Hartford Insurance Group Inc (HIG) 2006 Q2 法說會逐字稿

Good afternoon. My name is Michelle, and I will be your conference operator today. At this time I would like to welcome everyone to The Hartford second-quarter 2006 earnings 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). Thank you. Ms. Johnson, you may begin your conference.

Thank you, Michelle. Good morning and thank you all for joining us for today's second-quarter 2006 financial results conference call. As you know, our earnings press release and form 10-Q were issued late yesterday afternoon. To help you follow our discussion a financial supplement and a complete slide presentation are available at our website at The Hartford.com. Participating in today's call are 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; and Neal Wolin, general counsel of The Hartford. Following the prepared presentation we will hold our usual question-and-answer session.

During the presentation on slide 2 please note that 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 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 for the quarter ended June 30, 2006, annual report on form 10-K 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 date.

The discussion in this presentation of 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 second-quarter of 2006 and in the Investor Relations section of The Hartford's website at www.TheHartford.com. Now moving to our presentation I would like to turn it over to The Hartford's Chairman and CEO, Ramani Ayer.

Thank you, Kim. Good morning everyone, and thank you for joining us. I will briefly cover our overall financial results and operating highlights for a property casualty and life businesses for the second-quarter of 2006. Next David Johnson, our CFO, will update you on our guidance for the third quarter and full-year 2006. We will conclude today's call with our usual Q&A session.

Now turning to slide 3, the underlying performance of the Company was very good again this quarter. Disciplined execution, effective sales management are enabling us to deliver strong results even in today's competitive environment. We are growing in the most attractive property casualty and life markets while effectively managing our risks.

Net income was $476 million in the second-quarter compared to $602 million in the first quarter of last year. Core earnings were $573 million or $1.83 per diluted share. Core earnings reflected strong underwriting results in our ongoing P&C businesses and increased assets under management and life operations. I should also note that this quarter's earnings included a $158 million after-tax charge related to last month's announcement for agreement with Equitas and our evaluation of reinsurance recoverables.

Our balance sheet is strong and we continue to build shareholder value. Book value per share excluding AOCI grew by 13% year-over-year to $53.62. And our return on equity over the past twelve months was over 14%. Turning to slide for 4 I will cover the highlights of our property and casualty results for the quarter. Our property and casualty operations core earnings were $235 million in the second-quarter. Of course, this includes the Equitas settlement and reinsurance recoverables charge. Now core earnings from ongoing operations in the second-quarter were $361 million compared to $392 million in the prior year. Strong underwriting results and higher net investment income continue to drive excellent returns.

The second-quarter combined ratio for ongoing operations before catastrophes and prior year development was 86.9%, 1.6 points better than the prior year. Much of the improvement in the combined ratio related to our re-estimate of our citizens assessment. Loss caused trends are benign. We continue to see favorable frequency trends in both business insurance and personal lines auto while severity remains moderate.

Benign loss cost and continued strong underwriting profitability are beginning to make their way into pricing. Now as we moved through the quarter we saw evidence of increased price competition, particularly on new business. Overall, markets still remain rational. This gives us comfort that as long as we execute in a disciplined way we should be able to continue to grow in our targeted markets.

Written premiums for property and casualty were $2.7 billion this quarter, level with a year ago. Again, this quarter growth varied dramatically by segment. In specialty commercial written premium declined. In personal lines and small commercial where we have been investing in the past few years we continue to gain market share. We have broadened our products, improved agency technology and service and significantly increased the number of independent agents representing The Hartford. We are also participating in the growth of the direct response market through our relationship with AARP. Now with these initiatives in place we are confident that we will be able to grow small commercial and personal lines faster than the overall market, provided that margins remain adequate.

Let me review this quarter's personal lines results in more detail. Written premiums topped $1 billion in the second-quarter, 4% higher than a year ago. AARP written premiums grew 7%, driven by increased marketing efforts to attract new business and an excellent retention rate of more than 90%. Agency personal lines written premiums were up 6% this quarter. Enhancement to our Dimensions class plans and greater productivity from the agents we appointed in 2004 and 2005 are having a positive effect on sales results. This quarter we announced two initiatives related to our agency business. First, we launched Dimensions with auto packages. And this enhanced product offering provides a more segmented approach to the market and gives agents the ability to offer more choices to their customers. The product is currently offered in seven states, and we expect to be in roughly 30 states by the end of 2006.

Second, we announced the sale of Omni, our nonstandard auto operation. Exiting this business allows us to streamline our operations and focus our efforts in growing profitably in standard personal lines. Now looking ahead, we expect personal lines competition to remain challenging, especially in auto. However, given our agency appointment initiatives and the new Dimensions introduction, we expect that the growth trends seen in the first six months should continue through the remainder of the year.

Turning to business insurance written premiums grew 2% in the quarter with small commercial written premium growth of 7%, offsetting a modest decline in middle market. Small commercial premium growth was driven by expanded market share in targeted states, the continual refinement of our product offerings and very good retention rates. In middle market written premiums declined 2% this quarter. Here we are seeing the combined effect of modest pricing declines and increased competition, particularly for larger accounts. In specialty insurance written premiums declined 16%, reflecting the termination of a specialty casualty program in late 2005. Property written premiums declined 8% in the quarter as we selectively wrote new business and reduced exposure in cat-prone areas. In both middle market and specialty commercial we will maintain disciplined underwriting and will grow only where we can achieve our targeted returns.

