Hartford Insurance Group Inc (HIG) 2006 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Hartford fourth-quarter earnings call. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Ms. Kim Johnson, Vice President, Investor Relations.

Thank you, Kimberly. Good morning and thank you all for joining us for today's fourth quarter 2006 financial results conference call. As you know our earnings press release was issued late yesterday afternoon. To help you follow our discussion, a financial supplement and complete slide presentation are available on our Web site at www.theHartford.com.

Participating in today's call are Ramani Ayer, Chairman and CEO, David Johnson, CFO, Dave Zwiener, Chief Operating Officer of our Property Casualty company, Tom Marra, Chief Operating Officer of our Life company, and Neal Wolin, General Counsel of the Hartford. Following the prepared presentation, we'll hold our usual question-and-answer session.

Turning to the presentation on page 2, please note that we will make certain statements during this call that should be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These 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 press release issued on January 25th, our quarterly report on Form 10-Q for the quarter ended September 30, 2006, 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 the Hartford's financial performance includes financial measures that are not derived from Generally Accepted Accounting Principles, or GAAP. Information regarding these non-GAAP and other financial measures is provided in the investor financial supplement for the fourth quarter of 2006, in the press release we issued yesterday and in the investor relations section of the Hartford's Web site at www.theHartford.com.

Now moving to our presentation on page 3, I'd 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.

As you saw in our press release, the fourth quarter of 2006 capped an excellent year for the Hartford. In all areas of the Company we delivered on our promises to customers, distribution partners and shareholders. This morning I'd like to take a few minutes to recap our full-year 2006 results. And before our Q&A session, I'll turn the call over to David Johnson for a brief discussion of the fourth-quarter results and an update on our guidance for 2007.

The Hartford had its best year ever in 2006. Net income was $2.7 billion, a record for the Company. Core earnings rose to $2.9 billion, with strong double-digit growth in both our Property Casualty and Life Operations. Core earnings per diluted share were up 24% over 2005 to $9.07. 2006 results certainly got a lift from a good equity market and favorable weather.

We're also seeing very strong underlying performance in each of our major business segments. Our Life Operation is highlighted on slide 4.

In 2006 we reported more than $12 billion of net flows across our wealth management businesses. These strong net flows and good equity markets drove assets under management in these businesses to $283 billion, and we expect it to grow from here. The Hartford is capitalizing on the opportunity to provide innovative solutions for large and growing retirement markets in both the U.S. and Japan.

The face of retirement planning is really changing. Instead of asking how can I save for retirement, aging boomers are now asking, how can I assure myself that I don't outlive my assets? Guaranteed lifetime income benefits answer that need. Our new lifetime income writers introduced last August are finally gaining traction.

Variable-annuity sales in the fourth quarter rebounded to $3.1 billion, 26% higher than the year-ago period. Despite net flows, variable-annuity assets under management rose 9% year-over-year.

Retail mutual funds had a phenomenal year with over $11 billion in deposits and $5.7 billion in net flows. In the fourth quarter alone, mutual fund sales hit $3.1 billion. The seasoning of our dedicated wholesaling team, strong fund performance and attractive fixed income products drove our sales gains. During 2006, total mutual fund assets under management rose by 33% to $40 billion.

Retirement Plans deposits reached $5.5 billion this year and assets under management rose by 21%. Our growing 401(k) business now provides solutions for over 16,000 plans and 800,000 participants. Now, in this area as well, we have expanded our offerings. Last September we launched two new products -- a 401(k) plan targeted to midsize businesses, and a product addressing the 403(b) market.

In Japan we faced increased competition for new deposits in 2006. Nonetheless, for the full year, we reported $4.4 billion of net flows and 20% growth in assets under management. Total sales in Japan for the fourth quarter came in at $1.2 billion.

Global financial markets are providing the Hartford's variable annuity customers in Japan with very attractive returns. In 2006, account values grew an average of 6.6% before contract fees, which is on top of the 20.4% in '05. With these types of returns, the Japanese VA market should continue to present a great growth opportunity.

We are evolving with the market in Japan. Last September we launched a VA aimed at customers seeking a shorter deferral period before receiving guaranteed income, and we plan to add a new variable annuity next month to complement our existing offerings. This product will provide customers with a feature that Japanese customers are seeking -- the opportunity to lock in their gains after they reach a targeted level of return.

Individual Life, Group Benefits and Institutional Solutions had record sales years in 2006. Through the first nine months, we retained our number one ranking in group disability sales, our number two ranking in variable life, and we're number three in group life sales. Additionally in Group Benefits, we are seeing the impact of our increased efforts at cross-selling. Actually, 42% of 2006 sales to employer markets were sales to existing customers. Individual Life, Group Benefits and Institutional Solutions businesses provide stable earnings growth and diversify the Company's risk profile. Taken together, these three businesses generated 20% of the Hartford's core earnings in 2006.

Now turning to slide 5, 2006 was a record year for our Property and Casualty businesses. Favorable weather and excellent underwriting performance combined to drive 22% growth in core earnings. Total written premium in ongoing operations rose 2% over 2005 to $10.7 billion. We significantly outpaced industry growth last year in personal lines and small commercial, where margins remain attractive. And in middle market and specialty commercial, where we face more price competition, especially on new business, we're maintaining our underwriting discipline and being selective. The full year 2006 combined ratio for Business Insurance was 87.9%, and Specialty Commercial ended the year with an excellent combined ratio of 95.9. We're working hard to protect this very attractive book of business.

Now, in the fourth quarter, increased marketing to AARP members generated 9% growth in written premium, while Personal Lines agency business grew 6% over the fourth quarter of 2005. And we continue to see favorable frequency and modest loss cost increases during the fourth quarter. As a result, underwriting margins remained strong through year end, helping to drive an excellent combined ratio of 88.6% for the full year.

