Hartford Insurance Group Inc (HIG) 2007 Q1 法說會逐字稿

Good morning. My name is Joy and I will be your conference operator today. At this time, I would like to welcome everyone to The Hartford first-quarter 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). Ms. Johnson, you may begin your conference.

Thank you, Joy. Good morning and thank you for joining us for today's first-quarter 2007 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 website at www.thehartford.com.

Participating on today's call our 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 will 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 yesterday, our quarterly report on Form 10-Q for the quarter ended March 31, our 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 The Hartford's financial performance includes financial measures that are not derived from generally accepted accounting principles or GAAP. The information regarding these non-GAAP and other financial measures is provided in the investor financial supplement for the first quarter of 2007 in the press release we issued yesterday and on the investor relations section of The Hartford's website at www.thehartford.com.

Now moving onto 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. Today, I am going to briefly cover our financial results for the first quarter of 2007. I will also review our operating highlights and current market environment. And before moving to Q&A, David Johnson will update you on our outlook and guidance.

Turning to slide 3, you will see our results for first quarter 2007. We had a strong start to 2007. Net incomes and core earnings both set Company records. Net income was $876 million in the first quarter, an increase of 20% compared to $728 million last year. Core earnings were $843 million or $2.61 per diluted share.

Core earnings were primarily driven by excellent underwriting results in property and casualty, strong net investment income and a 16% increase in assets under management in our life operations. This quarter's results extended The Hartford's strong track record of delivering significant shareholder value. Our book value per diluted share, excluding AOCI, grew by 13% to just over $59 and our return on equity was at 17% for the last 12 months.

Both property/casualty and life operations are executing extremely well in competitive markets. We are growing where the margins are attractive and managing our risks. Our property and casualty operation had a very good quarter driven by sustained underwriting profits and higher net investment income. Strong operating cash flows, higher portfolio yields and partnership income pushed net investment income up 16% over the prior year. Property/casualty core earnings for the quarter were $448 million, 6% higher than a year ago.

The graphics on slide 4 show The Hartford's written pricing trends for the past three years. Although drifting lower, business insurance and personal lines pricing hasn't fallen steeply. Rather, the business is still being written at acceptable levels. That said, we are seeing indications that things are getting more challenging on the margin.

Non-cat loss costs moved higher in the first quarter of 2007. In both our auto and property lines, we saw an uptick in frequency and severity. These results were observed in personal lines and business insurance. While one quarter doesn't make a trend, this is something we are watching closely.

On the top line, competition is also heating up in many markets as companies fight to pick up or retain the more desirable business. In some market niches, we are seeing more aggressive pricing. In addition, we continue to see producer compensation used as a competitive lever. This has often taken the form of producer incentives targeting new business in particular lines or geographic regions.

Let's turn now to The Hartford's first-quarter operating performance on slide 5. In total, written premium was unchanged from the first quarter of 2006 at $2.6 billion. We have talked in the past about growing our business where margins remain the most attractive. We'd adjust that in the first quarter of 2007 by increasing written premium in personal lines and small business. In middle market and specialty commercial where competition is more intense, written premium contracted.

Our ongoing operations combined ratio, excluding cats and prior year development, was excellent at 87.6%. Total underwriting profits were virtually the same as the first quarter of 2006. In business insurance where new business slowed, written premium for the first quarter was $1.3 billion, flat to the same period last year. We reported a combined ratio of 89.1%, excluding cats and prior year development and underwriting margins remain strong.

We continue to see business insurance as a tale of two markets. In middle market, written pricing has declined for three years and underwriting margins are under pressure. In small commercial, earned premium growth has largely offset increased loss costs and this segment continues to provide the better opportunity for near-term growth. Small commercial written premium grew 3% for the quarter and margins in this segment remained very attractive.

While we continue to appoint new agents, we are focused on increasing the flow of business from our key agents, the ones that have historically generated the most business flow for us. We are also making investments in technology and processes that improve the ease of doing business with The Hartford.

In middle market and specialty commercial, we face more intense price competition particularly on new business. First-quarter written premium and middle market and specialty commercial was down 4% and 10% respectively. The quality of our current book is very good and we remain focused on retaining our best customers while competing selectively for new business.

We had a great first quarter in personal lines. AARP and agency written premium grew 10% and 8% respectively. Even including the impact of the sale of our nonstandard auto business, total personal lines written premium was up 4% to $939 million. The competitive environment in personal lines is similar to what we saw in the fourth quarter.

In the first quarter, we maintained an excellent combined ratio of 84.1%, excluding catastrophes and prior year development. At these margins, we are driving to grow personal lines. To that end, The Hartford appointed over 350 agents for personal lines in the first quarter and continued to refine our product offerings. In today's competitive environment though, generating top-line growth is only part of the story. Staying focused on cost efficiencies is also key.

In summary, our property and casualty results in the first quarter of 2007 were truly outstanding. While new business slowed, our underwriting performance was excellent and we grew in the more profitable markets. As we look to the rest of 2007, The Hartford remains committed to retaining and attracting business that meets our targeted returns. As such, we are maintaining our guidance on combined ratios while lowering our outlook for written premium in both business insurance and specialty commercial.