Now turning to slide 5, there is one topic I want to briefly cover before reviewing our life business. Historically we have effectively used reinsurance to transfer risk associated with large catastrophes. Our primary cat reinsurance treaty was renewed in January when we increased our retention from $125 million to $175 million. And earlier in the year we secured an additional $105 million of reinsurance capacity through Foundation Re, our catastrophe bond facility established in 2004.

Now in the second-quarter we purchased an additional $300 million of reinsurance coverage to address exposure to hurricane and earthquake events in the northeastern United States. As indicated on this slide, this new reinsurance attaches for covered losses greater than $1 billion. The changes we made in our primary catastrophe reinsurance program, the use of risk linked securities and the purchase of regional reinsurance are examples of our constantly evolving approach to risk management.

To summarize, property and casualty results were excellent in the first half of 2006 while top line growth slowed, profitability was very strong. While we have seen signs of increasing competition we have not seen widespread irrational competition. As the cycle continues to develop, we will maintain a disciplined underwriting approach. Now let me turn to the life operations highlights on slide 6.

Life operations reported core earnings of $386 million in the second quarter of 2006. The Hartford sources of earnings are becoming increasingly diverse. I am pleased that each of our business segments had double-digit core earnings growth over the second-quarter of last year. Over the past twelve months strong net flows in our asset accumulation businesses had a 6% rise in the S&P 500, pushed total assets under management in life operations to nearly $291 billion. 13% higher than a year ago. While the change in U.S. variable annuity assets was largely consistent with market growth, we rapidly grew our assets in mutual funds, retirement plans, institutional solutions and Japan. I will provide some additional comments on sales and flows for these asset accumulation businesses in just a moment. Before that, though, I want to highlight the results we have seen in group benefits and individual life. Both of these businesses are showing excellent growth in sales and earnings.

For the second-quarter and first six months of 2006 these two segments generated approximately 30% of life operations core earnings. In group benefits effective cross selling helped drive sales up 22% this quarter over last year. And fully insured premiums increased by 9%. The Hartford's disciplined approach to underwriting and claims management continues to generate excellent profit margins. In individual life our broad product portfolio and expanded distribution is driving good growth in sales and earnings. A recent [limra] report ranked The Hartford as number one in life sales through stockbrokers and financial institutions. Sales this quarter were up 18% over a year ago period to $67 million. And account values grew 10% year-over-year to $10.6 billion.

Now turning to slide 7, this slide takes a closer look at sales and flows in The Hartford's U.S. and Japan asset accumulation businesses. Total sales and deposits topped $10 billion this quarter. A rebound in U.S. variable annuity sales, along with strong sales into mutual funds, retirement products and investor notes offset the impact of increased competition in Japan. Looking at the chart you will see our net flows by segment. We recorded $2.9 billion of net flows this quarter compared to $3.1 billion in the second-quarter of 2005. While total net flows have not changed dramatically, we have seen a significant shift in the sources of these flows. Last year The Hartford still had a strong first mover advantage in the Japan variable annuity market. Net flows in Japan alone were $2.6 billion in the second-quarter of 2005. With increased competition Japan net flows dropped to just under $1 billion in the second-quarter of this year. As anticipated, the rapidly growing variable annuity market in Japan has attracted strong domestic and foreign competitors but we underestimated the pace of change. Today there are more competitors and more product choices available than ever before. In the second-quarter our variable annuity sales in Japan were $1.2 billion. We had hoped for more. Feedback from our distribution partners revealed the importance of shorter deferral periods in today's market.

Now we are addressing this issue quickly. In September we will introduce a revised Adagio product with the same level of guaranteed income and a shorter deferral period. We do not expect the revised product to have a large impact in the third quarter, but we should see sales begin to build up again in the fourth quarter off of this new base. While the Japanese market is changing rapidly, we believe it remains an extremely attractive opportunity for growth. Net income this quarter was more than double last year at $54 million. And we are already generating ROEs within our target range. With $29 billion in total assets under management we have the scale to compete. Over time we expect to broaden our product portfolio to meet more of the markets' needs. And we believe that with our strengths in product wholesaling and service we will continue to be a leader in this market.

Shifting gears now to the domestic market, with our Lifetime Income Rider and low fee Director M Annuity we have seen a rebound in U.S. variable annuity sales. Sales topped $3.2 billion in the second-quarter. A level not seen since the third quarter of 2004. Now we are not standing still. In the third quarter The Hartford will launch two additional income for life riders. Both miners include enhanced features, spousal benefits and higher withdrawal percentages for older ages. We will continue to introduce new products that combine the best in customer value with an appropriate return on equity.

In mutual funds the seasoning of our dedicated wholesalers, strong investment performance and sales of fixed income products propelled mutual fund sales to a record $2.8 billion this quarter. This sales level pushed The Hartford ranking up to the number 10 seller of nonproprietary mutual funds in the U.S. We are proud of this accomplishment in that we are still a young mutual fund operation. We just celebrated the 10th anniversary of our mutual fund business earlier this week.