With the investments we made in product, sophisticated pricing and expanded distribution, we expect Personal Lines written premium to rise somewhere between 4 to 7% this coming year.

We also have a positive outlook for profitable growth in Small Commercial. Competition in this line remains rational, particularly at the smaller end of the market. Over the past two years we also appointed over 1700 agents to write this business. It takes time to ramp up newly-appointed agents to a meaningful level of production. During 2007, we will be focusing our efforts on increasing the flow of business from these agencies.

We have also enhanced our products. Last month we introduced a new commercial auto product, and it is now available in 30 states. This new product is a significant step forward in increasing market segmentation and pricing sophistication. With our emphasis on placing the right rate on each risk and the expectation of modest increases in loss costs, the small commercial business should remain an attractive growth segment for us in 2007.

Competition is certainly increasing in middle market Business Insurance, and Specialty Commercial, particularly in certain regions of the country. Our strategy in these segments will be to focus on retaining profitable business, while being selective on new business.

A slowing topline also requires diligent expense management, and we have our plans in place to keep our expense ratios in check. Our Property and Casualty results in 2006 were really outstanding. As important, I believe that with our current mix of business, The Hartford is very well positioned for the year ahead.

Now, turning to slide 6, a big driver of stock valuation is book value per share and return on equity. On those metrics we delivered great results in 2006. Book value per share, excluding AOCI, rose 15% year-over-year to $57.83. That's an increase of $7.42. And we also paid dividends of $1.50. So, total shareholder value as measured by growth in book value plus dividends actually rose 17.7% in 2006. And as you can see on the chart, 2006 built on a strong record of growing shareholder value. In the last three years, growth in book value per share plus dividends averaged over 19% per year, and our annual return on equity over the same period was 15% or higher. Long-term our goal is to continue to drive double-digit growth in book value per share, plus dividends at 13 to -- plus dividends, as well as a return on equity between 13 and 15%.

With that I'd like to turn this call over to David Johnson for a more detailed look at our quarter's results and our guidance for 2007.

Thank you, Ramani. Moving to page 7, we had a great quarter that exceeded our expectations. The largest items that improved after we spoke to you on December 11 were better-than-expected CAT through the balance of December and favorable partnership [income].

There were other important items in the quarter that we did build into our guidance on December 11. Most important was the results of our now annual DAC review. The DAC unlock reduced net income by $76 million after tax. The core earnings impact was a charge of $30 million after tax. A $13 million impact was recorded in corporate, and Life Operations core earnings were reduced by $17 million for DAC and related adjustments.

I won't go through all the pluses and minuses, but I would call your attention to additional disclosure we have added on page L5 of our investor financial supplement that provides detailed by-driver by-segment impacts of the DAC unlock.

Second, we had favorable development in both current and prior accident years in P&C ongoing operations. Substantially all of this development was anticipated in our December guidance. Prior-year development in ongoing operations totaled 14 million after tax, and we had $38 million of favorable current-year prior-quarter development, for a total of $52 million.

Third, we recorded a $17 million expense for early retirement of debt. That was, of course, anticipated in the guidance we gave you in December, and also at our third-quarter earnings call.

Turn to page 8. Very little has changed in our business since December 11, and thus, our '07 guidance is almost entirely unchanged. The only adjustment to EPS guidance is for the impact of SOP 05-1, which revises the accounting for replacement activity. You'll recall in December we told you the SOP would likely change our '07 guidance; we just couldn't quantify it, particularly due to uncertainty on the impact on Group Benefits. We can now make an estimate, so we've included it in our guidance. We estimate that this accounting change will lower core earnings by $0.05 to $0.08 in 2007.

Our guidance range of $9.30 to $9.60 per share uses the lower end of that range of estimated impact. I do wish to stress, though, that this accounting is still in flux, and we are awaiting further input from FASB. In fact, I think they're scheduled to meet next week. So, this estimate could change.

The biggest impact from SOP 05-1 was on Group Benefits, where we will be amortizing DAC more quickly than the past. The change in guidance on the Group Benefits margin, which we describe, is solely to adjust for the SOP 05-1 impact. There's no change in the fundamentals.

All other changes to our '07 thinking are very minor. We've increased our outlook for variable annuity sales and flows by $0.5 billion and upped the mutual flow fund net flows by a similar amount. These changes don't justify revising our EPS range only 45 days after we first issued it.

And finally, our stock buyback is underway. To date we have completed purchase of about 100 million of our announced program. No other capital news to report. Ramani?

Thank you, David. Operator, I'm going to turn the call over to you to open it up for questions.

(OPERATOR INSTRUCTIONS). Andrew Kligerman, UBS Securities.

Just first on the Property Casualty side, with ongoing P&C written premiums growing only 2% in the fourth quarter of '06, I'd like to get a sense of your confidence around the ability to hit the upper end of the 2007 3% to 6% range that you guided for.

Frankly, we are very pleased with what happened in the fourth quarter. I know, looking at the 2%, you may question that. But I think as you parse that through and you look at the growth that Ramani and David mentioned in small business and personal lines, the kind of momentum we were expecting is still going on in that fourth quarter. I think that that really underpins our guidance for full year '07. So, I think, at this point there would be no reason at all that we would change that guidance. I think depending upon how the competitive markets change over the course of the year will determine where we end up in that range, but I think right now there's no reason to change that.

Shifting over to the Life side, maybe Tom could touch on the PLANCO variable annuity wholesaling team, and how that's holding up; hearing that there's a lot of pressure, competitive pressure for wholesaling. And then lastly, just the competitive conditions highlighted in the Group Benefits marketplace -- is that getting real competitive? (multiple speakers) what are you seeing in pricing?

