter with sales of $60 million. We are seeing good growth in both Variable Life and Universal Life. We continue to outpace the industry as we expand distribution and broaden our product portfolio.

Group Benefits recorded 17% sales growth over the first quarter of 2005. While Group disability sales were down, several large case Life sales and effective cross-selling to existing customers led to a record first quarter. In a very competitive marketplace, we've been able to maintain profitable growth by leveraging our strengths in claims practices, service and distribution.

Turning to slide 7, I would like to spend a few minutes on our results and outlook for Japan. Core earnings growth in Japan was outstanding. With increased assets under management, Japan had core earnings of $48 million in the quarter, making International the third largest business segment in Life operations.

Variable annuity sales for the quarter were $2.3 billion at the low end of our prior guidance, excluding the effect of currency. And VA assets under management at $27 billion is up 62% year-over-year.

Now I have said many times that our first [move or] marketshare would likely drop in the face of increasing competition. In the first quarter, competition stepped up resulting in some changes in key distribution relationships. In addition, a slower than expected transition to our new variable annuity product impacted first-quarter results.

Last November, we introduced a new product, Adagio V3, or announced a new product, Adagio V3, as a replacement for our existing product offering. This new variable annuity provides customers with increased liquidity and a greater allocation to equities. At the same time it reduces and diversifies our risk profile in Japan.

The new product is getting a favorable reception in the market. When our distributors are fully trained, sales are increasing. We are on a very aggressive schedule to complete training on Adagio 3 in the next few months. We are also working to add new distributors, but this will take some time.

Given the transition challenges and increased competition, we have lowered our outlook for variable annuity sales and net flows for the second quarter and full year 2006. But even with lowered net flow expectations, assets under management in Japan should continue to grow rapidly. We remain very optimistic about the impact that Japan will have on core earnings growth in 2006 and beyond. And we're pleased to report that in just five years, the Japanese business is at our target ROEs.

Overall, the Life story is a story of growth and increasing diversification. With that, I would like to turn it over to David Johnson to comment on guidance. David.

Thanks, Ramani. For those of you who haven't yet done so, I encourage you to review our quarterly report filed on Form 10-Q last night, same time as our earnings release. We have incorporated a lot of enhanced outlook disclosure in the MD&A, which goes into great detail to describe our prospects for the rest of the year and a lot of the drivers of our guidance and in more detail than I can go into on this call. I would like to take a minute or two to quickly highlight some of the changes from our prior guidance.

On slide 8, you will see that in Business Insurance, we've lowered our guidance on net written premium to mid single digits. At the same time, we're anticipating combined ratios in the high 80s. Everything else is on track with the guidance we gave you last quarter.

On the next slide, you will see second-quarter and full-year 2006 guidance for our asset accumulation businesses. Sales guidance is up on U.S. variable annuities, but we have left the net flows unchanged for the full year. Surrenders were a bit higher in the first quarter and we expect that rate to continue throughout the year.

We have raised the guidance on sales and flows for mutual funds and institutional markets while lowering Japan, as Ramani discussed. The ROA in Japan is likely to run between 63 and 65 basis points this year. That should not be considered the long-term run rate for '07 and beyond. We are still seeing some extra earnings from early year contract surrender charges that we don't believe we will have long term.

Slide 10. Life and GBD guidance is essentially unchanged. We have lowered the earnings growth rate for GBD, but that is only to base that growth on actual 2005 core earnings, including our fourth-quarter $9 million tax benefit. So this is just a pro forma change. No difference in the fundamental bottom-line expectation.

And finally, as we stressed in our press release, our guidance and our outlook does not include any further regulatory approvals, and it includes our standard arbitrary assumption on prior year development. And as I have told you many times, the only thing I'm confident in is it will not be the number incorporated in our guidance. It will either be more or it will be less.