Fund performance of the Wellington Managed Equity funds and HIMCO fixed income funds have helped propel our success. Twelve of the fourteen funds with ten-year track records beat their LIPPER peer group averages. Retirement plan sales and deposits rose 32% over the second-quarter of 2005 with growth in both 401(k) and government plans. In 401(k) we continue to have success in the small case market with Aviator product. We will be introducing new products for mid-market 401(k) and 403(b) in the second half of the year.

So overall our life operations are executing extremely well. Despite a challenging, competitive environment we are delivering good growth in total sales, assets under management and earnings. With that, I would like to turn it over to David Johnson to comment on guidance. David.

Thanks, Ramani. Slides 8, 9 and 10 spell out our guidance drivers for the rest of the year. They summarize discussions you'll find in the MDMA sections of the 10-Q that we filed last night. On capital I have little news to report. We completed the remarketing of our first tranche of equity units during the second-quarter and will remarket the second tranche in the third quarter. Again as a reminder the impact of the shares produced in those remarketing and subsequent issuances on our EPS for 2006 and 2007 is detailed on page T12 of our investor financial supplement.

Otherwise we continue to expect to produce $500 million in excess of our needs of capital in 2006. That is despite repeated hits to our capital resources. For example, we now expect that the property catastrophe revisions in S&P's capital model will cost us more than half $1 billion. Despite that increase we still expect to produce $500 million in excess this year.

In the absence of intervening events we expect to start to talk with our board in October on what to do with our marginal resources. But to reiterate our philosophy, we manage capital to maximize long-term growth and book value per share and dividends to our shareholders. Because we focus on book value per share our priorities under current market conditions would be in order, one, investment in our business whereas you know we have a 15% return target; two, acquisitions; three, dividends; and last, share repurchase.

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

(OPERATOR INSTRUCTIONS) Nigel Dally, Morgan Stanley.

Thank you. Good morning. The first question just on variable annuity sales guidance. You delivered results at the high end of expectations, but you didn't increase your sales guidance there. So to use the midpoint you're guidance implies sales will slow down in the second half of the year to about $2.8 billion per quarter which is down from $3.2 billion this quarter. Given you seem to be regaining (indiscernible) momentum in this line with the success of your product introductions and more product introductions on the way, I just wasn't sure how to rate that. Perhaps if you can provide some additional color there.

And then second question just with Japan do you have a preliminary rate on industrywide sales? Is it possible that we will see some of the decline you saw was also a marginal weakening of demand for this product? And our expectations for potential longer-term growth in that industry may be somewhat overly optimistic.

Let me have Tom address both questions. Tom did you get the second one?

Yes, the audio is a little questionable, but anyway, Nigel first on the U.S. variable new sales and the guidance for the second half of the year, I think we want to be a little careful; certainly pleased with our performance and we are coming out with new products which we are excited about. But the market hitters are also evident. So we thought it was important to be a little careful there. Obviously we would be disappointed if we were at the low end of that full-year range, but that is the answer there.

And on Japan variable annuity sales it is difficult to get overall market share data. There isn't a large type source that produces credible overall competitor sales data. So generally where we've been is we certainly made the market and got off to a torrid start when we began the business back in late 2000. We knew competitors would come in. They have come in, really in full force, both domestic and foreign competitors which Ramani has said, and we are responding by adjusting our product. We have learned from feedback that it is important that our guarantee period, where the guarantee becomes effective, should be 10 years. Our latest product we were pleased with in than it had an income feature beginning day one of 3% but then the guarantee didn't kick in until the 15th year, and we are going to adjust that down to 10. So they will have a choice of either 10-year deferral or 15-year deferral, and we are hoping that that is going to set us up for growth which we should see in the fourth quarter and beyond. Third quarter will be a transition quarter.

(multiple speakers)

-- make the risk management given the change in your product design.

Yes. We are pleased with the risk management of both products, which we will be offering. And that goes for the U.S., as well, which also we've always tried to put value to the customer into the equation, and the two new U.S. products for example are going to come out at 30 basis points and 40 basis points, which is definitely at the low end of the U.S. competitive.

I would also add, Nigel, that the Japanese market outlook we continue to believe, that Japan, the overall market will continue to expand over the next four or five years. So we maintain our conviction that the Japanese market as a whole by 2010 would be somewhere between $250 to $500 billion. So the market should be a growth market.

That's great. Thank you.

Alain Karaoglan, Deutsche Bank.

Operator, there is a lot of static cutting in and out so I hope our transmission is coming through okay.

Good morning. It is Alain Karaoglan, I can hear you okay so on my end it is fine. A question on the S&P increased capital requirement, but also on the new vendor models that came out at the end of May. So S&P's capital requirement for you has increased by $500 million, which is around 6% additional capital that now is required to be kept. Is that changing your pricing, your view on what you are doing? And in a related question so S&P has their capital requirement. How does from an economic point of view, have you had the opportunity to run the models that were revised? And is there anything that came out of that experience in terms of your exposure, where you are and what you would like to do going forward?