Now let's turn to life operations on slide 6. Our life business is off to a great start in 2007. Core earnings were $418 million, equal to the first quarter of 2006. Now the first quarter of last year included a $34 million benefit from the release of certain litigation reserves. We were able to match last year's record results through strong growth in our underlying businesses.

We reported $13.6 billion of total deposits in our US and Japan wealth management business in the quarter. Growth in retail mutual funds, retirement plans and institutional solutions was excellent. In the competitive annuity markets in both the US and Japan, we are encouraged by this quarter's sales results.

Strong net flows and good equity markets drove total life operation's assets under management up 16% over March 31, 2006 to $336 billion. The chart on this slide shows a breakdown of assets under management. The foundation of our wealth management story is our US variable annuity business. At the end of the quarter, assets under management were $115 billion or about one-third of the total life assets. Strong equity market performance has driven variable annuity assets under management up 6% over the first quarter of 2006. US variable annuity deposits in the first quarter were $3.3 billion and net outflows were $583 million.

The Hartford's marketshare improved late last year after the introduction of our enhanced lifetime income writers. This quarter, variable annuity deposits are up 4% sequentially and are 5% higher than the first quarter of 2006. Our leader and Director annuities have some of the lowest fee structures in the industry. These plans provide excellent consumer value, especially when combined with riders like our Lifetime Income Builder II.

As a feature war and annuities slows a bit, we believe the Hartford is very well-positioned. Based on our first-quarter results, again, improved our outlooks for variable annuity deposits and flows. We are seeing terrific momentum in our high-growth businesses; other retail, which includes retail mutual funds, retirement plans and international.

Total assets under management in these businesses topped $100 billion for the first time this quarter, rising 22% from March 31, 2006. Achieving $100 billion is a big milestone for us. Added together, these three businesses now comprise about 30% of total assets under management and they generate over 20% of life's core earnings.

Now, first-quarter retail mutual fund sales reached a record $3.6 billion. Strong net sales and market appreciation drove assets under management up 28% to $41 billion. Our success in mutual funds is a combination of dedicated wholesaling and very strong fund performance. 61% of The Hartford's mutual funds with a five-year track record are ranked in the top two quartiles of their respective Lipper peer groups. And among our funds with a 10-year track record, 73% fall into the top two quartiles of their respective Lipper peer groups.

Retirement plans deposits were seasonally strong in the first quarter. Growth in ongoing contributions and new sales drove record deposits of $1.7 billion, which is 9% higher than the first quarter of 2006. Assets under management rose 21% from March 2006 to $26 billion.

In Japan, we introduced a new variable annuity product in February called 3 Win. Now this product satisfies Japanese customers who desire to lock in their gains. It also provides a balanced fund and principal protection. The successful launch of our 3 Win product drove variable annuity results above our expectations. Where we have both of our variable annuity products on the shelf, we are seeing incremental sales. There is clearly an opportunity to create an array of products to serve different market needs.

Now VA deposits in Japan were $1.7 billion and net flows were $1.2 billion in the quarter. Strong net flows and market appreciation drove total assets under management in Japan up 16% over the first quarter of 2006 to JPY3.9 trillion or $33 billion. Now that said, competition in Japan remains intense and competitors are bringing new products to market every month. Because banks and securities firms in Japan offer a limited array of products, we do not anticipate that our full product set will be available everywhere.

We are continuing to work on new product ideas to reach more segments of the market while adding to our wholesaling force and expanding distribution. Expanding individual life group benefits and institutional solutions helps to diversify our business and provide a stable source of earnings. Now this quarter, individual life sales were $60 million, equal to last year's record first quarter. We continue to see strong growth in banks, wirehouses and regional firms. Total life insurance in force rose 9% over the first quarter of 2006 and comp values increased 8%.

In group benefits, fully insured premiums reached $1.1 billion this quarter, an increase of 5% over the first quarter of 2006. Sales in the first quarter declined year-over-year. We landed fewer large national accounts and maintained our underwriting discipline in the face of an increasingly competitive market.

Now our approach to group benefits is very similar to our property and casualty business. We focus on enhancing our products, retaining profitable business and selling new cases that are priced to achieve our target returns. Now based on the first-quarter results and the completed renewal rights deal for our medical stoploss business, we believe we will generate mid-single-digit growth in premiums this year at very attractive margins.

We had an outstanding quarter in institutional solutions. Deposits of $2.9 billion benefited from several large funding agreement sales and bank-owned life insurance. Institutional sales can be very lumpy quarter-to-quarter. That said, the Pension Protection Act of 2006 should be a long-term positive for this business.

The pension buyouts market may grow as more employers terminate their defined benefit plans. In addition, the Act clarifies the guidelines for corporate and bank-owned life insurance and this has opened the door for more sales opportunities. Over time, core earnings in institutional solutions should track with assets.

Assets under management in this business rose 18% over the first quarter of 2006 to $54 billion. So overall, we are very pleased with our competitive position and growth outlook for our life businesses. Now let me turn the call over to David Johnson. David?