Overall, though, based on the strong results in the quarter and our outlook, we have raised our guidance range by $0.60. Core earnings guidance is $8.80 to $9.10 for full-year 2006. That is it. Ramani.

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

(OPERATOR INSTRUCTIONS). J.F. Tremblay, HSBC.

So now, particularly that we're seeing some very strong results on your Japanese VA business, in the past, you've mentioned that you would contemplate potentially increasing your sales in Europe, as well highlighted the U.K., Germany as potential markets. Is that still in the cards?

Let me have Tom take this one. Tom?

Thanks. Well, yes, we are up and operating in the U.K. We are doing that from an Ireland base of operations. So that will give us flexibility to go onto the continent if we choose so. We haven't yet made any determination to expand further. I think our focus should and needs to be on the U.K. where we got off to a slow start, but I am happy to report in the first quarter, we did see a bit of an uptick and we just have to keep the momentum there.

Demographically, we think the same phenomenon we have seen in the U.S. and Japan should hold in the European market, but I think you'll find us taking a cautious kind of step by step approach to expand.

I had a question about your P&C business and in Business Insurance, the expense ratio trended down significantly from 30.5% for instance in 4Q down to 27.6% year-over-year or so decline. Is that a new run rate and could you give us some color on what is trying that? Is that a different [function] structure?

Thank you, J.F. I'm going to turn that over to Dave Zwiener:

Good morning. No, I would not take that 27.7% as a run rate. I think we had some timing differences there that gave us a very favorable quarter. For guidance purposes, I think what we would refer you back to is their full-year expense ratio. '05 was 29.5% and we're looking to get at least a point off of that for the full-year '06 and I think that is a better run rate assumption.

Tamara Kravec, Banc of America Securities.

I was hoping you could just talk briefly about the competitive environment? Just a little more insight into what is going on with the annuity environment in Japan, and whether you foresee any real significant changes throughout the rest of this year?

Good. Thomas?

Tom Marra. As we expected, they are there. So we did see the impact of some good competitors come into the market. We still think it is a fertile market, but we have a lot of good company. I would say the level of competition is rational, and it is really a firm by firm battle to get the shelf space and then I think once you achieve that -- we have had particular success with the training that we have done, which we are in the midst of doing now with the new product. So we do have some good competitors now on board and I think we can expect to see it being a competitive environment going forward.

The other important point is we have said several times that by 2010, this ought to be a sizable market because the annuity business in Japan is still an early stage business and we expect the overall market size to continue to grow.

And do you see those competitors -- I know it is probably early -- but do you see those competitors maybe pursuing different strategies or anything that you think would hurt or help your position there over the longer term?

Not dramatically. This is Tom again. I think the main play is with the variable annuity product. Although there are different ways to go about that. We also have a fixed annuity, and I think as we have alluded to before, we're at least considering other line extensions so that we will have various product lines to play with. But I think the core variable annuity market is being played somewhat similarly -- obviously everyone tries to play to their own particular strengths -- but I don't see any dramatically different than what we have seen here in the U.S. in terms of competitive practices.

And then, Tom, another question for you. Recently at the [Limmer] conference, you had talked about longevity insurance, and you recently introduced a product, and I was a little bit surprised at how aggressively you were pounding the table on the product, and it seems to be very high margin, and I'm curious as to your thoughts on that market and that product, and it is a little bit commoditized, but do you expect to see more entrants, and do you expect that to really have an impact on any sales or revenues meaningfully this year?

Well, I am very passionate about the role insurers are going to play in the long-term retirement. I think the theme I had at that conference was that life insurers are going to be the hub of the retirement industry going forward and the other players, be they asset managers or brokers, are going to plug into us for their piece of the action. That is mainly because we are uniquely positioned to be able to provide the breadth of need solution, in particular, [these] longevity protection, which I think is something that has really been missed in the whole notion of retirement planning and needs to be a big part of it.