Let me have Johnson start the question, and then on the second half I'm going to turn it over to Dave Zwiener.

Thanks. Actually I perhaps implied more precision than we're able to deliver at this point. We haven't finished our work with S&P, but our current indication would be that the increase in the capital requirement out of their model will be north of $500 million, exactly how much we don't know. But I think $500 million is probably a reasonable minimum at this point. That does incorporate an estimate of the impact of the new model. So that is all in. But the exact amount we aren't able to fix. We're still in dialogue with them in terms of understanding exactly how they are going to execute the model. Now in terms of how that impacts the business, I will turn that over to David.

Good morning, Dave Zwiener. With regard to operationalizing the new models we have had the opportunity, obviously, to review the models, and we are installing them. So they are going to be incorporated obviously into our cat management process including planning, profitability management and the capital attribution in all of our core businesses. In terms of the impact, I guess I would characterize our review of the impacts as not having been surprised in too many areas. Obviously in the peak wind zones we've seen increases in the average losses in the PML, and then there was a little bit of a decrease in the New Madrid Fault areas. But I would tell you they weren't a surprise because I think that we take the models into account but we take a number of other factors into account as we plan our exposure management. And I think even prior to the release of the new models we were taking a number of actions. I think we've talked about some of them on prior calls, but we've been reducing our exposures in some of the peak wind areas principally in our specialty area first state. We've also taken a number of aggressive pricing actions, and we have shed a fair amount of business throughout the area.

So I think that we are anticipating those sorts of increases, and I would also say that has impacted our cat reinsurance program as Ramani mentioned in his opening comments, we've taken a number of actions over the last several months with risk linked securities. And then we've also mentioned -- I know we disclosed in the Q that we've added another layer -- $300 million x $1 billion for New England cats that went into effect June 1, and that will be a twelve-month cover. So I think net net we've anticipated and adjusted to and are acting upon the new data, and we will continue to adjust this as new information becomes available.

And if I could follow up with one question on the construction defect reserve additions in the specialty line, could you tell us a little bit, what did you see in order for you to add to these losses to the reserves? And what year were, what accident year did they refer to?

The $45 million that we disclosed there that was a strengthening on construction defect, that relates to accident years '95 and '97 and the simple answer there is we were just reacting to increases in claims that are already trends that we saw there so we made the adjustment in the quarter.

Tamara Kravec, Banc of America Securities.

Thank you. Good morning. Just a question on your U.S. variable annuity sales, and given that sales were strong this quarter I just wanted to get a better sense of is it just the Lifetime Income Builder product that you think is driving that? Is it a combination of other things? And given where the equity market stands so far in the first half, are you worried at all about what you've embedded in your guidance in terms of S&P returns or what effect that could have on your new product introductions in the third-quarter?

As I mentioned earlier we would be disappointed beyond the low-end of that full-year guidance because obviously the first half year would indicate higher. But you need to be a little careful because the tension in the market and investor confidence. But having said all that, we like our position. We're real pleased with Lifetime Income Builder; it's successor product which will be Lifetime Income Builder 2 comes out in August, and we're excited about that. That will be an improvement in that the withdrawal percentage will actually go up with age. So it is 5% at 60 but then if you defer until later ages you actually can get higher withdrawal rates, so it's an improvement, and that should do well for us. So we like where we are; just want to be a little careful given the nervousness in the equity markets.

So what percentage of the sales if you could quantify at all the sequential increase you think really was more penetration of Lifetime Income Builder versus just general market share gain?

Well, that is hard to do, very hard to do because it is a whole package. (multiple speakers) was a meaningful contributor because it kept increasing its share of total sales. So I think the Lifetime Income Builder has been a big part of the success along with all the other aspects of wholesaling and good service and good performance of the funds. It is a whole package; but it was a meaningful contributor.

Okay, and in Japan I understand that you are redoing your products and you've got initiatives going on there, but just given the intensity it seems of the higher competition are there any other initiatives or strategic things that you can do in order to keep some sort of leg between you and upcoming competition?

Again, it's a full package so we're trying to work on all the pieces. We think the key current issue is product, and so that is being addressed for September one launch. And that is the main thing. But all aspects, the training that goes on at the field level is very important, and we are spending a lot of time on that. We are also looking -- and this is more down the road, but looking at other product lines that we can introduce. A productline we currently have that has been a little bit dormant is fixed annuities. So that is another thing we're looking at currently is how we can generate up some renewed interest in the fixed annuities. So you always need to work on all the aspects of it. I would say in both the U.S. and Japan currently product is maybe been at the top of the list. But you can't let your guard down or the intensity of building up the other pieces as well. So we are working all aspects.

Okay, and any effect of the deregulation that is coming there at the end of '08? I know that is kind of far out, but any thoughts on that?

It's far out but that could give us prospects to do life insurance through banks, which we need to study to heavily penetrated a life insurance market. But we need to study whether the banks would be a great avenue for product distribution there. So we will be looking at that shortly.

Bob Glasspiegel, Langen McAlenney.

I got one for Tom and one for David J. Tom, what is behind the improved margin outlook for Japan?