Thank you, Ramani. My comments begin on slide 7. As you saw in the press release, we've raised our core EPS guidance by $0.30. This reflects strong performance in the first quarter, plus a small lift to our expectations for P&C investment income for the balance of the year.

You will note that the weighted average shares assumption of 320 million includes the full impact of 800 million of stock repurchased in the first quarter. Just to review, that 800 was the sum of the 300 of discretionary capital we accumulated last year, plus 500 million of the one billion in excess of our needs we projected for 2007. How we use the other 500 million of projected excess capital for 2007 is a decision for the fall. We have incorporated no assumption regarding further repurchases at this time in the 320 million share number.

Ramani spoke to our changes in outlook for P&C written premium and life investment product flows. You will also note that we raised the bottom end of our Japan VA ranges. That reflects our increasing confidence in our Japanese strategy.

In group benefits, you will note we have slightly reduced our sales and premium outlook. Now since investment income is relatively insensitive to premium volume in the short run, that top-line change actually increased our after-tax margin guidance. And finally, we tweaked annual ROA guidance for Japan and the institutional solutions segment to reflect first-quarter performance. That's it. Ramani?

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

(OPERATOR INSTRUCTIONS). Nigel Dally.

Great, thank you and good morning.

Good morning, Nigel.

First, just on the capital side, I am guessing given the strength of the results in the lower capital strain from weaker premium growth in property/casualty, your estimate of 500 million for additional excess is likely to be moving higher? And then I just had a follow-up on group life.

Nigel, no, I think at this point, that is still probably our best estimate. We did have a good quarter, but sales do use capital, so I would say 500 is a good guess. There is always a lot of volatility around that. A lot can happen during the balance of the year and that is a statutory number, which can move driven by factors that don't necessarily show up in the GAAP results. But there is -- I think we are pretty confident that we will get to at least 500 in excess at least and there could be upside, but certainly not ready to declare it now.

Okay. Then just to follow up on the group life side, the group life and disability market was getting more competitive. Hoping you can provide some color, some additional color on which segments of the market you are seeing the increased competition. Is it predominately the small case market or is it more broad-based? Is it coming from any particular large competitors or is it more smaller competitors, just some additional color behind those comments?

Hi, Nigel. It's Tom. Yes, it is getting increasingly more competitive. Obviously we still like the business given our full year forecast, but it has been a business that has had expanding margins industrywide for the last few years at least and we are seeing increasing competition I would say across the board, but most particularly in the small case market, which tends to attract both the big players and the smaller players. So that is in particular a crowded market. But on balance, we still like the way we play it obviously and have done it successfully for years and expect to have a good year despite the competition.

Okay, great. Thanks a lot.

Bob Glasspiegel.

Just a follow-up, the increased margins for group benefits is being driven by what?

On the guidance?

Right.

It's actually just kind of a technical thing. The way we express that is a margin on premium in our guidance. So when you lower the denominator -- since though a big component of the top line is investment income, that doesn't move with premium. So just from a technical point of view, that causes the ROA to go up when you lower the denominator.

ROP.

Yes, ROP. Sorry.

And Allstate on their call thought the increase in frequency in Q1 could have been driven by Northeast weather, which I might have thought you might have seen more than they were. Your comments about increased frequency in your business takes weather out of the picture or could a tougher winter versus not much winter a year ago be driving that trend?

Bob, good morning. Dave Zwiener. With regard to first quarter, I think we had assumed and planned for increased loss costs relative to first quarter '06 I think just given the extraordinarily light year we had last year first quarter. Having said that, I think they did come in a bit higher than we would have expected and I think we would attribute that to a lot of the non-cat weather and geographically, that would have Northeast, but also Midwest. But looking forward, I don't think that changes our view in terms of loss costs are embedded in our guidance and so I think that we feel that is well-incorporated in the guidance we have going forward.

I just want to follow up because Ramani I thought was trying to give us a little bit of a lookout. We are heading South in the PC business because of frequency and severity and I think you are saying maybe it was just a blip or am I misreading the two messages?

No, let me back up. I think we are saying the same thing. First of all, in our guidance for '07 going back to the fall and certainly the fourth quarter, it was our expectation that margins were going to compress both as a function of the pricing dynamic, but that we would have expected loss costs to start ticking up. Frequency was a big part of that. I think the very favorable frequency that we saw in almost all lines in '06, we had assumed would start to close in '07 and I think that was embedded in Ramani's comments that that trend is in place.

I think that we are probably at the point that we would say frequency is flattening out. We are probably watching that carefully. The assumption that we are going to see continued favorable or negative frequency is probably not likely to occur in the year and so we are starting to see that be reflected in the loss cost assumptions that we have both in terms of pricing and guidance.

I will follow up with Kim. Thanks a lot.

Okay.

Jimmy Bhullar.

Hi, thank you. I just have a couple of questions. The first one on capital for Dave. On the additional 500 million in excess capital that you're going to generate this year, what are the potential uses? I guess it's probably buybacks and M&A and if it is M&A, which are some of the areas where you are looking? Then secondly for Tom on life insurance, you spoke about the Japan business. Haven't discussed the European business, doesn't seem like that is ramping up as fast and if you can comment on that and that's it.