Now will longevity insurance as a standalone product be a huge product? Short term, probably not. But I think you already see it in the variable annuity business in the five for life type products, which is what we have with our life Lifetime Income Builder product. That does encompass longevity protection. So I think whether it is in the form of VAs or in combination products that have the longevity aspect to it, I just see really good long-term things coming from the Life industry because this is a huge need that I don't think people are very aware of and I think financial planners historically have not had a very good way to deal with it. So I think lots of opportunity for the whole industry actually.

So you think it really will just have a scaling effect on top line over time?

Over time, but it will be pronounced in my view.

Gary Ransom, Fox-Pitt Kelton.

I was wondering if you could talk a little bit more about the competitive environment in personal lines with some emphasis on the differences you might see in the AARP channel versus the agency channel?

This is Dave Zwiener. I would, like many people, characterize the personal lines environment as extraordinarily competitive, and so I think that we, like others, are trying to play to our strengths. I think in the AARP relationship, as you know, we had a history of profitable growth there. I think our focus, like other direct writers, has been on marketing, and we have had some success with some of the marketing initiatives that we have driven there. You see that in the top line of the quarter with AARP up 7%. We would expect to see continued success there.

On the agency side, as you know, we have rolled out the Dimensions product over the last couple of years, which has been very successful for us. We are coming out with probably the fourth issue of that here this year. The real focus for us there is not only highlighting the advantages of that product, but as I mentioned in the past, we are growing rapidly our appointed agency plant. I think that now with a highly competitive product and good service capabilities, much like our AARP product, our real focus has been on expanding the distribution and we have added a number of agents, in fact about 500 new agents have been appointed to the personal lines business during the first quarter.

So very competitive, but I think we're pushing other things and we think we can do well and we're getting good growth and terrific profitability in both lines.

Could I just ask a follow-up on frequency and severity during the first quarter itself? I understand it was good and I did read the guidance, but what actually happened in the quarter?

In the quarter, auto frequency was down mid single digits and the severity was probably up low to mid single digits. You're still seeing a very favorable loss cost environment there. On the homeowners, I think that you are seeing probably about a zero frequency or a low single digit severity is up low single digit. So I think personal lines is different than -- and business insurance or commercial lines right now in the written or earned pricing is still in excess of loss costs, where on the commercial business side, you are seeing the flip of that, where with the price decreases you have seen in many lines, you're probably seeing earned or written pricing below the loss cost (indiscernible).

Jimmy Bhullar, JPMorgan Chase.

I just have a couple of questions. First for Dave. I think in the past you have mentioned having capital margin of about $1 billion. I am wondering if you could address what that is as of the end of the quarter and what potential uses do you see for that capital?

And then second for Tom on disability, you've actually had the fastest growth among the top competitors in the market. A lot of companies have been seeing recently competitions picking up, and a bunch of them are pointing fingers towards you for being very aggressive in the market. I am wondering if you could address the competitive environment in the disability market, and how you have been able to outgrow the market so fast over the last couple of years.

David, do you want to take the capital -- ?

David Johnson. The capital margin is still in good shape, $1 billion after the first quarter. Again, just to stress, the uses of that margin are risk protection. We think that is the required capital in order to protect the enterprise and protect our rating. So it is fully utilized, in place protecting the enterprise, so it is not available for discretionary use.

Now that being said, we are also still on track after the first quarter to generate $500 million in excess of that, and we still anticipate being able to have that available for discretionary use through the balance of the year either investing in new sources of growth or return to shareholders, either through share repurchase or dividend.

And in terms of timing of something on that (indiscernible), would that be late this year that you decide what to use it for?

I think we're opportunistic. I would say that we are currently monitoring some of the developments in capital utilization, insolvency margin regimes. We are in discussions with S&P to understand some of the changes they are making in their modeling. Though we don't see those as being tectonic for The Hartford. So there is probably a slight predisposition towards the latter part of the year since interesting things always seem to happen to insurance companies mid summer and onward.