Similar story to what we've seen. I think the small case market is a little tighter. But all in, these are always competitive markets. We think these have had been pretty good times for group disability carriers. The PLANCO team is upbeat. I think the turnover that we experienced in the first half of '06 won't end, because wholesalers are really sought after folks these days. But they're upbeat, they're making more money, our products are positioned well, and I think they're really excited for '07. So, I feel good about the PLANCO situation. And by the way, the mutual fund team, obviously, is feeling good, given the tremendous sales we had in '06.

The mutual fund team seems to be on fire. But you do feel that the VA wholesaling team is --?

Absolutely. I think they would say they're on fire, too. And it's been a long road back for some of them, but they really are feeling upbeat.

Tom Gallagher, Credit Suisse.

First question is just on your VA net flow guidance. I noticed you changed it a little bit to the positive side, or I should say it's less negative. But if you look at the first-quarter guidance of net outflows, and we just annualize that, it would suggest that you're being more cautious for the balance of the year. Tom, can you talk a bit about what you're seeing there? Is there anything unusual going on in the first quarter that would lift that result, and then potentially drag it for the balance of the year? Or is it more uncertainty?

I wouldn't read too much into the first quarter guidance. I think mostly what you're reflecting is our increase in sales. And frankly, if we come at the low-end of the first quarter, you're right; then I wouldn't expect we'd be even more than likely at the low-end of the full-year. So, as the year goes on, we get a little more refined on the full-year guidance. So, I wouldn't read too much into that. After first quarter, we'll probably be able to give you a better read of it.

Tom, would you say -- just from a high-level standpoint, clearly the improvement in net flows is a sales-driven issue, because surrenders are still fairly high. Are you -- it sounds to me like you're feeling better overall about sort of directionally where that business is headed. Do you think there's actually some hope or some visibility that you might actually turn fund flow-positive at some point in the next year or two?

I don't see it this year still, Tom. I did feel a little bit better with the sales situation. I think it's still early in the year, so we have to be a little careful. But I'd say the whole industry should have a good '07. We're all coming off of a good '06. So -- and one thing to also note that we like to point out here -- good investment performance sort of exacerbates the net outflow issue, because the same surrender rate applied to a higher account value has that impact. But things are, I think, pretty good for VA carriers right now.

Got it. Just another quick one for Dave Johnson. Should we still expect that you're going to get through approximately 800 million of buybacks by the end of June of this year?

700 million now, yes. That's definitely our ambition.

And then, I think, Charlie has something on the P&C side.

My first question -- how would you assess or expect corporate operations would be -- for your Property Casualty operations, to be more specific -- would be influenced by the Florida catastrophe legislation enacted earlier this week?

Given that the law has been on the books for less than a week, we're still actively analyzing its detail, just to get a better understanding of its effect on our business and the market in general. I would say that we understand the strong political desire here to provide immediate rate relief to coastal residents in Florida. But the bill may significantly increase the financial risk to Florida and Floridians. And this may take, in our view, Florida in the wrong direction.

First of all, expanding the Florida hurricane cat fund is going to potentially saddle Florida insurers and customers with a substantial unfunded liability if a large storm actually strikes Florida. And their legislation now plans for a potential $38 billion event, up from the current 22. The cat is potentially responsible -- the cat fund is potentially responsible for 35 billion, up from that 22. And the cat fund is going to have to approach the capital markets post-event and pass the financing costs along to all Florida policyholders, with the exception of comp and professional liability. So, most people, most observers believe it's going to be forced to lean on the federal government for liquidity, should such an event occur.

And the second thing that's going on here is the rate increases that were planned for citizens are being rolled back; especially the one in January and the one -- impending one in March is being rolled back. And so, citizens is going to be both growing their business and potentially running the risk of not pricing accurately. So, the whole price accuracy and free market moves to relieve the stress of this marketplace is now actually being rolled back a little bit, and that's a deep concern to us. We're studying all the impact of all of this. We are, clearly, a disciplined writer of insurance in the market, but we're not yet ready to give you a clear direction on how this will play out in terms of our volumes of business and so on going forward. We need to understand the bill. The legislature is going to reconvene in March, and they're probably going to debate this issue further. And we as an industry are going to have to participate in educating both the people and the legislature that this recent set of moves will run the risk of saddling future citizens of Florida with issues. So, a lot of work to be done.

That was a great answer. Thank you. My second question -- looking at page PC13 of your statistical supplement, if I'm reading this correctly, it shows that business insurance price increases were negative 3%, I guess, in the fourth quarter of '05, 2% in the fourth quarter of '06. Does that mean that actually the rate of decline has diminished?

I would say that's a mix issue as well. Let me give you a little more information. If you look at the data, the -2 for fourth quarter '06, that really reflects, essentially, zero for small commercial and about down 5 for midmarket. And I would say that those have held relatively constant over the last five quarters. But small commercial having become a bigger proportion of the total, I think, that's why you're seeing the 3 going down to a 2. But I wouldn't read anything more into it than that.

The only other question -- how do you define middle market?

How do you define middle market? The 25 million sales and under for a customer is in the small business area, and above that is middle market, up to 1 million in premium.

So, if the company has sales of less than $25 million, it's small?

Right. That would be our definition, Charlie. Obviously, as we compete in the market, our competitors have different definitions of small or middle, and so there's some overlap in that. But that's how we would approach the market.

Josh Smith, TIAA-CREF.

Charlie kind of stole my thunder on the Florida question, but if I could just add an additional question there. Are you comfortable effectively buying reinsurance from the state, given the potential collectibility issues, and then having to pass those savings on to your customers? Or would you prefer buying that from the private insurance reinsurance market, where it could be spread amongst highly-rated carriers, and there's less of an issue with having to go to assessments or bond issuance to come up with the funds?

It's too early for us to really give you a clue as to how we would think about this. Remember now, our reinsurance programs were renewed on January 1. So, as far as 2007 is concerned, we are already in place with our core reinsurance programs. So, as to how we should think about the available reinsurance out of the state cat funds, we need to do some deep thinking about this.

