Hartford Insurance Group Inc (HIG) 2007 Q4 法說會逐字稿

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

Thank you, Tania. Good morning and thank you for joining us for today's fourth-quarter 2007 earnings conference call. As you know, our earnings press release was issued yesterday. Now if you follow our discussion, a financial supplement and a slide presentation are available on our website at thehartford.com.

Participating in today's call are Ramani Ayer, Chairman and CEO; David Johnson, CFO; Tom Marra, The Hartford's President and COO; Neal Wolin, President and COO of our Property/Casualty company; John Walters and Liz Zlatkus, Co-Chief Operating Officers of our Life company and Alan Kreczko, General Counsel of The Hartford.

Following the prepared presentation, we will hold our usual question-and-answer session. Turning now 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 ending September 30, 2007 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 2007, in the press release we issued yesterday and in the Investor Relations section of The Hartford's website at www.thehartford.com. Now I would like to turn it over to The Hartford's Chairman and CEO, Ramani Ayer.

Thank you, Kim. Good morning, everyone and thank you for joining us today. We have a lot of important topics to cover, so my comments will be brief. I am going to touch on several highlights for 2007, as well as where we are headed in 2008. And then I'll turn the call over to Tom Marra who will provide details on our 2007 operating performance. David Johnson will comment on our investment results and 2008 outlook before we open up for Q&A. So let's get started.

We are very pleased with the Company's strong 2007 results. If you turn to slide 3, you will see that our solid fourth quarter finished off a record-setting year for us. Net income for 2007 came in at $2.9 billion, a record for the Company. Core earnings rose to another full-year record, $3.5 billion. Core earnings per share were up 21% over 2006 to $10.99, driven by double-digit core earnings growth in both our Property/Casualty and Life operations.

Book value growth over the last 12 months, again, exceeded our long-term goal of double-digit growth even with the market challenges we've faced in the second half of 2007. Since the end of 2006, book value per share, excluding AOCI, is up 11% and our return on equity topped 15%.

As you know, the credit markets remained extremely volatile in the fourth quarter. This volatility contributed to the $429 million of net realized losses we recorded in the fourth quarter. Obviously, we don't like seeing losses of this magnitude in our portfolio. Our investment professionals are actively managing a diversified $95 billion general accounts portfolio. With most of the portfolio invested in fixed maturities, it is difficult to avoid credit losses in markets like these.

Now the first few weeks of 2008 have seen a continuation of market volatility. Investors are now looking at credit risk across a number of investment categories and the latest area of concern is muni bonds in light of the issues faced by bond insurers. We hold about $13.5 billion in muni bonds and slightly over half of these securities are wrapped with insurance. As David will cover later in the call, we don't expect the bond insurers' current troubles to have a material impact on The Hartford.

Now turning to slide 4, you will see that we continue to execute well in competitive markets. In our Life operations, 2007 saw record core earnings of $2 billion, up significantly over 2006. Life's record profitability was driven by successful asset accumulation over the past 12 months with $53 billion in deposits. US variable annuity deposits represented over $13 billion of that total, up 9% over 2006.

The recent decline in US equities may put some pressure on near-term industry sales. Over the longer term though, we think periods of heightened volatility will reinforce the value of living benefit guarantees for customers and financial advisers. This is exactly the type of market where benefit guarantees prove their worth. Given the increasing longevity, the typical retiree must allocate a meaningful proportion of their assets to equities.

And so if you take a hypothetical 69-year-old retiree, assume she has an investment portfolio consisting of several mutual funds, some cash and a variable annuity with living benefits. With headlines clamoring about Wall Street volatility, she is going to be sleeping much better at night if she -- much better at night than if she didn't have the safety of a guarantee. She knows that she has an income stream that will continue to deliver regardless of what happens in these markets.

And so with that in mind, I am looking forward to the new VA product we will be introducing in May. This new product should help us improve deposits and flows in the second half of the year. Tom will discuss our fourth-quarter Life performance in more detail, but I have to say that I am impressed by the progress we made in 2007 in our retail mutual fund and retirement plans businesses. Assets under management in these two businesses grew at a combined rate of 22% last year. These fast-growing segments are important elements of our longer-term strategy to diversify our Life earnings space.

In Property and Casualty, I am pleased to report record core earnings for 2007, up 10% over the prior year. We have benefited from favorable weather, our underwriting profitability was healthy and investment income was strong. P&C competition has been and continues to be intense with new business difficult to come by.

During 2007, we introduced a number of initiatives aimed at retaining more of our most profitable business. These efforts did bear fruit in the third and fourth quarters in the form of increased policy retention levels in several lines. We think competition will remain tough in the coming year, but we don't expect pricing to become broadly irrational and that is why we believe we can achieve modest premium growth in 2008.

And finally, we finished 2007 in a strong capital position. We spent the last few years building our capital resources and enhancing our risk management capabilities in order to navigate the types of markets we are facing today.

When we first introduced the concept of a capital margin, our goal was $500 million. As our business grew, we increased the margin to $1.5 billion and that margin is in place today and we have tremendous liquidity. The Company has the capital resources and flexibility to ride out the current market instability while competing vigorously in our business lines.

And now before I hand off to Tom, I would like to comment briefly on last week's announcement that David Johnson will step down as The Hartford's Chief Financial Officer. I really want to say that it was with regret that the Board of Directors and I accepted David's resignation. David has been a highly-valued adviser and partner on financial and strategic matters over the last seven years to me and my management team. He has consistently challenged our organization to improve the quality and transparency of our financial reporting and all our public disclosures. And it is important to note that David will be staying on as our CFO until at least the middle of the year. In the meantime, we are committed to finding the very best candidate to fill this critical role. Let me turn it over to Tom to provide additional details. Tom?