Thank you, David. Tom?

Yes, on the group disability, first of all, we're very pleased with the performance of our Group Benefits operation, which has been probably our steadiest business for many years. Just a point of fact, the first quarter, while sales were off, it was from the group life side. Group disability was actually (multiple speakers).

No, my comment was more about '05 as opposed to for the year.

Okay. Yes. That being said, that wasn't a huge factor in how I am doing this. We do think our underwriting and discipline has been there and it remains. I think it is important to note that in the first quarter, a third of our group sales in total were actually to existing customers, where we are adding new lines of coverage where they already had a line. So all in, I feel real good about that. We have got a very strong team, a stable team that has done this for a long time and I think our consistency speaks for itself.

Bob Glasspiegel, Langen McAlenney.

A few more quarters like this, you'll have a tough time being opportunistic in the late half of the year. I hope that is a problem for you guys. On the personal lines, Dave, with all due respect, your commentary that things are "competitive" there, 7% growth with an 85 combined ratio, admittedly aided by cats with margins stable, blows my historical vision of how the personal lines industry works. Why are things not being competitive this time around unlike my 25-year history?

Well, I apologize if I led anyone to believe it is not competitive. It is an extraordinarily competitive environment, and I think that what I was trying to say is our strategy, as you know, for the last two or three years, as one gets the product right, and I think with the Dimensions, we have got as competitive a personalized product out there as anyone, both home and auto.

Having done that though, our focus has shifted not just to enhancing that product, but to a distribution strategy. So we have been expanding rapidly, obviously with some thought to geography in terms of penetrating the middle part of the country. We have been adding new agents. Obviously that is perhaps in some ways even more competitive. Appointing an agent is a start. It's an opportunity. Actually penetrating a new agent requires not just product capabilities, but for us, we've been pushing hard on the service capabilities as well.

So we have been able to get that 7% growth rate. I would like to believe that we continue to grow at or about that level in, as you pointed out, in a market that probably is going to get more competitive, not less. And I think if we can do that, that is going to be quite a good performance for us in '06.

One thing I would add is this market has significant market leaders who are adopting a very disciplined approach. And underwriting selectivity through pricing strategies is making it very possible for both market leaders and other players with distinctive capability here to maintain margins while they achieve some growth rates. Different from prior markets where things used to move up and down in almost systematic fashion. So I really believe the competitive landscape is a little different.

At the same time, also believe that capital formation in the business is definitely continuing very strong. So what that portends for competitive environment down the road is still uncertain.

Just for the record, Dave, I was saying that -- you were saying it was competitive. I was saying 7% growth and 85 combined ratio with stable margins in my view isn't competitive, and I think Ramani gave a good answer on perhaps why it isn't. But I am not sure I agree. We will argue that offline.

On the international Japan side, is AIG one of the competitors? What are you doing to respond to the new entrants tactically, either management, operationally?

It's Tom. AIG has been there. They primarily have been a fixed annuity player, but they have been there from the beginning with variable annuity as well. I think it is blocking and tackling primarily, knocking on some new doors. There are still a ton of banks and broker-dealers where we have not had shelf space. So I think there is that as always part of our charge. Getting this new product up and running and getting the training fully in action is really the top priority at this point. But we are committed. We have a lot of things going, a good team and a lot of help from the U.S. PLANCO is a very big part of our international operations. So a lot of what they have brought here in the U.S. has been real helpful to us internationally.

Andrew Kligerman, UBS.

The questions were answered. Nice quarter.

Eric Berg, Lehman Brothers.

A couple of questions. Tom, with respect to the group business again, if we could just delve into that a little bit further than we have. I understand there were some additional product sales to existing customers, but could you explain -- I don't think you went over this. Maybe you did. If you did, I will apologize and we will move on.