And just a bigger picture question on your guidance. Around this time last year, if I adjust for the charge that you took, I think it was second quarter last year, your midpoint of your '06 guidance around this time last year would have been about 790, and you came in about 15% above that. How should I view your current guidance in light of that? I mean, you typically set the bar high and exceed it exceedingly. So, how should I not view this guidance with a level of skeptical conservatism? In other words, what are the things that could hurt you to the upside or the downside on this guidance?

I think the biggest way in which we exceeded expectations last year was on catastrophe activity. The guidance that we gave out last year assumed kind of a normal run rate of cats, and we and a lot of people in Florida and other places were blessed by a below-average level of cats in 2006. So, we have again a kind of normal run rate of cats in this guidance, and we definitely would have upside, as we did this year, if we come out significantly better on cat activity. But, obviously, we can't assume that.

And then, on the balance of it, we are a company in a number of different businesses. We have tried to provide detailed driver guidance on kind of what informs the inputs there. I would say that the -- and a lot of those are going to be driven by how the levers play out. You can model -- I know you can model as well as anybody -- the equity market and financial markets is a big driver on the Life side. And on the P&C side, it's severity and frequency. And we've put forth our best thinking there as to where those trends are going to go. But if you have variation there, that definitely could give us upsides or downsides.

And then again, as you correctly point out, another big lever is development, or the lack of development in other operations in our P&C runoff, where we didn't do as well as our kind of arbitrary assumption that was loaded into last year's guidance. This year, again, that could be a volatile line up or down. I'm certainly hoping for down, but that's another range. But it's -- you kind of have to build it up from the fundamentals. I don't think it's -- and then, obviously, the final lever is prior year development on the P&C side, which, again, you can't model that, just as you can't model cats.

Those are all fair points. On the cats and the discontinued ops, I would argue that those sort of washed each other out. So, instead of being up 15%, if I don't adjust for that, maybe it was up 10% -- still significantly higher. I guess that's mostly due to the strength in the equity markets, I would say?

One thing -- I just want to add a broad statement here. Our guidance always reflects our most current best thinking on how we see the year shaping out. There's a lot of elements of good execution. There was also everything that David pointed out; a good frequency environment in '06 that we experienced. So, there's -- this is the insurance business, when you finally think about it. And we definitely give you guidance based on our collective thinking of what we believe is a reasonable place for us to position our company one year over another, given market circumstances.

Great. Thanks for being conservative and consistently being there.

Jimmy Bhullar, J.P. Morgan.

Our next question comes from the line of Joshua Shanker, Citigroup.

Looking at the small business landscape right now, considering issues of retention and rate right now, are you seeing competition getting heavier in that market? Or do you think that it's holding rather constant at this point, and your proposal over the next few years of increasing the share of your business that is accounted for by small business and personal lines can be on target?

The answer to your first question -- yes; we do see more competition, without a doubt. And I think that it's coming from the normal large national players who have some of the similar capabilities that we do and our agency driven. But I think that we've worked very hard to do two things. One, keep the product; and by product it's not just the actual policy itself, but all the technology that supports the transaction with the agent and the end customer -- to keep that as leading as possible. Because, I think, as we've talked about before, that's really where we're going to be able to continue to achieve our plans, is by making it simple and easy and, hopefully, cheap for our agents to offer this product.

Secondly, as we've talked about, I think that we've been very focused on expanding our agency plans, and so I think we may good progress throughout the course of '06 as well as '05 -- but '06, in terms of expanding not just small commercial, but also personal lines agents. And so, I think the combination of the two reaffirms our confidence that even in the face of increasing competition, we're going to be able to achieve our plan.

And then, to your second question, given that, would we expect the mix to continue to shift to more small commercial? The answer would be yes, both because I think that we'll be able to continue to grow small commercial, but I do believe there's a lot more competition in the middle market. And so, I think that you were facing price decreases there in the last year, as I talked about on an earlier question, about 5%. My guess is we're probably going to be looking at mid single-digit decreases again in '07. The competition for new businesses is quite intense. Retentions are also being challenged. So, I think, holding flat in midmarket and growing in small commercial would cause that mix to shift further in '07 to small commercial.

In terms of this competition, what kind of effects is it having on commissions to the brokers you go through?

There are some players who are competing through their commissions. But obviously, '07 is going to present a bit of a challenge in that it's going to be much more of a tapestry of different forms of compensation. I would say probably the most aggressive right now would be some of the regional players who, obviously, are continuing to use aggressively their contingent comp programs, but also their fixed commissions are moving those up. So I think you will see some players move with the commissions to try and drive it, particularly on the new business side. We have not as yet. I think, again, we've tried to emphasize not only below cost of being able to place the business, but also the service element of the business. As you know, we service about two-thirds of the business that we have. And that we sell to the agents as being a cost savings and a profit enhancement for them as well.

So, I think, your point is well taken. You probably will see players who don't have those capabilities rely perhaps more upon the commission structures they'll have to pay in '07 and beyond.

Typically, most underwriting cycles, you initially start with marketing expenses and commissions are in the broad bucket of marketing expenses, whether its advertising or marketing through distribution. And it's when the cycle gets a lot tougher when you get into more severe price competition.

Thank you very much. Congratulations on the quarter.

Jason Zucker, Fox-Pitt Kelton.

A couple questions. One, could you just tell us why you have some increased optimism on the variable annuity sales outlook for 2007. And then, the other question relates to the SOP 05-1. First, could you explain why there's little impact on the variable annuity business? And secondly, I was hoping you could clarify your interpretation of Group Benefits within the SOP, and maybe just explain to us the difference between the DAC expenses expected in 2007 and the cumulative charge that you plan to take.

Here's what I'm going to do. I'll have Tom handle the variable annuity sales questions, and I'm going to turn the DAC and SOP questions over to David Johnson.