Thanks, Jimmy. Our uses there -- it is the same priority as it has been for a number of quarters. First and foremost, would be investing in our business if we could find additional opportunities. So our capital plan pretty much lines up with the opportunities that are embedded in our guidance. Second would be acquisitions. Third would be dividends and fourth would be buybacks. So that is the order we look for opportunities.

I think on acquisitions, we are -- there's few areas of our business where we would not be willing to evaluate opportunities if we could find them. We are pretty much in the businesses we like at this point and so we can talk about individual things, but we are open for business for acquisitions across our portfolio and we will be disciplined. You can count on that. To date of course, we have been open for business for the last couple of years and have not been able to find opportunities, but -- so if it comes along, we will look.

And Jimmy, it's Tom, on the UK sales. They have been below our expectations; however, they have been improving. So additionally, another bright spot coming this quarter is we are adding a second productline, essentially an individual pension line to go with our investment bond product. So we think that in and of itself going to provide a significant increase to the run rate. Still a long way to go though, but I am encouraged by the improvement.

The think I'd like to add, Jimmy, is in Japan we had a perfect storm in terms dereged banks getting into the business, Japanese customers looking for guaranteed investments and a whole bunch of things and we just hit the market in a perfect storm if you will, a positive storm.

And then just lastly on -- you mentioned in your comments that individual life was getting increasingly competitive. I would've thought that competition would be easing a little bit because companies are pulling back from premium finances, but if you can comment on what parts of the individual life market where you are seeing more competition and that is it.

Jimmy, Tom. No, I don't think that we specifically have said individual life is any more competitive than any of these businesses. None of them are easy as you know. We like our position. We have a very unique model in that we are selling through financial advisors primarily, meaning stockbrokers and banks and financial planners. What we bring in terms of our sales expertise and local, state and business planning services, I don't think we are in the wildly shopped markets. I think our value added has allowed us to be real pleased with the quality of the business we write.

Okay. Thank you.

Josh Shanker.

Good morning. Thank you. My first question regards the Japanese 3 Win product. I noticed that in less than two months, it comprised 31% of your deposits and you haven't taken up your high end of the range for deposits for '07. Did this product replace another product that was already being offered and in some ways cannibalizes on stuff that you are already offering or is it a completely new product that is actually contributing to brand new growth? And I have another question afterwards on the P&C.

Josh, Tom. It is a new product that is going to supplement our existing Adagio V3 product. Where we can, we will have both running at the same places, but that won't be everywhere and in fact, the new product won't be accepted everywhere. That said, we are real pleased. It has gotten off to a great start. It is in the say 40s of run rate for the February to March period of the total sales and that is an excellent start to what I think is a good complementary product to the other one. But each outlet is going to take it on as they see fit, so just want to make sure everyone is clear on that. We won't have that product available in all outlets.

Thank you. And on the P&C, in the opening comments, Ramani said that companies were being more competitive about the most attractive business. Now I know you want to pursue small business, but what is the most attractive business? How do we know they are pursuing the most attractive business versus just pursuing businesses as a whole? What does that mean precisely?

Well, I think -- this is Dave -- Ramani's comment was probably a general comment about the market, but within each segment, I think that the first area that people are being very aggressive is obviously to retain their existing books of business and so there is an awful lot of effort on the part of carriers to retain the quality books of business that they have. That obviously is cutting down the flow of new business in several segments and so within the new business, you are seeing much more price competition.

You are seeing some compensation shifts in terms of commissions and things to try and attract and get that new business. I think you have heard others comment, but where we are seeing that sort of competition certainly in personal auto, quite a bit of competition and in small commercial where we are seeing more players move very aggressively to try and grow in that market.

One thing I would add, Josh, is basically where you make the better returns is where the attraction is and so competition for good business in this market is definitely growing.

Is it so obvious where the better returns are?

But it is all a function of what the price levels are at which you write that business, so that is where the trade-off comes up.

Sure. Thank you very much. Congratulations on a wonderful quarter.

Darin Arita.

Good morning.

Good morning, Darin.

In Japan, the 3 Win product seems to be having nice success as it addresses a particular market need. Can you talk about what other market needs might lead to new products by The Hartford in Japan?

Sure, Darin. This is Tom again. The market need obviously is this lock-in feature. Japanese customers, some of them have a targeted return that they want and once they get to that point, the facility will allow them to get out of the market via a transfer to the general account.

The other product we have is more of an income benefit and I think things we will look at in the future will be shaped around the income needs, similar to what we are doing here in the US and I don't want to tip off to much of what we are looking at because of the competitive reasons, but certainly I would put in the basket of the income market overall. It is a very similar dynamic to what we are seeing in terms of customer need here in the US.

Okay. That's helpful. And turning to the retail mutual fund business then, can you provide a little more color about the types of funds that are attracting the most deposits?

Yes, we have -- actually a real objective for our team is to -- we have a lot of funds that are putting up real good performance and as I mentioned on the last quarter, there are two funds in particular, the capital appreciation fund, which is sort of a go anywhere stock fund with a long successful history and then we have a floating rate bond fund that is very attractive in these kind of markets where people may expect that interest rates are going to go up and it has an attractive yield.