A little bit of tax which will be non-recurring and a little bit of surrenders which is kind of stabilized reduced. So I would guide you down there, Bob, more towards 65. I know we've done better, but I would guide you down.

Okay, well your ROA guidance for the year is been raised from the analyst meeting, correct?

Yes, but that is when we had the good first half of the year.

Okay, so it is just looking at history as opposed to --

Yes, I am saying run rate, 65.

I got you. And David, it seems like buyback is out of the picture until we get through the hurricane seasons is what you've counseled me on prior calls. Can you give me sort of an over under threshold of unusual cat losses that we can rule out buyback as an option or how bad would cats have to be to grind out buyback as an option?

I would recast your question as how bad would they have to be in order to eliminate our anticipation in generating $500 million in excess of our needs. If you would permit me some amount of precision I would say they have to be somewhere between bad and really bad.

Okay, but.

I mean it's extremely difficult question to answer, Bob. (multiple speakers) you have to put in the context of other things going on in the market, where the equity market is, how the rating -- if we really had an extremely bad hurricane season comparable to last year, I don't think that actually would endanger our capital production. The more important issue is what that does to the overall cast of the market going forward; what it does to the reinsurance market going forward, what it does to the attitudes of the rating agencies. So it is much more question of the context for the market going forward. If that for example significantly damaged reinsurance capacity going forward, that might change our outlook on what capital we needed to hold, as opposed to actually using up our capital. Because as Ramani detailed I think we have an extremely responsible cat management program in place for this season.

You know I am not going to let you off the hook. Would you be willing to let your excess capital get to zero? I guess I'm trying to say is it really $500 million of excess capital, or do you want a cushion --

We have a cushion of $1 billion of capital margin which we will not slip away. So this is just $500 million of flow that we expect to be able to generate in anticipation of our needs. And, obviously would love to put in the business but in current market conditions it is more likely to go somewhere else.

So you would not let it go to zero. Okay, thanks.

No, we expect to spend that full $500 million if we end up at the end of the year not needing it.

Got you. Very helpful. Thank you.

Bob, one thing that David has always stressed with the investor community is our long-term goal is to grow book value per share as well as dividend distribution. So do not automatically assume that it goes into buyback; I just wanted to make sure you all understood that.

Thank you very much.

Andrew Kligerman, UBS.

Two questions in the life area; first on Japan, second on disability. What strikes me as interesting is that this 3% guarantee product with the 10-year deferral that you're going to move to in September is one that competitors, such as I think Manulife and others have been offering for a few months now. The question is a company that is arguably in the United States the most innovative, most responsive if not one of the most, why match the product? Why not come out with something a fair amount ahead of the competition in order to garner that share? And just as a sidebar, it just seems that the benefits offered in Japan are so much lighter than those in the U.S. that something like that would be pretty easy for Hartford to do. And that is the first question, and I'll have a follow-up on disability.

We certainly view ourselves as trying to be innovative everywhere. We think the income right away is unique. The other thing that seems to not get sufficient mention is the assets behind it. So what we've tried to do is not just protect the guarantee, but try to give customers an opportunity to get good investment performance. So if you look at our mix of equities, and then we try to balance that all off with the risk we're willing to take and then at a cost that we think is reasonable for wholesalers to absorb. But we think we are a little innovative there if you look at the asset mix. And that I think our upside, our historical investment performance we have stood up well. So no, we are not -- we don't view ourselves as copiers. We view ourselves as independent thinkers and we try to put these products together taking all factors into account.

Disability. One of your competitors, StanCorp, seemed to have at the very minimum temporarily very weak numbers in the group long-term disability area. Interestingly, your sales came down 26% in the group disability area year-over-year. Is that reflecting a much tougher market?

There is a tougher market in the small case in particular, and we have felt that, and we are staying consistent. I guess our outlook is that we will continue to do well in sales. We have become the number one writer of new disability coverage. So obviously we are strong in the sales area. But we pick our spots as we see them, like it said right now we are working hard to compete in the small case market and that has been more difficult. But we still think it is obviously a great opportunity for growth for us. So I wouldn't read much into the one quarter's results. I think we still view it as a core business where we will grow both premium and earnings and obviously sales is a big driver of that.

Great. Thanks a lot.

Eric Berg, Lehman Brothers.

Thanks very much, and good morning. Obviously very sensitive to and impressed by the improvement in the variable annuity inflows but the maturity of your block is such that you continue to be in sort of net redemption mode. How long can we expect that to go on for?

Barring any major change that would cause us to have a breakout on the top line side, I think the next several quarters you will see outflows. Obviously we are trying to keep that negative to as low a number as possible but it is just the reality of the maturity of our business, and where we are right now. So that is where I would look. If something were to happen where our sales were to pop another 20 plus percent -- you can do the math -- we would breakout. But right now we don't see it.

My second press relates to your individual life insurance business. While I see the earnings going up I need to steady sort of more why that is happening. One of the things that is apparent is that you are not getting -- if these are asset gathering oriented businesses, and maybe I shouldn't think of them that way, but if universal life and variable life are asset gathering oriented businesses, you're not really gathering assets, your fund flows are basically essentially close to zero. Is that, am I over-reacting to that? Is that not a problem or put it differently is it possible to do well in the life insurance businesses as is practiced today by you without growing your asset base?