The increase in the group life sales, if you take out what is referenced in your footnote, $22 million of buyout premium from a year ago, it is close to 100%. How do you, in what is a very competitive, according to MetLife, a very, very competitive time for the group life business, Standard is saying this too, how do you double your group life sales?

Well, it is going to be a lumpy business to begin with, and since we play in the small, mid and large segments, this happened to be a quarter that we wrote a few large cases and that skewed the results. It should not signal any change in underwriting pricing, but merely -- if you look at our history of group life sales, you'll find that they do bounce around quite a bit over time.

Thank you. That was helpful. Also with respect to the Individual Life business, I noticed that the -- again, you are getting very good earnings growth, but the revenue growth is pretty well short of the earnings growth. I think it was 3% in the quarter. Year-over-year it was down sequentially. There is very little funds flow in the business.

I guess two questions. One, should we expect the revenues in this business to start growing at a faster pace than they have been and relatedly, in trying to understand the earnings growth that did take place in the quarter much quicker than the revenue growth, was there a DAC unlocking?

There was a DAC unlocking. So that was I guess $5 million. So you should acknowledge that. I think what you have to look at for the quarter -- the specific point you are getting at is do we have a growing business here, and I think you really need to look at the big drivers of revenue long term to mute out some of the noise. And if you look at our full-year guidance, we are expecting high single digits to about 10% growth in both account value and inforce death benefits.

Meanwhile our sales engine, which feeds the inforce, I think was off to a very good start, and we are projecting that to be about a low double digit grower as well. So I like the position. We added a new term portfolio because it is a business we haven't historically played in. We think with some of our distribution, particularly banks, that is an opportunity for us. We are feeding it well. It is now part of our overall U.S. wealth management. So they will be gaining greater synergies with the investment products organization.

So I have a lot of good feeling relative to our Individual Life business. I think actually they've performed quite well as evidenced by this quarter.

Vanessa Wilson, Deutsche Bank.

[Alon] also has a question as well. Tom Marra, you have raised the guidance for the ROA for both the domestic and the Japan annuity business. I guess this is almost a Dave Johnson question as well, where can this go? I remember when the variable annuity business was generating 38, 37 basis point margins and it continues to creep up here. And what kind of ROE does that translate to? Is that just driven by the higher capital requirement?

No, not really. This is Tom, and I will let David jump in. Obviously the tax rate historically has helped us quite a bit as it has steadily gone down. We have managed to maintain expenses. Some of the creep-in of the living benefits is starting to show itself. But we are guiding U.S. 53 to 55. In Japan, we are actually guiding that to be a little lower than what -- it's 63 to 65, but some of that is due to some of the things that happened in the first quarter. So the ongoing run rate probably is right around 60 or high 50s is a good way to look at it.

David, do you want to add anything?

I think you make the correct point that when you have to put more equity into a product then that also can take the ROA up if you are maintaining your margin. That being said, the change in guidance this quarter I don't think is driven by a need to allocate more equity to the product. We make those calls typically annually as part of the annual budgeting and outlooking process associated with that. So this is more driven by numerator factors that emerge during the quarter.

Tom, could you give us a little more color on the surrenders? What do you think is driving the spike there? You cited competitive pressure, but where should we think about this going? And then Alon.

It is going to continue to be a trend. There is one small adjustment you should make to the first quarter. It's a little over $100 million that was basically a settlement we had to get a market timer out of the variable annuities. It was a little over $100 million of surrenders. But that rate in the high 12%-ish range is reality for now. We are looking at all avenues. But I think that seems to be a fairly steady situation.

We are not looking forward to worsen the rest of the year, but it is just part of the maturity of the business and frankly, as you said, the current competitive environment. So we will continue to look at all avenues, but for now, our best guidance is it will continue to run at about that rate.

Thank you, Tom. Alon.