And those two funds have really I'd say caused what we would expect to be great level of success to be -- phenomenal levels of success and now the objective for us is to really get some of the other attractive products more evenly distributed. So clearly diversification is on our minds and these two funds have really contributed to the torrid pace we have been operating at.

And on the redemptions, are there any particular funds that are having more redemptions than others?

Well, the floating rate is the only one that would stand out because that is -- some people do use that as kind of a short-term funding vehicle. So that tends to have a higher redemption rate. On the equity funds, you are going to find -- it is going to follow recent performance and if you get in a bad streak, folks vote with their feet and you are going to get redemptions.

Great. Thank you.

Josh Smith.

Thanks for taking the call. A quick question on pricing and another one on valuation. Progressive and Travelers have been pretty clear that they are willing to write the marginal piece of business as long as it is above their internal hurdle rates, so they are taking less profitability to grow shares as long as it is profitable. You and almost everyone else has taken the opposite track where they are basically reducing the top line because they don't feel business is profitable.

With combined ratios near historic lows, I will play devils advocate, why not write more business and how do you weigh the option of writing more business and using the capital for writing business versus buybacks? I have a follow-up on valuation.

Sure. Josh, Dave here. The way we have approached it on a very consistent basis is that we will write business at the margin that meets or exceeds our target of returns and so I think in several businesses, you are seeing that -- it is our believe at least that we are at that point where we are not seeing the flow of business at the prices that allow us to achieve that and you are seeing in the specialty lines some of them in midmarket, an actual shrinkage on the premium.

We absolutely believe that is the prudent thing to do and so we will continue to follow that course and our expectation is that you are going to continue to see softness on our top line at least in those lines of business and that is incorporated in the guidance.

I think that in the personal lines, we continue to push and make use of where we have margin. I think we probably have more in the AARP in our direct program and so therefore you are seeing us spend on the marketing as we have talked about the [ZRT] or [direct TV]. We are growing that program 10% in the quarter and so I think your point where we have that capability, that margin and that access, we are going to push hard.

The one line I would probably comment on would be small commercial. Small commercial probably is right on point to your question, which is we have got terrific margins, terrific returns and we are growing 3%. A couple of points there. One is, as you notice, although the written premium is up 3%, the policy count is up 7%. So you can sort of quickly deduce that the average premium per policy has come down a bit.

A couple of factors there. One is we have signed up an awful lot of new agents over the last year and so we find that the average premium per policy with newer agents tends to be smaller and grows, but that mix is affecting us and two, we are seeing a lot more competition in the what I will call the larger small commercial, so that is affecting the mix. But we are seeing an awful lot more of commission movement in the small commercial market. So I would expect to take advantage of our margin in the area of compensation to make sure or ensure that we are always competitive on the commission side and I think that makes the most sense for us to do going forward.

Okay. Thanks for that and quickly on valuation. Chubb, probably your closest competitor in the P&C side, trades at 1 6 of book, 10 [times] to PE. On the life side, Lincoln without having your international exposure, which I view as an advantage, trades at 1 6 and 13 times. They both have lower ROEs and they don't have the overall diversification you have being life and P&C. Both being much more aggressive on the share buybacks.

Why do you think your stock trades in line or at a discount and when it really should trade at a premium and what is the best course you can take to unlock the value? And just to follow on on that one, AIG is citing excess capital from rating agencies, giving more credit for diversification. Shouldn't that play into your hands as well?

Do you want to start, David and I'll --?

I will start and I think Ramani probably has two comments also. Well, I think you almost answered the question. Certainly at this stage of the cycle where PEs tends to kind of go all over the place depending on where folks think the inflection for the industry profitability is going to be, that is a harder one to use for comparable valuation and on price-to-book, the numbers you read out would indicate that we are not that out of line, vis-a-vis those comps.

I didn't throw out AIG, which would have been much higher, but -- go ahead.

AIG is comparable to The Hartford in that they are a multiline, but comparable to The Hartford obviously in that they are an international franchise. But we don't spend a huge amount of time trying to evaluate valuation. Again, that is something for investors. I find that when management tries to express strong views as to where the stock should be, most of our investors would ask us to defer to them on that.

On your question about AIG and rating agency credit for diversification, I actually do think that that is a tremendous opportunity for companies like AIG and liked The Hartford to get more rigorous benefits from the capital point of view for the diversification, which I think really is a strength of franchises like ours and like theirs.

That being said, I think we and AIG and a few other companies are definitely embarked on a dialog with the rating agencies on that, but it is going to take a while. I would say that is an opportunity for a year or two from now as opposed to something we are going to get immediate credit for, but we are excited about that dialog. We are excited about where a lot of the raging agencies are going, particularly S&P and we do think that is a long-term benefit and opportunity for us.

I think David did a great job, Josh, answering the question. I would reinforce the point -- the metrics we tend to look at are really on price-to-book. Although price-to-earnings is one to also pay attention to.