Asset growth is important. Remember you've got two major sources of revenue there and that is on the mortality side and on the asset side, so the asset piece is clearly important. If you look at the year-over-year, our assets are up 10%. I know the sequential was low, and as you point out net flows were off the charts. But the second quarter was a down market. But twelve months we've grown assets 10%; but also keep in mind we have grown our life insurance in force 8%. And if you look at that quarter by quarter I guide you to page L24, at the very bottom of the page you can see that our life insurance in force keeps marching along at like a 2% sequential growth quarter after quarter after quarter. And if you look back in our history this shows five quarters, that has been a pretty steady march, and that has been a big part of why we've been able to grow earnings. It's an important part of the equation, and you will find that growth to be a little more predictable and stable than assets which jump around with market performance. So all in we still think life insurance business is good for us, and we've had decent growth in the drivers being account value and life in force.

Ron Frank, Citigroup.

I've got a question and actually Collin is here to ask one, too. My question regards the small business commercial market. Part of your value proposition to that market as I understand it has been a relatively broad risk appetite, covering a broad range of industries, classifications, etc. And [Ace], although obviously their focus is not that market, recently complained that they are seeing the number of agency companies broaden their risk appetite and define what might be called E&S risks in another market as standard risks currently. Is that part of the competitive behavior that you are seeing in small commercial when you mention an increase in the competition?

I am going to have David answer that question, but before that I just want to on behalf of all my colleagues wish you a terrific life in retirement. I have always respected you as an analyst, and it was good knowing you, but let me turn it over to David to address the question.

Ramani, thank you and let me just add that if it ends up being a life in retirement there will be a bounty on my head.

Ron, I think the observation would be a fair one. We have seen some of that. Obviously that is not something that we're doing. I think that is much more of a middle market phenomenon than small commercial but we are seeing some of the players also behave that way in the small commercial area.

Okay, thanks. And then Colin has a question.

This is obviously for Tom. Tom it is certainly very encouraging to see the variable annuity sales and you've talked about that and (indiscernible) over $12 billion this and regain their number one position. But at the same time it would appear that the company is going to lead the industry in a less distinctive category, and that is in losses with the like amount $12 billion plus that would appear in losses. I notice losses are up 72% year-over-year this quarter, and I guess there is three questions to this.

One, is there anything you can do to address this in terms of internal exchange programs? Two, how badly is accelerated DAC expense on these very high losses impacting earnings? And then the last one, and the one that is troublingly me most, is given this accelerated loss activity, the products are so different today and there seems to have been a material change industrywide in persistency, is this causing you to step back and look at that fairly significant variable annuity DAC asset you've got on the books and should it be revalued?

I will try to get DAC out of the way first. We stress test everything. As we stress test both certainly market conditions but also lapses, so we don't see any major issues with DAC in any way in terms of its recoverability. We will, we're looking at DAC in total, just methodology wise as industry trends have developed. Relative to the overall lapse situation, I think it is really a reality of the maturing of our book of business, and it is a fact that a fair amount of this business is leaving for some of the newer, more robust guarantees. And we are looking at potential internal exchanges. We've been very careful with that because any program that ends up being effectively a whole rewrite of your book would not be a prudent thing for us to do. So we are working ourselves and also in discussion with firms. We also work with the firms so that they can focus in on areas where we think there may be concentrations of surrenders that may not be in the customer's best interest and we've had I'd say marginal positive results from that. But it is a big area of focus for us; we're doing everything we can. We are looking at the exchange situation but as I said earlier, I guess the net of it all as we look at the near future we would continue to expect to be in net redemptions.

One follow-up, how much are your earnings benefiting from the release of death benefit guaranty reserves on these old loss business that seems to be running off the books very, very quickly?

Not much. I would say that has not been a material aspect to our overall profitability, Colin.

Okay, and are you still advertising roughly two-thirds of the DAC over the first -- over the surrender charge period (indiscernible). And then the remaining over the next I thought it was about 15 years. Is that correct?

Yes, that's how pricing works, that's right. And run this past quarter about 51% was our DAC ratio, or amortization ratio, rather.

Thanks again for the kind comments, Ramani.

Tom Gallagher, Credit Suisse.

I have a couple, and then Charlie Gates has some on the P&C side. I guess just back on Japan if we could maybe just talk a little bit about the specifics of the products that are out there, my understanding was one of the reasons that you guys started to lose share is competitors have started offering full at maturity guarantees that fully mature in ten years. Is that a significant part of the market as you understand it right now because it doesn't sound like you're going to start offering that if I understood what the new product launch is here. And then maybe compare that against the other products or product that you're going to be launching, is that more of a 5% GMWB? And kind of where you're at today versus where the market is. So that is the first question, just kind of products, what is out there today and how do you think that sort of plays out?

And then the second question is, is there also a risk here that we see a spike in the lapse rates in Japan like you've seen in the U.S., or are there structural impediments in Japan that will prevent an onslaught of 1035 exchanges? Thanks.

Let me take the second one first. The biggest impediment -- and it is a very significant one -- is there is no 1035 in Japan. So in the U.S. you can exchange from one to another and your gains would not be taxable. In Japan, to go from one company to another, you've got to incur full taxation. So that is a major and significant difference.