Good morning. Great results and my question relates to your capacity exposure. From a cat load, what are you assuming -- is it the same as what you were assuming before? Have you done any more work or that you think any updated vendor models -- and you mentioned your reinsurance costs might be going up or you expect some reinsurance costs going up. Could you tell us what is happening there? And also maybe comment on the Florida market? What you think is going to happen there because it seems that that market is in crisis on the homeowner side?

This is Dave Zwiener. A couple of points, but if I miss anything, come back to me. I think first of all to answer your first question, we would not change our guidance from what we have said in the past, the roughly three points that we have assumed in the guidance.

Secondly, as we mentioned on our last call at the end of the year, we did complete our corporate program reinsurance. So the additional costs in that are reflected in our guidance as well. I think having said that, you see the deterioration in the premium in our Specialty Property line. I think that reflects some nonrenewals and some actions on our part where we are not going after the business we don't think is priced appropriately, particularly down along the cat-exposed areas, and a good portion of that is in Florida.

I think that we will, like others, look for the new models as they come out here and the new agency view -- and David may want to say something here, but I think we have always taken a fairly conservative view of the models. I think we do an awful lot of our own work internally. I think that we have adjusted for and reflected things like demand surge and others and we have obviously taken into account our own exposures on an aggregate basis. So I think we'll just continue to refine based upon others’ views. At this point in time, we feel very good about the actions we're taking, the programs we have in place and what that means for our guidance for the rest of the year.

Historically, we have been pretty conservative in our cat modeling. The new models are likely to be out sometime mid year from some of these vendors that we use, and so when we have a better understanding of what that does, we will definitely share our understanding with you in the second quarter when we post our second-quarter numbers.

And on the Florida market?

What specifically would you like me to comment on?

The fact that Citizens has a big deficit, the capacity fund as well. Do you see any -- do you foresee any solution or any legislative solution to that situation?

In the near term, the state is looking at other ways of bridging the deficit. So there is a 1.7 billion or so deficit in Citizens and I think 250 or thereabouts deficit in the Florida hurricane cat fund. So in the near term, I suspect that is what is being considered.

Long term, though, Florida does have a problem and I believe this problem is going to take a lot more severe solutions from the state and we are certainly participating in the discussion through AIA. It is too early for us to give you any feel for where this is going, but homeowner availability is going to be a challenge.

Secondly, a lot of the market is in the hands of these new Florida companies with very marginal capitalization. So it is going to be a challenge as you look to the next several years.

Tom Gallagher, Credit Suisse.

Just wanted to follow up with a few Japanese questions. The first thing, or first question, is can you describe a little bit about the new product that you launched? How it compares to the old product? Is it more or less aggressive? The second question is can you talk about how losing your CEO recently in Japan you think will impact your business? And the third question is -- I guess if I take Ramani's comment about the fact that the new product should have somewhat lower risk characteristics, should we be concerned at all that this may be the equivalent of what you did in the U.S. in late '04, derisking the product that then caused you to lose share? Maybe you could just compare and contrast that. Thanks.

Tom, let me take the Japan CEO question and I'll turn it to Tom for the other questions. Certainly our loss is AIG's gain because we thought very highly of Tim, outstanding executive and Hartford-trained as usual, and so very confident and capable. So we will be rapidly addressing that. Greg Boyko is now the CEO for our Japan operations. Greg was the one who really was instrumental in helping us develop our Japan strategy working with Tom. So we are confident that we will move on from there. Let me turn it over to Tom on the other questions.

I echo Ramani's comments. I have a lot of confidence in Greg Boyko who really started the Japanese operation as head of International and with Liz Zlatkus now in International Group Benefits. I think we have good continuity. So I am pleased there, but we will miss Tim.

On the new product, it has gotten good reception. There is a lot of training to be done, as I said, but the essence of the product is it allows for immediate income, which is a new twist. So you can get 3% income out for the first 15 years and then the guarantee would kick in. If the account values were below 55% at that point, we would guarantee 5.5% of premium for the next 10. So that is effectively how the product works.