Thanks, Jason. I would say on variable annuity, basically there's not a lot of magic to our optimism, just that we've seen the new product take shape, and I think the overall industry that -- I think the brokers are seeing the value of, particularly the lifetime guarantee features, which are now prevalent in the industry. So, as I said, I just think it's good times for us as an industry, and I think we're well positioned within that industry, or it's a modest uptick in our guidance. So, I wouldn't get overexuberant. But, I think we're going to have a good year. And hopefully, as the year goes on, it will get even better. But right now, I think, I am predicting it to be a good year for the industry and a good year for us.

Great.

On the SOP, we will be the first to admit this is a fairly confusing piece of accounting standard-setting. The first, which is -- question, which is why there's relatively little impact on our VA, and that is by far the smallest part of the ongoing impact as we see it, it really flows from the fact that The Hartford historically has not had very much replacement activity. And as a result, if we continue in that mode, there's not going to be too much impact from this.

Second, in terms of how we think about GBD and why it falls in the scope of this standard, it's actually a different way to look at it. At the last -- fairly late in the development of this standard, there was a dramatic increase in scope. What had started out as an attempt to figure out how to handle internal replacement activity in variable annuities suddenly got scoped up to include pretty much the entire insurance industry. And then you have to look at the technical kind of mesh within it to determine then what gets taken back out again. So, GBD did not get taken back out again, and it's produced some surprising results for some folks as things have become more clear as to how this is likely to be interpreted.

So, what we have, we have historically had a reasonably conservative view on DAC and GBD. We don't DAC too many expenses. We have just a little over 100 million in total DAC period in that segment. But we amortize it right now over the expected life of the customer, the policy relationship, which is the appropriate way to do it; you do actuarial studies of how long that's going to last, and then amortize that over, which is slightly under five years for The Hartford. Under the new SOP, as we think it's likely to be interpreted, you're instead required to amortize over the period of life of the policy until it undergoes a material economic change, which in our case is a provision which is quite standard in the Group Benefits business, allowing a repricing of a contract, either on renewal or pursuant to other aspects of the contractual relationship. And that takes down the amortization period for our book to somewhere between one and three years, depending on the contract. So, what you do on adoption is you take all the DAC that's on the books that's currently supported by life -- the delta between 4.5 and 1 to 3, and you write that off immediately. And then go forward, you conduct yourself on a schedule where you're amortizing the DAC on a faster schedule, as I said, kind of one to three years. So that's how you get the pieces of both the cumulative effect and the ongoing impact on GBD for us, and GBD is the largest part of the ongoing impact.

That was very thorough. Is there any timing that you know of as to when this goes into effect?

It's already in effect. So, the only question is whether FASB decides to intervene and defer that effectiveness, which (multiple speakers) to do. My understanding is they're scheduled to meet on this issue next week.

Gary Ransom, Fox-Pitt Kelton. This question has now withdrawn.

Tamara Kravec, Bank of America Securities.

A couple of quick questions. For Japan, the run rate for VA sales has been somewhere around 1.2 billion the last three quarters. And looking at your guidance for '07, the range seems very wide, from, I think, 4 to 7 billion. So, if you could talk about your comfort level with the wideness of the range, why the range is so wide, and what gives you confidence that you could increase it to 7 billion? And my next question is just some comments on spreads and what you're seeing there. It seems like some are holding up, and you're seeing some pressure in other areas. So, as we're in '07 with a still inverted yield curve, if you could comment on that. And then I have one small follow-up.

First, on the spreads, I think that caused a minor tick in the fourth quarter, but we don't -- our guidance assumes relatively stable spreads for '07. So we don't see that as a huge negative issue for us. Our guidance for full year is wide; it's 4.5 to 7 billion for Japan VA sales. (indiscernible) in early February we come out with a new product to run side by side with our current V3 product. We have relatively high hopes for this product, and we think it's responsive to some of the recent trends in the Japanese VA marketplace. Ultimately, the wide range is needed because we're just not sure how much that is going to take off. But, like with the U.S. VA situation, we'll know more after first quarter. In particular, by the time we report first quarter, we'll be able to give commentary on how the new product is taking to the market and how it's fitting with the other products. So, for now, I think, we need a wide range.

So, even with other competitors coming into the market -- AEGON recently announced they were coming in with a JV with Sony -- even with competition where it is, you think that range is possible because of your product innovation?

I think what you're getting at there is are we worried about the low-end of the range. And I would say it's not a [lay-up], but I would be very disappointed if we were below the low-end of the range. What probably is the bigger question is whether we're going to pop toward the upper part.

Okay. And then, my last question was on small commercial. There was a comment made that it takes a while to get new agents up to a meaningful level of production. And I was just wondering if you can comment on how long does it normally take, given that you're growing that force? And do you expect to have profitable growth?

I would say small commercial takes a little bit longer for us than personal, so I'll answer both questions. Personal lines, we would expect to be able to get our newly-appointed agents to a level of profitability within about 12 to 15 months. And I would say for small commercial we would be targeting somewhere in the 18-plus range.

You meant growth.

I'm sorry. Yes, growth. And so, I think that we've got the metrics to track each new appointment, the flow of business, the investment we're making in appointing and educating that agent, and then comparing it to the profitability of the business that we're getting from that agent. So I think that we're reasonably confident that we're going to be able to get that.

I would also mention, too, that the flow from these new appointments is very important as well. The agents that we appointed in '05, we probably got in the neighborhood of about 50 million of premium out of them during that year. The agents we appointed '05 and '06, if my numbers are correct, together probably contributed about 150 million of new premium in '06. So you can see it's a material impact on the premium flow that is coming from these agents, and I think over time that will become increasingly important.

Alain Karaoglan, Deutsche Bank.