Relative to the product, actually been the GMAB that you described, the bullet guarantee is popular. There are others coming out; particularly the domestic companies have come up with other designs that are unique. And we've tried to take the body of what is out there competitively and put it in our framework where we thought we could be successful. And we think this income product, which gives you 3% for 10 or 15 years, and then if you're underwater at either of those points, you can get the remainder out over the balance of a 25-year period. So those products are going to be offered side-by-side. They offer different asset allocation opportunities.

So all in, we think we are in a decent position from the market -- it is not to say that these other products aren't competitive or currently very attractive. But we are going to fight it out as we always do to gain back some market share.

But Tom, time, is it fair to say that -- so the product you're going to be launching is a 3% GMWB?

It's actually an income benefit but it allows for income over the first or just take the 10 year as an example, 3% for the first ten years which gets to the 30%, and then if the products is underwater at that point, the client can elect to collect, to opt for the guarantee, which would give them the remaining 70% over a 15-year period.

Okay.

Instead of a deferred GMIB with current income available. And it should be we think a good offering, not to say that it will be the hottest on the street, but I think it should position us pretty well.

Initial feedback on that has been positive.

Got it, and just I am clear there are some competitors with a comparable product with a 5% guarantee, correct. Or a 5% liquidity?

Yes, I think there may be slight nuances, but, yes there are products out there that I think they would say they compete head-on with what we're coming up with.

Okay, thanks and now Charlie Gates is going to have some questions.

Good morning. Two questions. My first question, I believe Ramani, in his opening remarks at least twice referred to increased competition in property casualty insurance. If you could elaborate on the competition that you were referring to, that is my first question. My second question, seemingly as you look at your property casualty operations the specialty commercial lines business is to some extent like the stepchild or the party that you're trying to step back from. If you could elaborate or speak to what the specialty commercial lines business is and how you see that evolving.

Good morning. I think in terms of increased competition we would probably point to two areas where it is probably most apparent to us that the pace of competition has stepped up. First, and I think it has been well discussed, is the personal auto market. I think many competitors with good margins and strong positions have stated their desire to grow, and so I think that the pace of competition in that market has certainly stepped up.

On the commercial side I think, and this is probably the more acute area, would be the mid market area. I think that we are seeing companies fight very hard to keep renewals. We've even seen evidence of some companies offering multiyear arrangements to keep renewals in-place. The gap between new and renewal pricing is widening, and I think particularly in the premium area of sort of that 100 to 200,000 range, we are seeing fierce competition among the regionals there. So I think those would be the two hottest spots that we see.

Having said that, I think we in the industry are continuing to operate at a very high level. When you see combines in the '80s and '90s it is certainly an attractive market but I think we're just braising the issue that it's certainly getting much more competitive, and we are factoring that into our plans and our guidance.

The second question on the specialty I would not characterize it as stepchild but I understand your comment. I think we've worked very hard over the last few years to manage that portfolio down to businesses that really are important in two ways. One, we feel we are very, very good at those businesses. And two, they complement our distribution, particularly with the intersection with the mid market that we think we've really got great access to. And so on the property, the bond, even the D&O we see those as businesses that we can really push very hard through our existing distribution.

Having said that, we've acknowledged many times they are more volatile. You will see that quarter to quarter volatility both in the top line and the bottom line. You will also see some degree of volatility in the prior period as you have this quarter where (technical difficulty) longer tail lines and you will see that sort of volatility. But again, taking everything into account these businesses have delivered terrific returns for us. Ex cat and ex prior period, running right now in the mid '90, I think that in low to mid '90s this is a very attractive business for us, and I think that it is going to be an important part of our portfolio going forward.

My one follow-up question, to what extent do you see in casualty lines business moving from the excess in surplus lines market back to the standard market?

I would say the casualty lines area in terms of a real migration from excess in surplus lines to standard is not a big phenomenon that we have noticed.

Dan Johnson, Citadel.

Thank you very much. Last quarter was one of the first quarters in a while we've had much in the way of downward volatility in the markets. How would you characterize the performance of the hedging program on the variable annuity assets here in the U.S.?

I am going to have that taken by Dave Johnson.

Think the program worked extremely well. We did have a realized net loss in the hedging program for the quarter, but roughly 80% of that was actually an artifact in the change in the liability model. The actual net loss in response to hedging ineffectiveness was single digit. So it was actually given the volatility it was surprisingly effective. That being said, there were periods during on a day-to-day basis when we had larger gains and losses, but we ended up at a very benign level. But we continue to expect that you're going to see more gain and loss volatility as the book gets bigger and as the markets have more volatility and we have a more complex liability. But it actually we came out very well this quarter.

Just to be clear there was some element of the hedging loss that was actually just due to a set of assumption changes as opposed to market changes?

Yes. I think we reported what, $22 million net loss from the GMWB activity. And roughly 80% of that was actually just a change in the liability model. The actual ineffectiveness loss was single digit.

And then on the distribution side, I know you have been looking to grow the small commercial business for a while and you gave us some details around that at your last analyst meeting. Can you provide a little bit of an update as to where you are on that effort and any metrics you would care to as to where you would be as we approach year end?