Thanks, Ramani. Before I get started, I just want to echo Ramani's comments on David Johnson. I think everyone on this call knows David to be enormously talented and has contributed greatly to The Hartford's success, but I just want to add on behalf of the management team that he has also been a great teammate and a superb business partner and I personally look forward to working with him as does the rest of the management team over the next few months.

Okay, turning to the quarter, our Property and Casualty results are highlighted on slide 5. Our Property and Casualty operations finished a record year for core earnings with solid performance in the fourth quarter. Core earnings were $414 million. This marks the fourth time in the last five quarters that core earnings pushed above the $400 million mark. Good underwriting results, favorable weather and prior year reserve releases helped us achieve these very good results.

Written premiums were $2.5 billion in the fourth quarter, 4% below last year. Even though our top line has declined, we grew policies in force in personal lines, small commercial and middle market over the past year. Our fourth-quarter combined ratio is 91.1% in ongoing operations, including 2.6 points of cat losses. That is a very good result considering recent industry trends. Of course, a number of items affected the quarter, including 4.8 points of prior year reserve releases. The releases were partially offset by some reserve strengthening for the '07 accident year and higher than usual policyholder dividends. The impact of each of these items varies by business and since all the details are in our IFS, I won't go through every segment. Instead, I would like to focus on the key trends we see shaping our outlook for '08.

Slide 6 shows that the underlying trends and accident year combined ratios -- it shows the underlying trends and accident combined ratios for the past two years, along with our '08 outlook. These numbers exclude catastrophes. We also have adjusted '06 and '07 to exclude the divested Omni business and the benefits we received from citizens' assessments and recoupment.

I want to make a couple of observations. First, our '08 guidance reflects only a modest increase in the combined ratio for ongoing operations. We believe our Property/Casualty business will deliver a return on equity at or above our targets with up to 3% top-line growth. Of course, this all assumes a normal cat year. Our 2007 accident year combined ratio for ongoing operations, excluding catastrophes, was 2.5 points higher than the prior year. In 2008, we expect continued margin compression from lower pricing and higher loss costs.

That said, The Hartford is well-prepared to navigate this phase of the cycle. We have specific tailored action plans for each segment of our business. We are seeing more competition in personal lines of small commercial, but these lines remain largely rational. Loss costs, while trending slightly higher, are still quite manageable. We have the opportunity to grow these businesses in '08 at very attractive margins.

Our game plan is to grow our top line through expanded distribution and we will drive our competitive position and profitability through product enhancements, leading-edge pricing and underwriting technologies and ease of doing business. We are planning to increase marketing and add another 1000 new agents in personal lines. We are also introducing refined rating plans for both AARP and Dimensions early in the year.

In small commercial, process improvements and technologies such as ExpressWay are making it easier for agents to do business with us. Our recent product enhancements are showing promise. The commercial auto product we launched last December is generating more opportunities [to] quote and more sales. Overall, I am optimistic that we have the right initiatives underway in personal lines and small commercial. In 2008, we should see continued increases in policies in force and modest growth in premium, all at attractive returns.

In middle market, we are seeing the effects of several years of moderate pricing declines on our written premium and combined ratio. State-mandate reductions and workers' compensation rates are also dampening premium growth. Even so, our outlook for '08 is for a solid mid-90s accident year combined ratio, excluding catastrophe.

We believe we can achieve these results through a relentless focus on retaining our profitable customers and managing our business mix. We are competing aggressively for new business in select classes and regions where, historically, we have earned very good returns. In addition, the new commercial auto product is generating new business opportunities, particularly for companies with fleets of less than 25 vehicles. Our disciplined and underwriting expertise in middle market is clearly paying off. This is the second quarter that we have improved premium retention even with the lower written pricing. In 2008, we expect modest premium declines with good underwriting margins.

Now specialty commercial wrote about $1.5 billion of premium last year and reported excellent accident year combined ratios. Industry profitability has driven excess capacity in many of these lines and competition is intense. Our focus for businesses like professional liability is to expand our product offerings to middle-market and small commercial customers. In other specialty lines, we are selectively writing and renewing business that meets our target returns.

So no doubt, competition has increased in every segment of our Property/Casualty business. That said, we believe that we have the initiatives in place to strengthen our position in the market while delivering good returns for our shareholders.

So now turning to slide 7, Life operations had another quarter of strong performance. Core earnings for the quarter were $457 million, a 16% increase over last year. Total assets under management were up 14%. The chart on the left breaks out the growth of our asset management businesses. As you can see, strong net flows and the markets drove AUM growth. Total deposits were $11 billion in the fourth quarter and $53 billion for the whole year. Net flows for the full year topped $15 billion, up 26% over 2006.

In our US variable annuity business, fourth-quarter deposits were $3.1 billion, flat to last year. Variable annuity net outflows for the quarter were in line with guidance at $1.1 billion. Given current competition and market conditions, we expect first-quarter variable annuity sales of $2.4 billion to $2.8 billion. As you know, we will be launching a new product in May. For competitive reasons, I can't provide you with product details now, but our guidance reflects stronger sales and net flows in the second half of the year.

As Ramani said, the performance of our mutual fund continues to be outstanding. More than half the equity funds we offer are ranked four or five stars by MorningStar on a [load wave] basis. Our portfolio of strong retail mutual funds helped to drive full-year net flows above $5 billion. Fourth-quarter retail mutual fund deposits were $3.5 billion, a 14% increase over last year. And net flows for the fourth quarter were $1.3 billion.