Congratulations on a very strong 2006. I have three questions, and then my colleague Darin Arita has some questions on the Life side. The first one is on Business Insurance, is there a meaningful difference between the profitability of the small commercial and middle market business? The second question is, on the accident here -- on the reserve releases, you've had some for the 2006 accident year. Could you discuss what gave rise to these in the fourth quarter? And last, what are you assuming in your pricing in personal auto for frequency trends for 2007? And then Darin has some questions.

Alain, keep me honest here; make sure I get all three. In terms of -- let me take them in reverse order. I think on the pricing, on the negative frequency, as you've heard us say in the past, we've been of the view that that was going to dissipate. We have not traditionally priced for that. I think that the latter half of this year, '06 and into '07, we're beginning to assume there will be some small amount of negative frequency, and we are pricing for that, but less than what we've seen in '06.

In terms of the profitability of small commercial versus midmarket, I'd make one overall comment. That is, the volatility of the profitability is different. As we said before, what attracts us to the small commercial area, very much like personal lines, is our ability to respond quickly and maintain a fairly consistent level of profitability. And so, what you would see is us meeting our targeted returns or exceeding them over a very extended, consistent period, and pretty much regardless of where we are in the cycle.

On the midmarket, you'd see more volatility. But at the high-end you would expect that business to make more. But at the low-end, you would find it more challenged to make its targeted returns. And so, on average, though, it's our expectation both businesses are going to perform at an acceptable level. And I'm sorry; your third question was --

The reserve release in the fourth quarter from the prior quarters of 2006.

Okay. So, the current accident year releases? We had -- in the fourth quarter '06, we had a release in Business Insurance for ALAE, and that was related to workers comp, and also in the small commercial and package business. So, that's where that came from.

Given the profitability of the middle market at this level, it seems that you can afford to -- or the market can afford to lower rates and still maintain reasonable profitability, if it's being operated at the same sort of combined ratio as the overall segment. Would that be accurate?

I would say at the margin -- and again, that's where the business gets priced -- at the margin, the profitability of midmarket is probably being challenged in a number of places around the country. We've talked about the Midwest, and I think there, in particular, competition is behaving very aggressively. And so, at the margin, I don't think many players there would have a lot of room to give.

I would say that's probably different than small commercial. But again, I think most of the players in small commercial, not all -- more of the players in small commercial act in a fairly disciplined manner. But in the midmarket, as you've seen historically, I think that's probably where you start to see first the changes in terms and conditions, which we are seeing. That's probably where you see the most aggressive pricing behavior, both new, certainly, and even now in renewal. And so I think that we're probably not going to have a lot of excess margin in that new business for people to be trying to make use of.

Thank you. I'll turn it over to Darin.

Thank you. The question here -- with respect to the new Japanese variable annuity product for next month, can you give a little more color on how the new product works, and whether any other competitors offer a similar product?

Is the question on how does the Japanese product work? Because you're cutting in and out.

That's right. How does the new one work for February, the Japanese variable annuity product?

Great. I'll have Tom take that one.

It's responsive to this concept of lock in. And essentially, one of the things Japanese customers like to do is pick a target rate of return. And ours will be after five years, if your target rate of return is -- you could pick between 120 to 150% in 10% increments. And as soon as it hits that level, we actually take it out of the market, put it in the general account, and it becomes liquid at that point in time. So -- but you can't elect that option, even if you hit your target, unless you've hit five years.

It's also got some downside protection, and then a GMAB, 100% GMAB at the 10-year mark. So, we think it's a combination. It's actually got three components -- the downside component, the lock-in feature, and then the GMAB; hence, the name we're calling it, three wins. So, we think it's responsive, and again, should do -- should fit well. It's very different than the other products, so we think we're well served to have both available.

Are there any other competitors that are offering a similar product?

I think the lock-in feature was kind of pioneered by Tokyo Marine -- has had a lot of success with it. And then, I think, there are a couple of others. So we think it's a good response. We wanted to have a longer-term, more traditional VA, which the V3 is more of the traditional cut. So, we'll have both available. And again, I'm hoping that we get at a decent mix, and that this is more incremental than substituting of existing sales.

Just one final question. If we could get an update on the non-Japan international Life operations. When do you think we'll see a greater contribution to earnings from that business?

It's going to take a while. We're, obviously, making money in Brazil and we're losing money in the UK. We're encouraged by the UK, in that we've had five successive quarterly sales increases. We also have a new program coming out with their pension act that was recently put forth, which effectively creates a pretty robust IRA rollover market in the UK. We'll have a product response for that in April. So, we're still a ways from reaching breakeven, yet alone target returns. But we're getting a little bit better each quarter. So we're cautiously optimistic that we're going to do well in the UK. Brazil seems to be a steady eddy for us. And so far those are the other two countries we're in.

Ed Spehar, Merrill Lynch.

One question on Japan. Tom, could you talk about how the ROA or ROE on this new product is expected to compare to your in-force book? And will you need to hedge the exposure that's created from the sale of this new product?

Good question, Ed. To date, we've decided not to pursue a hedging strategy. We're looking at different ways that we could get there, whether we do it on a global basis and not a product-specific basis. We did a little currency hedge this quarter already. So, that's a first move. We look at this in terms of our overall book. We have an integrated risk analytical system now that can look at the whole picture.

In terms of the ROA, I don't have a specific answer. I don't think -- we'll get back to you, but I don't think it's going to be materially different than the other. And it hasn't changed our overall guidance of around 70 basis points.

In terms of ROE, is this expected to be anymore capital intensive than the products you currently sell?

No. It's a back-loaded product. So, it should be similar in capital return.

Tom Cholnoky, Goldman Sachs.

I just have two questions. I know you kind of beat Florida to death a little bit. But just real quickly, have you done any sort of back-of-the-envelope calculations of what you potentially would save in reinsurance purchases were you to go and take advantage of the incremental limits offered by the Florida fund?