It is a different risk program in that it has got more equities and less currency exposure. So it is a good diversifier. I think you could have good debate as to whether it is a lower risk; it's a different kind of risk, but one we feel we can manage. So I don't think that the product itself is going to be a long-term issue in terms of our success. Time will tell.

The transition has cost us a little bit in the short term and that will continue into the second quarter. But as we get the training out and try to build up this support for the product and bring new distribution, we are looking for improved results in the second half of the year. So I think that gets to what you were thinking about, Tom, unless I missed something.

Sorry, Tom. I just wanted to say one other thing I forgot to mention. Shame on me. But we have a very deep bench in Japan. We have local management. We are not expats. We are actually right there locally. We have had enormous credibility in the market. We have been there right from the start and we have contributed greatly. So we feel very good about that too.

Got it. Just one other follow-up for Tom. I guess the other question I would have is since you are, I guess, transitioning out of the old product -- and I don't know if you have completely removed that yet, but in terms of where the market is at right now in terms of where you're losing some share, does your new product stack up with those products from others that are gaining momentum, or is it completely different? I'm just trying to get a sense for where the market is at and where you are at. Thanks.

In my view, Tom and I think as I said, time will tell how well this new product does. But in my view, it is a good product and basically gauged by the verbal reception we are getting from the heads of the big distribution outlets, and they seem to think it is going to play. Now that is not true in every firm or bank, but by and large, I think we've got good support for the product and we need to get it out there and work it.

Ron Frank, Citigroup.

A question for Dave Zwiener. In personal lines, you had adverse development. Now obviously it was very modest, really negligible, but it still is a striking contrast to a lot of the peers, which are, as you know, showing pretty substantial favorable prior year development in Auto. And I was wondering you are all basically in the same market, experiencing similar loss trends, not identical but similar. Are we really just talking about a more conservative or especially conservative reserving approach at The Hartford and if so, why?

Ron, good morning. This is Dave. I think if you have had the chance, we gave a pretty complete disclosure in the Q. I think it is on page 46 of the reserve development.

I saw it.

And to highlight for others, I think in the quarter, we really had three moving parts. One, we had a net release of our catastrophe reserves from '04 and '05 and you saw that. Two, we did have -- and to your question -- we did have a release out of the personal lines auto liability reserves for active year '05. It does in fact reflect our view of the favorable frequency that I think you have seen others mention as well. So we broke that out separate from the item I think you want me to comment on, which was that we did in fact strengthen our personal lines reserves for the claims that we thought had exposure to some extracontractual liability and excess liability.

And I think this really was -- we saw a couple of issues. We did a review and I would tell you this is a very small number of cases or claims where we felt we had some exposure. So we topped up the reserve and we think we've put this issue behind us. But I wouldn't in any way characterize this as some sort of systemic issue, but rather what we thought was an appropriate system to put up reserves specific to these claims.

It wasn't so much that that struck me. Just given what we've seen at some of the other companies, perhaps naively, I would have expected that to literally drown in otherwise favorable development from those earlier years. But maybe I am missing something.

No, I think you're missing this point. We just react to issues as they come up and I think we don't drown issues in a sea of other (indiscernible). I just want to be sure you understood that. We are very, very responsive to observations that we see. That is just the way we run our business.

I should have known you wouldn't let me get away with that adjective, Ramani. Thanks very much.

Operator, we have time for one last question.

At this time, sir, there are no further questions.

Well then, let me bring this call to a close. First quarter, as we have now shared with you, was a great start for the year for The Hartford. We are executing well across the board in Property Casualty, Life, Domestic and International. The higher earnings outlook for the remainder of the year reflects current business trends and our commitment to growing the business profitably. I hope all of you can join us in New York on May 23 for our investor day. So without further ado, thank you for participating on the call today.

Thank you all for joining The Hartford first-quarter 2006 earnings call. You may now disconnect.