I am pleased to say that our efforts to diversify our fund flows are also gaining traction. In the fourth quarter of 2007, deposits to the Company's equity funds, beyond our most popular equity fund, more than doubled over the prior year.

Our Japan Variable Annuity business topped off a strong year with another quarter of good performance. Solid net flows over the past year drove assets under management up 13% to JPY4 trillion or $36 billion. The earnings contribution from Japan is growing significantly with over 14% of 2007 Life core earnings coming from Japan.

As we expected, the implementation of the Financial Instruments and Exchange Law, FIEL, slowed sales of investment products in the fourth quarter. Our deposits for the quarter were JPY123 billion or $1.1 billion, representing an 11% decline on a yen basis compared to last year. We continue to believe the changes adopted under FIEL should work their way through the system by the end of the first quarter.

As FIEL settles into the mainstream, our Japan operations remain focused on the capabilities that have proven successful, offering a compelling value to customers, building a market-leading distribution system and introducing innovative products.

In February, we will be introducing a new VA product in nine of our distribution partners. We also plan to introduce another variable annuity, as well as mutual funds, later this year.

Turning to Institutional Solutions, full-year total deposits surpassed $11 billion in 2007. Strong sales were reported in bank-owned life insurance, structured settlements and institutional mutual funds. Our deposits for the fourth quarter were $1.5 billion. But given the current low interest rate environment, it may be difficult to match our 2007 sales results in '08. We now have $61 billion of assets in Institutional Solutions and it is that asset base that will drive our earnings.

Life's protection businesses also performed well this quarter. Total life insurance in force for individual life was up 9% over the fourth quarter of 2006. Solid full-year sales combined with very strong persistency drove this growth.

In group benefits, fully insured premiums were up 1% over the fourth quarter of '06. That figure understates our true growth though. Premiums rose 5% if you back out the medical stoploss business we sold in the spring of 2007. Core earnings also rose by 5%, driven in part by favorable mortality and morbidity. Competition in group benefits remains intense, particularly in the small case market. As we move into 2008, you should expect us to continue to balance top-line growth and profitability while deepening relationships with our existing customers.

I want to take a minute to talk about our retirement plans business and now I am on slide 8. Strong net flows and market appreciation drove assets under management and retirement plans up 16% from December '06 to more than $28.5 billion at the end of the year. And also you know, we announced three strategic acquisitions in December. I am happy to say we have already closed one of these deals, Top Noggin, and we expect to complete the other two in the first quarter. In aggregate, these acquisitions expand our presence in the midsize plan market. In addition, they bring us industry-leading service platforms.

For example, we will now have the ability to service defined benefit plans. More and more plan sponsors are seeking to combine their defined benefit plan administration with the sale or takeover of their 401(k) plans. This provides us greater flexibility to package the services of our customers' needs.

These acquisitions nearly double our retirement plan assets. It is worth mentioning though that assets of Top Noggin and Princeton Retirement Group we consider largely assets under administration as opposed to assets under management. The ROA for these businesses is lower than the ROAs we have been reporting. So we will update the 2008 outlook for our retirement plans group at the first-quarter call assuming the transactions are closed.

In summary, our Life operations had an outstanding year. We had a record year in terms of core earnings with solid contributions from each of our businesses. And with that, I would now like to turn it over to David Johnson. David?

Thanks, Tom. First, thank you, Ramani and Tom, for the very kind words. I want to thank you, the Board and the rest of the management team for the opportunity to come to The Hartford and learn the insurance industry. You have been unbelievable teachers and I am very grateful.

I have also greatly enjoyed the opportunity to work with the people on this call -- our investors and our analysts. I want to assure you my decision to step down from my post is a personal one and in no way a reflection on the prospects or the financial condition of this company. While the markets admittedly stink, The Hartford is very well-prepared for what may lie ahead. We have spent the last four years preparing this company for foul weather exactly like this. Our balance sheet is in great shape and our capital position has never been stronger. I know that voluntarily leaving a position without lining up your next move ahead of time is unusual and perhaps a little troubling for you. All I can do is reiterate that it is a personal decision for me and this is the plan that makes the most sense. I did this once before when I left Cendant and it worked out great. I ended up at Hartford and it has been a wonderful seven-year run here. In any case, I am not going anywhere for quite awhile. I will be certifying financials, managing liquidity, talking to you and assisting in the search for my successor until at least midyear.

Let's turn to slide 9. I am pleased to report our quarterly capital loss came in a bit better than we predicted in December. Long-term volatility subsided somewhat at year-end, but credit spreads continued to widen, but overall, impairments were a little higher than projected and losses in our hedged GMWB liability were substantially lower.

These realized losses affected GAAP book value, but not our capital position. As a US insurer, our capital is measured under statutory accounting, which differs from GAAP. We estimate that our roughly $430 million GAAP realized loss -- pretax, pre-DAC -- will translate to a more than $100 million gain under statutory accounting.

The largest reason for this anomaly is the accounting treatment for GMWB hedging. Under GAAP, our GMWB liability and hedged assets are both fair valued. When the hedging works, as it did this quarter, the change in the liability is substantially offset by a similar change in the hedged assets. Under statutory accounting, on the other hand, the hedged assets are fair valued, but the GMWB liability is not. On our stat books, the change in fair value of our hedged assets drove an increase in surplus.