It's a complex question, and I'll tell you why. Because the Florida fund, as it is set up, takes you up to, say, a 1-in-65-year event. So the question we would have to confront is what do you do on top of that. And secondly, the other issue is if you don't purchase this reinsurance, it will be imputed as though you did, and whatever is that imputed excess would have to be returned to the customers out there. So we have to do a lot of analysis.

I would say at the core, the way to think about it is the Florida funds are being sent up basically at expected loss levels, and without any risk loads or margins or whatever. And that is the way -- if I could make a generic statement, that is the theory of how, at least our initial impression would suggest, it's being set up.

So your reinsurance costs would not go down if you went into the fund? Is that what you're saying?

No. I'm saying next year -- let's assume you have this option of considering this. What I'm saying we'd have to decide how we think about the excess layers, excess of 1 in 65.

So, net net, it could result in no change to your reinsurance purchases?

I would have to assume that, net net, there would be an implication to the Florida portion of the exposure in the reinsurance program. So theoretically, that would lead to some concession. But, too early to speculate. I hope you got what I just said.

I think so. And then just Dave, real quickly -- on your combined ratio assumptions for 2007, I find it interesting, because I think prior comments, Ramani has suggested that 2006 was probably going to be the most profitable for the industry in terms of accident year margins. And yet, when you look at personal, and also in terms of specialty, both of those combined ratios ranges actually incorporate what you reported as accident year combines in '06. Now granted, there's probably more bias to the upside -- or actually, in personal lines, there's more bias to the downside. So, is it your view that even though there is more competition in the marketplace, that -- is it either through your risk selection, or is it through the fact that loss cost trends may actually not be all that punitive in '07, and therefore, we may only see very, very modest accident year erosion in '07?

Good question, Tom. I think part of what Ramani may have captured in his comments about peak year also reflected the favorable weather that we had in '06. But looking at those guidance numbers, which takes the weather factors out, and focusing on personal lines -- because that is probably the one that most people have raised an eyebrow on -- just two factors in terms of why they guidance would include an improvement in '07 relative to '06 in what is, obviously, a more competitive market.

One would be, as you know, in the fourth quarter we did sell Omni. And Omni was a bit of drag to us in our reported combines in '06 and prior, and so we are not going to have that drag going forward. Two, we're continuing to make strides with regard to expenses, particularly on the agency side. And I think our guidance reflects the fact that we're committed to making further progress in '07. So I think those two factors would give us some degree of confidence that even in a tougher environment, we should have a shot at performing at least as well, and perhaps better.

Is that true for specialty as well? Because I think if I got my numbers right, you only have a potential -- you reported 93, and you're talking about a range of 92 to 95. And yet, I think you characterized that as a lot more competitive market.

I think the business is clearly performing at a better level, and it's reflected -- you can see it in the fourth quarter. And I think we're just seeing the momentum of the profitability playing out in '07. So, that's really why we've put that range there. And the big component there for us is the property, as you saw, really cut back first half of '06, but it started to ramp up towards the end, really capturing the improved pricing environment. And that will play out into '07. And so, that would be, I think, a big driver for us in making that kind of guidance range for the specialty operations.

Eric Berg, Lehman Brothers.

Just quickly, with respect to the Statement of Position 05-1, it sounds like this is going to -- David Johnson, it sounds like this is going to affect the comparison of this year's earnings versus '06's earnings. But, once we get to next year, it doesn't -- it sounds like we will probably be able to start talking about this a little bit less than we are at present, and it will not affect the comparison next year versus '07 nearly as much as this year versus '06. Is that right?

Yes. I think that's absolutely right. As with any business where you shorten the amortization period, it gives you a little bit more sensitivity to whether you're growing or whether you're slowing. But, no; I think going forward this should be a very minor impact on comparisons.

Next, I had a question regarding the very, very detailed and elaborate DAC unlocking that you did. And I actually call it DAC unlocking, but maybe it's more than that. That was sort of my first question. With respect to the table that you're showing on L- -- on page L-5 if your supplement, which is very helpful in a complicated accounting matter, my first question is why is this affecting anything but the DAC line? Why are all these other line items affected by these changes?

I think that's an excellent question, and it actually leads to an understanding of why we've actually instituted this annual review. One of the evolutions in life accounting over the last few years is that more and more aspects of life accounting have taken advantage of the estimates of expected gross profits that underlie FAS 97 and accounting for traditional DAC. And so, as you see more and more accounting looking to that EGP estimate -- for example, SOP 03-1 asks you to incorporate that EGP estimate into the mortality reserve that you put up for GMDB, and you see that also in revenue recognition in the individual life business.

So, as more and more of the accounting regimes looked to take advantage of that estimate, we felt that the stochastic test, which we currently use, and which we think is dead on in meeting the needs of FAS 97, needs to be supplemented by additional actuarial studies, since these other more actuarially-driven accounting regimes were drawing in the EGP calculation.

So that's -- so your question is dead on; it nails (1) why there are these other impacts that you see, and (2) one of the reasons that we thought this was -- going to this suspenders-and-belt approach of combining the annual review with our traditional stochastic test is the best practice going forward.

So even though I called it a DAC unlocking, that's not really accurate; it's an unlocking of the EGP assumptions underlying lots of things, right?

That's absolutely right.

One final question directed to either Ramani Ayer or to Tom Marra. It's just striking how successful the mutual fund business has been. The numbers are just enormous, and I give you guys tremendous credit. I think $1.5 billion of fund flows. If we were to look into this in great detail to look at the performance, what would we find? Is about one manager who is just doing extremely well? Is it fixed income? Is it equity? Is it one salesman who has just been incredibly successful, one brokerage office or region that's selling a lot of your funds? What is this all about? How broadly based is this sales and net flow success?