But the other important thing is that as a management team our basic goal is to drive consistent growth in both top and bottom line and grow book value per share and I feel that over time as we deliver that consistently and with discipline, investors will reward us appropriately. So that is where a constant focus is to continue to generate value from a shareholder perspective. You can see that from both growth in book value, ROEs and the kinds of businesses and restructuring of our portfolios here that gives us confidence in our ability to do that.

Okay. I will shut up after this, but just on -- I am not asking you to tell me what your stock is worth. What I am saying is if you should get a premium for being diversified and you don't then maybe you should think about whether you need to be diversified. That's all. Thanks.

Thank you, Josh.

Andrew Kligerman.

Good morning. Two quick ones for Tom. First, on the life insurance area, new sales were flattish. Can you address the older age policies and what is going on there? Are you seeing a lot of submissions there? Are they coming down? What are your underlining guidelines? That is the first one.

And then the second is in that small case group benefits market and the group life, group disability, all in a small area, could you give a sense of the magnitude of how much pricing has come off in the last year, how much might it be down and what returns are you seeking on that business?

We are seeking our usual 13% to 15% and it is very difficult to give a price assessment on an overall basis because each case varies dramatically and so I guess the best I can do for you is characterize it as that is probably the most populated part of the competitive market and it attracts competitive behavior as you would expect. But we still feel pretty good about that, the business overall.

The small case is really an important part of that market because it is by far the most underpenetrated, particularly when you look at group disability. So we are pleased. The results are fine and we are hanging in there and this is not a new situation either. From time to time, that part of the market will get competitive.

On individual life, it is very interesting because we have been looking at this. In the older age, we did find our submissions were up substantially. A lot of that business we ultimately declined. Some of it was stranger-owned or investor-initiated life insurance that we just kicked out. So one of the things that we are doing now is taking a good hard look at how we are making the expenditures for these submissions. I don't want to underwrite someone who I have no chance of writing. So we are not writing a lot of older age business, but unfortunately the thing we spotted at least is that we spent a fair amount of money in the submission process, but didn't end up writing a lot of it.

Interesting. So just back to that group benefit, it sounds like pricing has come down somewhat sharply though. Is that a fair characterization in the small case market?

No. I would say it has come down to the point where we are feeling it, but I think sharply is probably an overstatement. Obviously you are seeing subjective terms both you and I, but I think sharply it is an overstatement.

Excellent. Thanks, Tom.

Thomas Gallagher.

Good morning, a couple of capital questions, I guess for Dave Johnson. Your 10-Q comments on how you took all out a little under $1 billion thus far in '07 from your Life and P&C subsidiaries, did this happen after the close of the first quarter in terms of the dividend paid up to the holding company?

I don't think there is any post quarter-end disclosure or discussion on capital in the Q, so anything in there would have been prior to March 31.

Okay. Because I am looking at your total surplus levels between year-end '06 and end of the first quarter, and it actually went up a little bit. I guess I would've expected a sharp drop if you took out about $1 billion of capital from those subsidiaries.

Okay. So when you say surplus, you are referring to GAAP equity?

No, actually just looking at the statutory surplus in your Q.

Okay. Well, I think you are correct that that is not easy to foot, because when we did the reallocation that we have spoken about in other cases for capital, what we did is actually some of that capital that was reallocated for management reporting point of view was actually left in the legal entity for statutory purposes that was just reallocated for GAAP reporting.

So we have picked out the appropriate in terms of management accountability for returns on that capital, but for tax and regulatory and other reasons, in many cases it is more efficient to physically leave it in those entities and just journal over the investment income in the management accountability. So that is why it is difficult to foot that.

Okay. So I guess I am just trying to get a sense for absolute surplus levels that are left, and I can follow up with you after the call maybe to get more specifics. But the other question I had is your disclosure says now that you have $1.4 billion of capital in the Japanese business currently. And when I just do kind of rough back of the envelope looking at it as a percent of AUMs, it still seems very high relative to the type of capital requirements that you have in the US variable annuity business.

So I guess my question is do you have any updates on the Japan regulatory capital requirements? Is there a chance that those could still come down closer to US levels or should we expect you are going to have to operate at these higher levels now for the next several years?

I think in terms of an update, there is no update to offer, so I think it is going to be status quo for a while. Again it is difficult to exactly compare that to US norms in that the capital levels there are based on Japanese regulation, but we also bring back some of that risk through internal reinsurance to the US where it is supported by US capital. So again, difficult to look at those ratios and try to do a comparison on US norms.

Okay. And then just last -- one last question. Ramani, did I understand you correctly, did you say in your comments that feature wars in the US variable annuity business are lessening to some extent?

Yes.

Okay. And if so, maybe you all could elaborate on how you see the competitive environment in the US variable annuity business.

Well, the competitive environment continues to be intense, but our wholesaling is really very effective as you can see by the pick-up in the first quarter. The focus in customers' minds continues to be Lifetime Income. We had over close to 45% of our first-quarter sales in Lifetime Income and Income-related attributes.