Also, bond impairments under GAAP are now largely driven by changes in market value. Under the current stat rules, it still requires a fundamental credit development to trigger impairments. So we didn't see the same level of impairments on our statutory books. The bottom line is that, at year-end, our statutory capital position remains very strong and our $1.5 billion capital margin was completely untouched.

Also, I want to comment briefly on our guidance given the impact of market levels on our asset-based fee revenues. As we noted in our press release, we will be at the low end of our guidance range if the market does not recover. And further market deterioration would take us below our range. Remember, for every percent the S&P is down at the beginning of the year, we lose about $6 million in after-tax core earnings or roughly $0.02.

Our guidance also does not include any estimate of the effect of the third-quarter DAC unlock on EPS. Were we to do our annual DAC study today, market losses since our last study would generate a negative unlock. Using the sensitivities that we provided you in our third-quarter 10-Q, the impact of market changes would likely be between $200 million and $400 million after-tax were we to do the study today. As a reminder, DAC was a $213 million good guy in our 2007 study.

In addition to our annual study, we do test DAC on a quarterly basis and if necessary, we would unlock immediately. But that is a far-removed event. We would need to see roughly twice as much as the worst market deterioration we have seen since July for us to unlock off cycle.

We have not changed our full-year outlook for an alternate investment income either. Our plan calls for income of this kind of roughly $240 million pretax or about a 9% annualized return. That also could be volatile in a down market. Bottom line is that the current market environment is challenging and it will certainly have some impact on earnings. But that being said, we are not yet ready to abandon the plan we describe for you last month.

Turn to slide 10, please. We have added a great deal of investment disclosure to the appendices to our slides. I would like to make a few comments on two categories -- monoline wrapped securities and commercial real estate. You can see that the vast majority of our monoline wrapped securities are munis with the balance in structures and corporates. It is not a hard and fast rule, but in general, we would say that for investments where the underlying credit is A or better, the wrap is not getting much value in today's market. The bonds are already trading close to the underlying credit. This process had already started in the fourth quarter and is partially reflected in our year-end marks.

Underlying credits below A are still getting some benefit from their wraps, but were all the insurance to disappear tomorrow, it would be immaterial to our muni portfolio, which has an average underlying rating of AA-. Of that total portfolio, over 50% is insured and 95% of the insured bonds have underlying ratings of A- or better.

The balance of our monoline wrapped investments -- I just note that roughly half the structured investments are subprime bonds we have previously disclosed to you, so don't double count them. They show up in two different places in our appendix slide.

Turn to slide 11, please. Historically, life insurers have always been major holders of commercial mortgages and we are no exception. We hold a balanced portfolio of $22.4 billion. Versus our peers, The Hartford does hold a larger portion of its investment in the CMBS format and we provide extensive disclosure about these holdings in our appendix.

The CMBS format has pluses and minuses. While in most market conditions they are more liquid than whole loans, this liquidity means they're accounted for at market value, while whole loans are carried at amortized costs. CMBS also benefits from diversification and if you buy the senior tranches, subordination. So in today's market, structural protection often doesn't get the highest value from investors.

On the fundamentals, the commercial mortgage business is still in very good shape. Delinquencies remain near historical lows. Property values, while down in the last 12 months, never experienced the hyperinflation of residential property over the last five years. At this point in the credit cycle, I would much rather be overweight commercial mortgages than high-yield corporates.

You may have noted that roughly $1.9 billion of our commercial mortgages are held in commercial real estate CDOs. I would like to stress that, of that, roughly $1 billion are not CDOs in the sense you might remember them from residential mortgage. The largest part are so-called bespoke CDOs, which repackage only AAA tranches at CMBS securities. The balance of that $1 billion consists of managed CDOs, which are really much like a CMBS, but the collateral flows in and out kind of like a conduit as long as it meets the appropriate criteria for the tranche. The rest of our CRE CDOs do involve the re-tranching of seasoned lower credit commercial mortgages. Again, fundamentals still remain very strong here, but these will be on our list for watching.

Finally, turn to slide 12. I would like to give you a brief update on FAS 157. Derivatives primarily show up in two places at The Hartford -- in our investment portfolio and in a portion of the living benefits embedded in our variable annuities. Prior to this year, these were accounted for under FAS 133. Now we will use FAS 157. This change has little impact on our investments, which generally are subject to traditional price discovery.

On the other hand, our VA derivative is embedded and not really tradable. We have always had to build a valuation model to account for it. Under FAS 133, we are required to incorporate any observable market input in our valuation model and I am proud that The Hartford has steadily incorporated new inputs as they became observable over time. The most notable have been new markets that emerged from increasingly long tenors of index volatility.

When a market does not exist for a key model input, for example policyholder behavior, under 133, we use our best estimates. Under 157, on the other hand, we are required to incorporate market values for all inputs even when a market doesn't exist. In particular, it requires you to add margins that you think a market participant would charge for the risk that the input might change. Our calculations are still being finalized and audited, but I would like to describe some of the risk margins we are adding in order of importance.

The largest is policyholder behavior. Remember, our living benefits give the policyholder a lot of choices, particularly when and in what amounts to withdraw their money. We make assumptions not only based on the person, age, qualified versus nonqualified account, past behavior, but also on market conditions. We generally assume people will value the benefit more in adverse markets.

For 157, we have developed a method that tries to emulate what a hypothetical trader might charge us to take on the risks that our behavior assumptions are wrong. This was by far the hardest part of our exercise and it also contributes to the largest increase in our valuation.

The second item is illiquidity and complexity. It is an observable fact that illiquid markets with few very complex transactions trade with a wider bid [ask]. We have included an estimate of what it would take to induce a trader to take on our very complex compound option as opposed to a simple 10-year S&P put.