Let me have Tom answer the question. I just want to remind you of the opening comments that I made, which is we really dedicated a wholesaling team to mutual funds in the latter part of '05, and this team is coming to a good level of experience. And our sales is actually pretty broad-based as far as distribution is concerned. But let me give the ball over to Tom; he can give you a lot more detail.

As you know, we have wide distribution in all four channels -- the wire houses, the regionals, banks and planners. And we have the most wholesalers of any mutual fund organization. We are riding a series of good performance in several of our funds. There are a couple funds that really stand out. One is on the equity side, the capital appreciation fund, and one on the fixed income side, a floating-rate bond fund. And those have -- I would say the superlatives you described would be attributed to the real outstanding strength of those funds. So, good results overall. I think what takes them to the superlative level is the two funds which have been very successful.

Mark Finkelstein, Cochran Caronia.

First question, just on the Property Casualty side. The expense ratio kind of picked up in each of the three ongoing P&C businesses, a little bit higher than I expected, a little bit higher sequentially. Can you just discuss quickly if there are any specific things that occurred in the fourth quarter, or if you would characterize it as just normal volatility or seasonality in kind of how expenses flow through?

I think that would be a fairly normal fourth quarter for us. If you look back to fourth quarter last year, you'll see a bit of a tick-up, too. We do a number of year-end adjustments and true-ups and so forth that flow through for the quarter. So, I would not be concerned about that. I'd probably just guide you back to the year-over-year changes in terms of the improvement that we had year-over-year.

Just to confirm, I think, in response to an earlier question, did you say that the 58 million current-year development was due to ALAE, [fully] ALAE?

No, not all of it. If I said that, I misspoke. I think we have in current (indiscernible) reserve release in Business Insurance -- that was -- that was about 2.2 points, I believe. And that would have been the ALAE. And we also had, I believe, a current accident year release in the personal lines. And that was about 3.1 points in the quarter for personal lines.

Okay. And then, I guess, a follow-up question for Tom on the Japan side. I guess in just thinking through the last couple products that you guys have rolled out, they seem to be kind of in response to evolving competitive changes in the Japan market, kind of following what seems like some other company product offerings. I mean, obviously, Hartford is the leader in this market. I'm just kind of curious if you have any new plans in terms of '07, once this product is rolled out, to again kind of think about it from a more innovative, kind of the first-product-out-there type of a standpoint. And I guess, firstly, is that a fair comment, that the last couple of product offerings have really been catching up? And two, you know, what -- in terms of kind of new products, given kind of what's evolving arms races, as you characterize it, are you thinking about further on in 2007?

I'm going to give this to Tom, but I want to make a couple of comments. One is we are continuing to learn and understand the Japanese customer and their unique and distinctive preferences. That's one very important issue. The second is we have always believed the annuity is a long-term vehicle for retirement and your personal pension needs. And this recent product introduction just incorporates a different assumption about what the Japanese customer prefers. And so, as we learn more about how the Japanese customer thinks about investing through the annuity vehicle, obviously, our ability to bring more and more innovations first to market will definitely get a lot sharper. So, let me just give it to Tom.

Ramani's point is right on. I think this notion of hitting a target return and then kind of retreating or getting out of the market is not something, obviously, that U.S. investors could be labeled with. Usually (indiscernible) we Americans double down, and we certainly don't say we've hit our mark and it's time to get out. So -- but, that is the way -- the things we've learned.

We are always building new products, and not only annuity product. I think '07 is the year when we're really looking at other lines of business, not for entry in '07, but for at least development and evaluation. So, I think, you'll see two-pronged [realm], and I think you'll see us get back to being called an innovator. And hopefully it will be in multiple lines. We're looking forward to the banks being deregulated as it pertains to the sale of life insurance, which comes in '08. So, that could be an opportunity. It's too early for us to tell.

One other point I would made, Mark, is 2006 marks the 2 millionth customer in terms of Japanese annuity customers. And we're really -- we're the leader in bringing all these ideas to that Japanese market. And I believe it's a great time to celebrate this whole new vehicle that allows the Japanese customer to plan for retirement. So it's an exciting time, and I think the market will continue to grow dramatically.

Operator, we run the risk of overstaying our welcome, so I'm going to take one last question.

Bob Glasspiegel, Langen McAlenney.

Two questions. One -- I don't think I've ever seen an insurance CEO characterize their balance sheet as being "remarkable." What do you mean by that? Are you referring to reserves as well as financial ratios? What's behind your position commentary?

I can't tell if that was a compliment or an admonition, but I will respond to it this way. Having seen our business and our company over a very long period of time, I really do believe that we are at a very distinctive point in many different ways.

One is, first of all, our execution across the board is consistently superior, meaning that every part of the Company is doing very well. Two, our capital management -- both in terms of capital attributed to the businesses, as well as the understanding of the risk at a very granular level, so that we are attributing the right amount of capital -- is much superior than we have ever been, given all the learnings of the last five years. And three, of course, our reserve position is sound. It always is something that in an insurance company you should be very keen and focused on, and our leverage is appropriate to both incorporate the changing world of risk, but at the same time to be sure that we are mindful of shareholder needs. So, we're balancing all of these things very well. And so, it certainly make me feel like it is a great place to be in terms of where we closed this year as far as 2006 is concerned.

So you think I should read something into that regarding your comfort level with where your environmental and asbestos and toxic reserves are in your position today?

I think you should read two things. One, as Johnson has repeatedly said to the market, we -- by doing our analysis every year at a ground-up basis, we have a discipline that is embedded in our organization to look at this thing regularly. And two, we are certainly handling our claims very professionally and very well. And three, we really mean when we say that our reserves reflect our best knowledge of how we see our current situation.

Thank you, Bob. I believe the comments I just made to Bob reflect our sense of where things stand, and so I'm going to bring this call to a close. We had an excellent year in 2006 and we look forward to working with you in 2007. Thank you.

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