Let me update you on really the agency appointment process. I think we talked at length at our investor meeting in terms of that being an important part of our distribution. And just by way of comparison, in all of 2005 we had total new appointments of about 1400. And of that they represented about 1072 of that were brand-new agents. So some were new appointments with existing agents; for example we added a commercial relationship, we added a personal lines appointment. And looking at the first half of '06 updating you on that we have new appointments of 1315, and in that that represents about 1115 new agents. So right now total agents are up to about 8500. So there has been some significant increases there.

In addition, importantly, we've been adding salespeople, internal Hartford salespeople. We've added about 27 personal lines salespeople, and we've also added about 21 small commercial, specific small commercial sales people so we are up to about 155 as of the end of the second quarter. One other metric I would share with you in terms of the impact this is having, if you think about the class of '05 appointments they contributed about $50 million of premium, new premium in '05. They have delivered more than that in the first half of '06. So obviously there is a lag between appointment and production, but these appointments are already generating some incremental premium for us. So I think what we're doing now in '06 we hope is going to be delivering some additional growth opportunities in '07 and '08.

And just to be clear, the more than $50 million was it the year to date?

(multiple speakers) Yes, Dan, that is -- the class of '05 has delivered more than $50 million for the first half of '06.

And where would you hope the ballpark-ish agency total count to be by the end of this year?

Over 9000 is what we're shooting for.

Great. Thank you very much.

Jimmy Bhullar, JPMorgan.

I just have a couple questions. First for Dave Zwiener, on the prior year development you mentioned the construction divest, could you give us some more color on what classes and accident years are emerging favorably and what is not doing as well relative to your assumption? And then second for Tom, you have mentioned in the past that the Europe variable annuity initiative, you haven't spoken about that business this time. If you could just address what is going on there.

Jimmy, making steady progress, still a long way to go. We've been operational for five quarters, and each quarter has been higher than the previous one. So for startups, that's what you want to see.

Has the progress been slower than what you would have hoped?

Yes, so we still started at lower base, but we are making an ascent each quarter, and so I am still optimistic that we will reach a success level there.

Jimmy on the reserves, let me turn it over to David.

Jimmy you're looking for color on the other item in the quarter that contributed to the prior development?

Yes.

There were four items, we covered one, the construction defect, the 45 million there. The other three major items, two releases, one in business insurance. We had a release of $38 million that is related to adjusted loss adjustment expense for workers comp and package business coming from accident years '03 to '05.

In personal lines we had another release from the auto liability reserves, and that again was '03 to '05. That is $22 million. The other strengthening item in addition, since construction defect was the workers comp ALAE, and that is '95 and prior. And that was I think 20 million.

Okay. Thank you.

Operator we will take one last question.

Gary Ransom, Fox-Pitt, Kelton.

I just had one more question on the Dimensions product that you are rolling out this year. Can you elaborate on what that will actually do for you or does for the customer? And how that compares to what other competitors are doing at this point?

You're asking about the Dimensions with auto packages? We are rolling out?

Yes.

We are as of August 1 we will be in eight states, and we will continue to roll that out. Essentially we will have four tiers of choices there of offerings that will range -- what we call them they range from Essential, Sentinel, Sentinel Gold and Sentinel Platinum. So those would be the four categories. Each of these represent features that we've had in market for some time, some of them going back to '99. We've added features. I think what we've done is we have taken advantage of our quote to issue technology, and so we can now provide those four offerings to agents to then present to their customers and give them choice in terms of the kinds of coverage they want. But the types of coverage and the features we have are things that we've had in market for quite some time, we're just putting them in a different offering configuration that I think gives the agent and the insured choice.

Okay. Thank you. And just one follow-up on the agency appointments. Once you get to where you want to be in this 8500 number or so, what is the next steps after that to perpetuate growth over the longer-term?

Well I think the next step is already in motion. The next step is really making each of these appointments more profitable, more productive. And so appointment is just the beginning. And so there is quite a bit of effort internally here and a large part of it falls on the shoulders of the salespeople that we are adding to develop and penetrate more proper relationships with each of these agents. So the raw metric of how many agents we have is important, but it's less interesting to us than how deeply we're penetrating and then the profitability of each of these agents by class and by region, and that is really the work that is ongoing.

And so with the agents that you've already been with for say four or five years, are those, is there metrics of success in penetration with those?

Absolutely. We have metrics with all types agents in terms of not just penetration of book, but also obviously the profitability we watch very carefully on these businesses.

Okay. Thank you.

Thank you, Gary. We have indeed overstayed our welcome here. I'm going to bring this call to a close. As I said in my opening comments, The Hartford second quarter results were very strong and with disciplined execution in both life and property casualty. Clearly the actions we have taken in the past few years have positioned the Company well for a period of increasing competition. We are really benefiting from our diversified earnings base and a strong balance sheet, and we continue to grow book value per share at very good ROE.

So I want to thank you for participating on the call today. Have a nice weekend, and good luck Ron Frank.

Ladies and gentlemen, we thank you for your participation in today's conference call. You may now disconnect.