The third element is basis risk. Our benefit is based on protecting account values that are invested in hundreds of individual mutual funds. Our hedge instruments and the observable market inputs associated with them are based on indexes. A trader would likely factor in a charge for the risk that the mutual funds in the aggregate don't exactly track the indexes they are (inaudible) in.

The final element is actually a minor positive. We are required to discount our payment stream in the derivative valuation using a rate reflective of The Hartford's credit standing as opposed to the risk-free rate.

As we have continued our work, we have been able to tighten our implementation estimate to between $200 million and $300 million after-tax and DAC to be booked in the first quarter of 2008. As a reminder, this is GAAP only and does not affect capital. I look forward to discussing the final number with you on our first-quarter earnings call. Tom?

Okay, thanks, David. Tania, we will now open the call for questions.

(OPERATOR INSTRUCTIONS). Jay Cohen.

Hi, I just want to ask one question on the Property/Casualty side and lob one in for Ed Spehar on the Life side as well. On the Property/Casualty side, I guess one thing that stood out a little bit was the accident year number and the personal lines business. And I know that included some current year development and some other issues and certainly some non-cat weather I am sure. But when you see that number, does it make you rethink your pricing at all? Are you going to take that information and maybe boost pricing in certain markets in the personal lines area just given what may be some underlying pressure on margins?

Jay, this is Neal, thanks. I guess the first thing I would say, Jay, is we want to look at this on a year-over-year basis full year because, as you say, there are some one-time unusual items in the fourth quarter and I think on that basis, if you have a look at it on an ex-cat, ex prior year basis, the development is not that big.

In the quarter, obviously, there was some development based on current accident year adjustments. Most of those relating to some of the things we have been talking about with respect to what we have seen on frequency over the course of the year. We have said that we are going to look at pricing by geography, maybe make some adjustments here and there, but fundamentally, we are still feeling good about our margins and making targeted returns. So that is what I would say.

The other thing is obviously what we have said for '08 is that we expect that loss cost development will moderate a little bit '08 over '07, so that plays into how we think about it as well.

And just one follow-up on that. Maybe probably too early in the year to even gauge that, but that view, is that yet being supported by the data you are seeing on claims?

I guess what I would say, Jay, is, as you say, very early days, but what we have seen at the very end of '07 and as we pivot into '08 is consistent with that view.

Great. I am just going to ask a question that Ed Spehar wanted me to ask and I think he may be listening in and he can follow up if he wants to, but I have the phone so, he was wondering what the ascribed fees are now, basis points on assets related to VA business with living benefit features.

David?

Ed, this is David Johnson. There is no one answer to that because it varies by product, but, of course, they are up for the cohorts that we were writing in the latter part of the quarter with market volatility up. So the answer is kind of anywhere up from -- probably anywhere from 10 to 25 basis points depending on the product. And that moves around a fair amount. We reset that weekly I think in terms of the cohorts that we book. So it is quite granular and it is a different answer for each week.

Great. Thanks for those answers.

Andrew Kligerman.

Great. A couple of questions. Just first for Dave Johnson. Congratulations on really a high-quality run over the last seven years. Where do you think you will appear when we see you in the next -- in your next role? Will it be similar to the CFO-type role you are in or something quite -- extremely different?

Well, courtesy of the good efforts of the folks here at The Hartford, I am here for a fair amount of time and have really not begun to explore my next opportunity because generally if people like each other, they want you to start right away and I can't do that. So I am really going to take the opportunity over the next few months to think about that. I love being a CFO. It is a great job. But I have the luxury at this point to think about whether I might want to do something else. So I love good disclosure, but what I am disclosing right now is I really don't know. It is going to be fun to think about.

Thanks. Shifting over to the P&C business, with written premiums down 4% in the quarter and a targeted 0% to 3% growth in '08, kind of just rattling it off, small commercial down 3%, I think targeting flat to up 3%, personal lines only up 1%, you are target is for better than that. I know Tom was mentioning potential growth in agents or personal lines, maybe some new products, but given that in the past year, guidance has not been met on written premium growth, what is your confidence level in your ability to make that 0% to 3% and maybe some of the reasons why you may or may not have confidence in some of the more predictable lines like small commercial and personal lines?

Let me start that, Andrew. It is Tom. Since I have been downtown here and watching the Property/Casualty team, I have been impressed. Literally, they are looking at every place within the discipline that is really the hallmark of The Hartford. They are looking in each line for pockets of opportunity in places and geographies and industries where we can be successful and that is across all lines. These are commendable numbers given the market rate -- or the market environment and the discipline with which we are approaching it. So I would turn it over to Neal to get a little more specific.

Thanks, Tom. Andrew, thanks. Let me start with the fourth-quarter premium and then pivot over to how we are thinking about that as we go into '08. If you look at personal lines -- for example, if you ex out Omni, the minus 1 is a plus one and in the commercial lines area, a meaningful amount of the top-line pressure is the result of state-mandated rate changes and in particular, New York where there was a one-time requirement to give back rate with respect to the unearned premium reserve for comp business written in that state. And so if you adjust all that out, I think the year-over-year quarter comparisons are rather better than those that you cited.

And so we start with that and then we think about pivoting into '08. We feel very good about a range of initiatives that we have underway across our segments. So in Personal lines, you know, we are releasing as Tom mentioned in his opening comments product both in the agency and in the AARP businesses. We feel very good about that. Those will be rolling in over the course of '08.

We are going to be putting 1000 new agents on our roles and so forth. In small commercial, again, we expect an '08 product improvement, some new releases, as well as meaningful enhancements to our service capabilities and ease of doing business.