Just to add, Tom, it's Tom. I think the Lifetime was the major breakthrough this decade and probably if I were to surmise where the next innovation is going to come, it is going to come in the form of the ancillary benefits such as long-term care, chronic illness. Certain -- retirees are looking at not only investment risk, but they are starting to really think about protection elements such as longevity and long-term care and chronic conditions. So I feel that that is where it will be.

So I would agree with the kind of stability of the arms race, very competitive market, attractive market. It has got a lot of competitors for a good reason. I think these new features are meeting customer needs as well, so it should be a good year for VAs.

Okay. Thanks a lot.

[Al Cupercino].

Thank you and thank you for the characteristic openness about the levels of market competitiveness. I had another question on the group benefits area. I am curious if you could tell us if you are seeing the increased level of competition there? Is that coming primarily from what we would think of as your peers, other life insurers or is that coming on the margin from HMOs, managed-care companies as well?

That is a real (technical difficulty) good area to kick around. Most of it is from the traditional life insurance players, but we are watching closely the medical companies, finding ways to get into this business. So I think we will see them play at the margin, but most of what we've talk about this morning is from the same folks we have been competing against for years.

Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS). Eric Berg.

Thanks very much and good morning to everyone.

Good morning, Eric.

Yes, thank you, Ramani. Good morning to you too, sir. So my questions concern two areas of increasing success, but also of investment for The Hartford; your 401(k) business and your retail mutual fund business. My question is it seems to be -- continue to be the case that your asset base is growing considerably more rapidly than your earnings are from these businesses reflecting the investment. I guess my question is when is the payday? When will the investment come to an end and we will start seeing earnings moving up more in line with the rate of growth of assets? That is my first question. Thank you.

Well, I want to turn this over to Tom, but let me just comment on a couple of things on both the 401(k) and mutual fund business. We do continue to invest in our growth strategies and I think over time our earnings growth will match the asset growth rate, but investment at this point in time is a smart thing because these are businesses where there is very little guarantee type risk and I believe constitute a good diversification for life business platform, as well as building on our existing relationships and our distribution channels. But let me turn it over to Tom for details.

Eric, there is no doubt we have been investing in the business and that is a lot of what you're seeing. We are encouraged that the investments are paying off as you can see in the numbers' top line. So we expect that the big investments for the most part have been made. Obviously wholesaling was a huge part of that. There was a little short-term noise around the capital attribution that we talked about in the last call, which particularly affected the mutual fund, ROAs.

So it is a good point and we are on it and I don't expect a lot more slide. You see our guidance for the full year for both lines would indicate that we are expecting to stabilize that and then we are going to grow assets. So with that, we should be growing earnings as well.

My second and final question is to your CFO, David Johnson and it is -- I think one of the members of the management team, maybe it was David, emphasized that you pay close attention at The Hartford to your book value, believing that there is a -- that shareholders are better off when book value grows.

So my question is if I have -- if I have characterized your position right, how do you think about the choice between increasing your dividend and buying back your stock when the stock at -- I don't know if it is record levels, but certainly at a very high level relative to where it was a few years ago, each time you buy a share, I think looked at in isolation, the active buying back of your stock at this price level does of course reduce the book value per share. How do you think about that trade-off between -- how do you decide between the dividend and the share repurchase given the reduction in book value per share at this point from share repurchase.

Very good question, Eric. David, do you want to take that?

Yes. We think about that a great deal and the fact that we list share buyback as four out of four in our list of potential uses of capital certainly reflects our view that it's with mixed emotions that you buy back stock at a premium to book and at least in the short term obviously there is a payback period when you can get back to a positive net effect on book value if you are growing your earnings, but it does delay that a little bit. So it is always with mixed emotions that you buy back stock at a premium.

I think there's two things that lead you to decide on the margin that a buyback is the right decision even in the face of that. The first is at some point there is a limit to the amount of your ability to pay an increased dividend because some rating agencies do put dividends into a soft or even a hard fixed charge coverage that they hold you accountable for. So it is just only a certain amount of regular payments that you can support in an insurance company structure. So that puts a limit on it.

But also and probably more fundamentally, while we think growing book value per share is an excellent metric for us to target in order to build shareholder value, we think holding adequate in fact superior ROEs is an even more important metric for delivering shareholder value. So they are both necessary, but neither one is a sufficient condition to deliver shareholder value over time.

So while you could say that not buying back stock at a significant premium to book would be a good thing for shareholder value, if that was at the cost of materially degrading ROEs below an acceptable level, you would probably grit your teeth and buy back stock in order to maintain ROEs because that is really the price of admission to delivering good performance.

The only other thing I would add, Eric, as you know, we are all judged on book value per share growth plus dividends distributed and last, I believe sometime in 2005, I can't recall when Johnson had reached out to investors publicly and we got a lot of feedback on this issue and that is how we created our internal guidelines on what to do.

Finally, I would make the additional point that in 2006 we did increase our dividends along with a follow-on buyback of shares. So we are constantly weighing this internally as what is the smartest way to deliver value for shareholders over the long pull.

I suspect you have to think about taxes too of course and the future of tax rates and that sort of thing. Thank you.

Always in the mix.

Thank you, Eric.

Jay Cohen.