And in the middle market, you know, an awful lot of attention to retention and our retention numbers have picked up. You see that in the quarter they have -- and as you look within the quarter, they have picked up sequentially within the quarter and we are really focusing on retaining what is for us a very profitable book of business. We have has really had a lot of success in doing that.

So all those things, as well as a number of new business initiatives where we feel, for example, in the middle market that there are still good opportunities for us to go find profitable business by line, by geography, and so forth. All of that makes us feel good about the guidance that we have provided you.

Just lastly, quickly on group benefits, 16% fall in the first nine months, up 26% in the fourth quarter in terms of sales; does the momentum carry into next year and what are the competitive dynamics?

Good morning. I would say that sales tend to be kind of lumpy over the quarters. You know, we are in all markets, small all the way to national accounts. So I wouldn't read too much into the fourth-quarter run-up.

Having said that, we do feel good about our core lines, Life and Disability for the first quarter. But there is lots of competition out there. I think the small case market will be a little bit more challenging, and some of our other lines like Retiree Health tend to be lumpy. But that is all reflected in our guidance.

Got it. Thanks, Liz.

Darin Arita.

Good morning. I was hoping to talk on the Japanese variable annuity business. Tom, you mentioned that you expect this FIEL system to work its way through by the end of the first quarter. And can you explain a little more what that means and why you think that might potentially -- with that behind us could lead to increased sales in Japan?

I will have Liz give the real color on that. I think in part, that just comes from our people on the ground and also just looking at sales, how at the beginning of the FIEL really fell precipitously, and then it kind of crawled back but steady strides.

Liz, do you want to add to that?

Yes. Let me just give a little bit of color on FIEL again. As a reminder, it was an industry issue, so it affected sales of everything from mutual funds to [JGBs] to variable annuities. For example, if you look at mutual fund sales for the quarter, the fourth quarter of '07, they were down about 19%, and [net fund slows] were down about 50%.

We don't have formal data on VA sales, but our best estimate is bank sales which comprise most of the market were down about 25% to 30% for the fourth quarter. So clearly, we see this as an industry issue. However, we do see I believe that December sales started to tick up. So that is why between that and all the conversations we had with our distributors, we do believe it will work itself through by the end of March.

Now having said that, we all know that the Japanese market has really taken a hit. It's down close to one third in about six months, although rebounded yesterday and so forth. But that is giving Japanese customers pause in their buying behavior. So a lot is going on in Japan in the near term. That is reflected in our guidance, lots of competition, but I will say again and stress we are bullish over the long term in Japan.

Variable annuity assets at about $150 billion as of September only represent 1% of the financial assets in the country. So we think guarantees, especially in light of what we have seen, will play well. We think the industry will grow and so you see kind of a second half of the year uptick in our guidance and certainly, we believe more bullish over the longer term. Finally, we are launching a product, as Tom said, in the fourth quarter and that is also reflected in our guidance.

And Liz, your comment on -- excuse me -- Darin, but I think an important point that I would like Liz to make is your comment on the Japanese equity market being way down. I think it is important that everyone out there understand that, because of the diversification of our portfolios within the VA products, that the actual investment return in our products is down a lot less and this is one of those areas where our allocations within the portfolios really help the customer.

Absolutely and I think they will see that. I mean we see that their returns were flattish for the year before fees, were less than equities then typically in the US about 44%. It was only about 23% of our in force and Japanese equities and then of course, the rest in Japanese bonds and global bonds. So clearly, we have a more diversified mix and that should bode well for our customers, but I am saying new customers are thinking about making purchases right now are a little tepid.

And then sticking with that and making it a little more broad, but can you talk about some of the metrics that you are looking at with respect to your living benefit liabilities and how that is tracking first in Japan and then also in the US?

A question on our living benefit liabilities, are we tracking that?

Darin, are you GAAP or stat?

I would be curious on I guess whatever is important to you, but I would say both.

Okay. Well, let's start with the US. You saw the net result of derivative activity from GMWB in the fourth quarter was relatively low. That has obviously been a volatile ride. In December, we shared with you where the mark was at the end of November, which was over $100 million. As you see, the real -- the big impact there is when you have the big spikes in market volatility -- the hedges, as one would expect, extremely well on delta, on interest rates. It is big spikes in [VEGA] and volatility, which are difficult to rebalance against where you see the slippage. And we always expected that to happen. As long term [vol] came back in through the month of December, you had the mark that you see in our financial statements.

So again, on that aspect of it, we feel pretty good. On the statutory aspect of it, again, which I believe is the real issue that insurers need to track with regards to these liabilities, again, we are in good shape as of year-end. The principal mark date for statutory surplus is an annual mark, but that one, again, as we have talked to investors before, if you had a very dramatic movement down in the market, that can create a large statutory margin call as we have talked about, but we are in pretty good shape right now.

In Japan, again, as I think Liz pointed out, this is a very diversified book. So while the -- the liability definitely probably will mark up a tiny bit, it is -- you are not seeing giant surges with regards to our exposure there the way you would if it was all in one Asian equity class. So, so far so good for volatile markets.

And just to follow-up, I mean are there any specific numbers that you are looking at in terms of benefits that are in the money, things that you can share along those lines?

Disclosed in our IFS on page L6, so you could just look at our IFS and you will see it.

Okay, thank you.

Tom Gallagher.

Good morning, Tom. Let's see. I guess mainly for David, just want to understand your comments about sort of the DAC sensitivity to equity markets. If I understood you correctly, should we assume that you could withstand roughly another 15% drop in the equity market before you would sort of trigger an out-of-period impairment potentially?

Yes, I would have to go figure out how that percentage lines up with what I said, but basically about as bad as it has been since last July would have to happen again. Now again, there is a separate analysis for Japan versus the US, so you could have a scenario where one triggered but the other didn't, but that is a pretty good rule of thumb.

Okay. Second question is -- your comment about the statutory -- the lower statutory capital losses, can you just give us a sense for -- if you had $318 million of impairments on a GAAP basis this quarter, what was that actual number on a stat accounting basis and why would it be meaningfully different?

Yes, rough estimate was that the stat impairment impact was in kind of the 125 to 150 range, so it was significantly less. Particular -- the principal reason is that GAAP framework for impairment has evolved over the last three or four years and it is now one where, in the face of a significant change in the trading value of the security, the rebuttable presumption is that you will impair that bond and that can happen if the market value shifts dramatically even if there is no downgrade, if the analysis of the cash flows underlying the security don't indicate any recoverability issue, any of the kind of traditional metrics associated with credit impairment, which are still the rules under current stat accounting. So you could have say something trade down at 75% of book for GAAP, that is going to be a hard presumption not to impair there even if it has not been downgraded and you think the fundamentals are pretty good. Stat, on the other hand, would not look -- (technical difficulty) -- stat would not look for you to impair in that scenario.

Okay. So I guess we are going to see some kind of divergence between the loss recognition on GAAP and status as we go forward here with GAAP being a lower threshold in terms of loss expectation going more toward a market value-based approach.

Well, I would not want to assert that there is a fixed relationship between the two and that stat will always be lower. There are other things in stat on the other hand that are much more sensitive to different things than GAAP. So for example, interest rates can sometimes have interesting impact on your stat liability and can create losses of statutory surplus in scenarios where you see nothing in GAAP.

Also, as I was talking beforehand, stat in terms of the CTE capital requirement is much more sensitive to absolute moves in the stock price and would produce a larger loss than probably our FAS 133, now FAS 157 liability might in the case of a big market like a 30% drop. So there is -- stat can be worse in some scenarios too, but with respect to credit impairments, I think that is true. You will generally see stat being less than GAAP.

Tom, just when you thought you could simplify the world, it's not so easy after all.

Yes, I hear you. The last question I had is just want to understand -- there is obviously a lot of accounting noise with the variable annuity hedging. But to try and simplify it, if that is possible, as I understand it, you all run about -- what is it? -- 30 basis points through the GAAP P&L? Or if you could remind us how much is being run through operating earnings. And then a separate question is if you look at the breakage we have had on an economic basis, your estimate of breakage on an economic basis, what would that incremental cost have been if you trued that up this quarter and maybe the last few quarters?

Well, again, as I said, the exact amount of the rider fee, which is attributed to core earnings as fee revenue varies by cohort and those go over time, but I think it is fair to say that over most of the life of the product that has been between 10 and 30 basis points and it has only moved out of that range in kind of extreme market conditions.

When you are talking about economic breakage, that is -- it is an interesting -- I kind of have to almost form and redefine the answer in order to try to give it to you because there has actually been no breakage in that we have never paid a claim that I am aware of of any material size under any of our living benefit programs. They require you to exhaust -- in almost every circumstance, you have to exhaust your principal before -- our withdrawal benefit liabilities would actually cause a cash claim for us. So there is a breakage in terms of the fair value reported on our books and you've seen that breakage every quarter. That is the gap between the liability and the hedge assets.

I guess the other breakage you could say is how much money have we spent on hedging and has there been rebalancing costs kind of bid ask] and you're kind of a loss of economic value from the higher volatility. Difficult to put a cost on that, but that could easily range from anywhere from -- oh, I don't know -- in a good scenario, five basis points over the life of the hedging and in a real volatile hedging scenario, that could be 10, 15 basis points or more for rebalancing costs over the life of the hedging program.

So certainly there has been periods in the last quarter where, if that persisted for 10 years, you would definitely be at the higher end of kind of trading breakage. Difficult to put a -- frame one version of an answer, but hopefully those two or three different versions are helpful to you.

This is Ramani. I just want to reinforce -- David gave a very comprehensive answer to your question. The way we think about the economic loss is really, at the end of the day when all liabilities are resolved, does that go against us or not and that is very, very far into the future and what you are seeing is The Hartford basically following accounting rules to mark everything to market and David gave you the components of that. So it is an important distinction that both you and I hope investors get in how we report our liabilities and changes in our liabilities through income.

Yes, thanks a lot.

Eric Berg.

Good morning to everyone. My first question regards the capital losses. You recorded pretax -- as much capital losses outside of the credit area as you did inside of it, about -- pardon me -- half as much, but still a significant number. $165 million is referenced on page 9 and also in the realized gains page in the supplement. I understand that this is all about hedge ineffectiveness and about certain hedges that don't qualify for hedge accounting. But how should we think about these losses? Are they economic? Should we ignore them in your opinion, David? How do you think about these? Because they are running through your P&L, so clearly the SEC feels they are meaningful. They are hitting your book value. What is your view on this $165 million and similar charges in previous periods? Thank you.

Sure. Eric, the vast majority of what you saw in the fourth quarter was losses associated with credit derivative positions. That is what is reported in that line. And I look at that in two different ways depending on the credit derivative strategy.

A portion of that loss is credit derivative strategies where we did effectively replication trade and took credit risk very similar to the risk we would take by owning a corporate bond by assuming credit risk through buying or selling credit derivatives and then also getting other fixed income investments associated with it.