I've just got a couple and then Ed Spehar has some as well. Mine are relatively quick. The first is in the personal lines business with commissions going up, should we expect your expense ratio to rise or will there be an offset elsewhere? The second question is if you looked at the accident year, this is again in personal lines, accident year combined ratio, excluding Omni, excluding cats, first quarter was actually better than the past several quarters despite what I'm hearing from you about increased frequency. I'm wondering why that was.

Jay, Dave. On the commissions, I think first of all obviously you know that the bulk of our personal lines operations is a direct operation. So three quarters of the total premium is in our direct platform. So I think that when you look at the agency side, I would right now judge our commission structure to be highly competitive. So I don't see that we are going to be making much of an adjustment there.

So I think the direction on the expense ratio as it has been this quarter and likely for the remainder of this year will be down and most, if not all, of that is going to be centered in the agency personal lines. As we have talked about before when you look at the total expense ratio, you really have to -- we don't break this out for you, but if you were to break it apart, you are going to find an expense ratio in the direct business below 20, but on the agency side, it has been running above 30. This quarter, we are actually below 30 on the agency side. So that is really where we continue to focus and I think we will continue to make progress there.

The second question was about accident year, looking at first quarter '07 relative not to a year ago but to the last couple?

Yes, exactly. Looks like the accident year combined ratio was a little bit lower than the past several despite what you had said about frequency issues.

Let me dig into that one for just a minute, okay? Do you have another question?

I think if I could jump in there, I believe, Jay, one thing that you noticed last year if you recall, later in the year, we had an accident year reserve release in the current accident year, meaning 2006 accident year. So our gut at this point in time is that the first quarter of '06 was probably, if you had adjusted for it would be lower than what is showing there for the first quarter. Do you follow what I just said?

Yes, but I was actually looking at the past couple of quarters and so [meaning] the real accident quarter ratio for the past several quarters would have been higher than you booked it at and yet the first quarter was lower.

Yes. The accident quarter is usually the accident year-to-date inside of the quarter. I know I am using very technical terms, but it is not a pure accident quarter; it is what is happening in the accident year developed inside of the quarter.

I figured out the answer. It's the expense ratio. I should've looked at loss ratio.

Oh, okay.

Sorry.

You were focusing on combined ratio.

Yes, I was looking at combined ratio.

Okay, but I gave you a good answer on loss ratio too.

Fair enough.

Okay.

Hi, it's Ed. Just a few quick questions on Japan. Ramani, I think earlier this year you expressed some optimism that you might actually be able to gain some share back in Japan. I am wondering how you feel about that now. Then a couple numbers questions. Is it fair to assume that the GAAP capital for Japan is less than the regulatory capital? In terms of margins and margins obviously have been very good and I am wondering can you spend more to expand distribution. For example, can you spend more money to convince more outlets to offer multiple products or is that just a sort of barrier that you can't surmount no matter how much you spend?

So let me parcel the questions. On the question of marketshare, public data in Japan is not easily available or not available as it is in the US, so it is hard for us to really be accurate on marketshare statistics in Japan. But our belief is that definitely we have improved our position this quarter.

Yes, we do have information on banks and that has showed that we have been getting the share back that we have been trying to probably in the last two quarters. Relative to -- we still price -- it comes back to everything, Ed. We price to try to get a 15% ROE, so that has been our dynamic that we have been operating with. It's probably spilling over to your GAAP capital reason, but I don't think there is a lot more room for us to increase expenditures without it affecting our ROE. So we like where we are and we are clawing our way back and we are picking up some share and we are very happy with the first quarter. I'd see if David Johnson has a thought on the GAAP equity issue.

We are going to give you a tentative answer and then follow back if something in the intercompany eliminations actually causes it to vary from our principles. On principles, for foreign subs, we tend to try to align the allocation of GAAP risk and actual capital line because that is just what is there. So it should -- in general, the statutory and the GAAP should be the same, but we want to check a couple of intercompany eliminations to make sure that there is not something that makes that untrue. Assume that's the case unless you hear from us.

Okay. Thank you.

Operator, any further questions? If not -- Operator?

Yes, sir.

So this will be our last question, Operator.

Okay.

Go on, Mark.

Hi, actually Ed just asked my first question. I guess the second question really is can you just review for us the seasonality trends in Japan sales? I know it is a building market. Your marketshare has move around a little bit, but what would you in kind of a steady-state expect sales to look like over the four quarters?

Yes, they run in fiscal half years and the end of year is March, so you would expect first quarter to be the best. Third quarter probably second-best because that is the end of the first half and then second and fourth quarter to be a little bit lower, so that would be steady-state. Inevitably, any one company's results are going to be affected by their competitive dynamics at the time, but steady-state, that would be the order I would rank them.

Okay. That's perfect. Thank you.

So I am going to bring this call to a close. As I mentioned in my opening comments, we had a strong start to 2007. Net income and core earnings both set Company records and our current guidance reflects our expectation that we can navigate through these challenging markets, some of which are challenging and generate good returns and build value this year and we hope to see you at our investor day in New York on June 13. Thank you all.

This concludes today's conference call. You may now disconnect.