So what you're seeing here is akin to the swing in the fair value of that replicated trade that otherwise would have been recorded in AOCI if this had been just a traditional corporate bond. So I look at that as -- I don't look at it as accounting noise because it reflects a change in fair value. On the other hand, I look at the fact that fair value is going to swing a fair amount when credit spreads gap out as they are in the current scenario and we would look for the vast majority of our corporate bond portfolio losses that you are seeing in unrealized loss in AOCI to come back. We feel the same way about the credit default swaps, which tend to be 10-year contracts that you see marked in this line.

Now on the other hand, there is another strategy and these are roughly half each in terms of the credit derivative loss that you see in that line associated with ownership of index swaps where we, again, where we basically took the risk of changes in value in some credit indexes, indexes associated with commercial mortgages and residential mortgages. Well, residential is extraordinarily small. It's really commercial mortgages and that is a short-term strategy and if we do not decide to roll over the positions in the first half of this year, that will be real economic loss.

Okay. And then I had one business question for Liz. It is actually a follow-up to Andrew's earlier question on group insurance. I notice that you reported 1% year-over-year premium growth in the quarter, 4% for the year. I tend to look at that number, even though it is simple, I don't think it is simplistic in the sense that that is sort of your GAAP revenue or your largest component of the GAAP revenue, dwarfs everything else in the revenue section of the P&L. Do you think, Liz, that the 1% and the 4% are for the quarter and the year are being held down by being distorted or are those numbers representative of the sort of ongoing growth power of the business? Thank you.

Thanks, Eric. I tend to think of the ongoing growth power of the business more in the 4% to 5% range. So some of that is -- again, we have two core lines -- life and disability -- and then we sell some other supplemental products and we see a lot of choppiness in those. So I would say the underlying -- and we had the IMS business, so I would say some of that is noise. Obviously, the business is in a saturated market, were a very big player in the market. We are number two in both in force and disability and number three in life and from a new sales perspective as of 9/30, we were number two in both. So we are a big player, huge employers aren't being created every day, but what I would say is we still see earnings power probably in that line, but maybe higher over time as we continue to manage loss cost price while gain efficiencies. But in the near term, yes, you are looking at probably a 4% to 6% kind of run rate overtime and you will have some higher or lower depending on some of that noise.

That was great. Actually, one more just quick question. In the past, I have asked you about your retirement businesses and it certainly is encouraging and it is noteworthy and encouraging that the assets are growing rapidly and I understand that you are investing in these businesses with new wholesalers and spending money in other ways to build out the platform. What sort of timetable can you offer up for the earnings to begin trending upward? They seem, in the supplement, to be sort of stuck in the low 20s area and while I understand that, again, the pattern of earnings is being sort of braked or retarded by the investment spending that you're doing, when are we going to get the good stuff so to speak -- the higher earnings?

Thank you, Eric. It's John Walters and let me comment on the retirement business. Yes, we made some significant investments in the retirement business in 2007, both investments in the technology and infrastructure that supports it and the three acquisitions that we announced in the fourth quarter. So this is a business that we are very excited about. It has been one of our fastest-growing businesses and we expect it to continue to be in the future.

What you should expect to see is, as we close these three acquisitions, one of which, as Tom said, is already closed here in the first quarter, then we will be working on integrating all of those acquisitions and bringing this together. We will have double the assets that we had before. That should give us economies of scale and the ability to invest in the business while the earnings start to materialize. Our estimate is that the integration will take about two years to fully complete. We have got to bring three different platforms together into one platform, which is what our intent is. We haven't yet finalized which direction we are going with that, but we expect to do that by the end of the second quarter and then we will be moving on in the integration plan.

So my sense is that you will get little impact from these acquisitions or the scale of the business in '08 and probably most of '09 as we do the integration and then it should improve the earnings levels after that point.

Just to add to that. I mean obviously the long-term strategic intent is to make this a big part of our overall portfolio given it just plays right to our sweet spot in terms of capabilities and just looking at the demographics and rounding out the offerings that we can bring to the retail financial advisers. So we are investing now, but we plan on having retirement plans be a huge part of our overall business.

And it is very clear that you are succeeding in the asset growth area so a job well done in that regard. Thank you.

Thank you, Eric.

Paul Newsome.

Hello, Paul. Tania, maybe we can get Paul back on the line and we will go to the next one.

Mark Finkelstein.

I just have two quick questions. David, on the last call, you talked about potentially hedging certain elements of FAS 157, knowing that there were some kind of economic or noneconomic considerations with that. I am just curious where are you at and how should we be thinking about the volatility around results if you don't go down that path going forward?

Thanks, that's a good question. We are -- the short answer is we are still thinking about it as we continue to refine our understanding of 157 and our implementation of it. I think the good news is it is looking like the implementation of the new 157 model will have an impact on the degree of the sensitivity of the liability to market changes versus what it was under 133, but perhaps not as much. So that takes a little bit of the urgency off to make wholesale changes, but we are still on about the same analysis path as we were before, which is to get that done in the first quarter or so.

Operator, we have time for one more question. Is Paul Newsome still on the line?

He withdrew his question. That was the last question.

Well, then I am going to bring this call to a close. We are pleased to report a record year for 2007. As I mentioned to you, core earnings exceeded $3.5 billion and our return on equity has exceeded 15% this year on a net income basis and also our capital position is in excellent shape and I know 2008 will bring some market-related challenges. We certainly look forward to meeting those challenges and continue to execute well in all of our businesses. I want to thank everybody for joining us on the call today.

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