The Hartford Financial Services Group

Transcription

1 The Hartford Financial Services Group Keefe, Bruyette & Woods 2006 Insurance Conference Ramani Ayer Chairman and Chief Executive Officer September 6, 2006

2 Safe Harbor Statement Certain statements made in this presentation should be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 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 The Hartford s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, Annual Report on Form 10-K for the year ended December 31, 2005 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 second quarter of 2006 and in the Investor Relations section of The Hartford s website at 2

3 The Hartford has a balanced portfolio of investment and insurance businesses Life Operations A leader in asset accumulation and protection products Strong growth in assets under management from 401k, mutual funds, and Japan Assets Under Management Property and Casualty Operations 11 th largest U.S. P&C company Leading writer of small commercial Exclusive AARP endorsement for auto and home with growing agency personal lines Ongoing P&C Written Premium ($ in billions) $168 $165 13% CAGR $210 $249 $277 $291 ($ in billions) $6.8 $7.8 10% CAGR $8.9 $9.9 $10.5 $ YTD 2Q YTD 2Q06 3

4 The Hartford is a market leader in multiple businesses Life operations #1 in U.S. and Japan variable annuity assets under management #1 in group disability sales #2 in variable life sales #3 in group life sales #10 provider of non-proprietary mutual funds P&C operations Market leader in small commercial #5 direct writer of personal lines (AARP) #5 commercial lines writer #5 in workers compensation 4

5 Our diversified businesses are delivering strong growth in earnings per share Core Earnings per Diluted Share [1] Net Income per Diluted Share $6.64 $7.34 $7.12 $7.44 $3.00 $4.96 $3.93 $4.40 $2.10 $3.97 $4.19 $3.86 -$0.93 -$ YTD 2Q05 YTD 2Q YTD 2Q05 YTD 2Q06 Please see Appendix for footnotes. 5

6 Our goal is to drive shareholder returns by focusing on book value growth, dividends, and ROE $60 $50 $40 $30 $20 Dividends $34.54 Book Value Per Share excluding AOCI 10% CAGR $37.77 $36.67 $43.55 $50.41 $ YTD 2Q06 $1.00 $1.04 $1.08 $1.12 $1.16 $0.70 Recent return on equity in both life and property casualty has been in excess of 15% Our long term goals are: Double digit growth in book value per share plus dividends ROE of 13% to 15% Maintain AA financial strength ratings 6

7 The insurance industry is facing several macro-trends that challenge traditional models 1. Demographic and societal trends are fueling opportunities for innovative financial services companies 2. In the property and casualty industry, accident year underwriting profitability is at its peak and strong companies are getting stronger 3. Prudent risk-taking requires enterprise-wide risk management and disciplined capital management 7

8 Retirees are moving from wealth accumulation to income and under-estimating their longevity What retirees worry about Traditional sources of income won t be enough A market downturn will ruin my retirement dreams I ll run out of money and be a burden on my children 8

9 Pre-retirees are on their own to protect their income and build their assets Safety nets are no longer available Fewer defined benefit pension plans Employers are less likely to pay for disability, life insurance and retiree health Questions abound on the future of social security 44% of families feel that they don t have enough life insurance Only 29% of workers in private industry have any type of long term disability protection 9 Sources: LIMRA; National Compensation Survey: Employee Benefits in Private Industry, March 2006 Many are also caring for aging parents

10 Other countries are facing a similar retirement crisis Percent of Population over Age 60 Worker-to-Retiree Ratio* 20% 25% 26% 28% 30% 34% 37% 31% U.S. U.K. Germany Japan U.S. U.K. Germany Japan Source : United Nations Population Division; World Population Prospects: The 2004 Revision * Ratio of workers (aged 15-59) to retirees (60 and over) Source: Watson Wyatt Aging Vulnerability Index,

11 The Hartford is well positioned to capitalize on current demographic trends The Hartford s Strategy Maintain a leadership position in U.S. and Japan annuities Provide innovative lifetime income products Help advisors make a market for retirement products and services Expand in qualified plans such as 401(k) and 403(b) Help consumers grow their assets and protect their income Mutual funds Individual life insurance Group life and disability 11

12 U.S. Variable Annuities: We remain bullish on the long term growth outlook for the industry 12 (In Billions) $150 $100 $50 $112 Industry Variable Annuity New Sales and Net Flows New Sales Net Flows $125 $128 $31 $46 $40 $132 $ YTD 2Q06 Net Flows As a % of 27% 37% 31% 15% 19% New Sales Source: VARDS $20 $79 $15 Recent market drivers Modest equity market returns Significant competition in living benefits Net flows are down as a percentage of new sales as business ages Industry consolidation is continuing Future market trends Favorable demographics Continued product innovation Enhanced risk management strategies and hedging Fees are becoming increasingly important

13 As fees become more important, The Hartford s portfolio is compelling Top-selling B-share Variable Annuities with Core Living Benefits $100,000 Investment Account Value after 25 Years* $400 Total fees (including mutual fund fees) 3.0% (In Thousands) $350 $380 $380 $369 $363 $351 $343 $342 $342 $334 $ % 2.6% 2.4% 2.2% $300 Director M Leaders Director M A Leaders B C D E F G H Competitive Product Offerings 2.0% 13 Source: VARDS 6/30/06 * Assumes 8% gross return before fees

14 We are committed to being a leader in domestic annuities $116 billion of assets under management drives earnings leverage Hartford Hartford Life Life Annuity Annuity Operating Operating Expenses Expenses New VA riders provide competitive guarantees at a reasonable cost Lifetime Income Builder II 08/06 Lifetime Income Foundation 08/ annuity wholesalers Award-winning service and excellent money management Recognized leader in hedging and risk management Positioned to capitalize on rising interest rates with fixed annuities (In Billions) $125 $100 $75 $50 $25 $0 $84 Operating Expenses Per Account The Hartford s Individual Annuity Assets Under Management $75 $98 $111 $ ROA

15 In Japan: Powerful demographics, liquid assets, and deregulation are fuelling growth in VAs VA Assets Under Management (in billions) in Japan Industry variable annuity assets are estimated to be $93 $250 - $400 billion by 2010 $100 $80 $60 $40 $20 $0 $10 Mar $18 $5 Sep $28 $8 Mar Industry $39 $11 Sep $52 $17 Mar $74 The Hartford $22 Sep $27 Mar Products are evolving to address the needs of consumer segments Guaranteed income Guaranteed accumulation Estate planning Competition is increasing among both domestic and foreign companies Source: Hoken Mainichi Shimbun, (Exchange rate: 110 yen/$) 15

16 The Hartford is Japan s VA market leader in a changing competitive landscape Hartford ING Mitsui Sumi Met Life Sumitomo Life Manulife Tokyo Fire & Marine Mitsui Life ALICO T&D Financial Life Daiichi Life VA Assets Under Management Top 10 as of March 30, 2006 Share of AUM 28.8% 14.0% 13.9% 9.7% 7.1% 6.3% 5.0% 4.9% 4.2% 2.5% Change since 09/ Source: Hoken Mainichi Shimbun, as of March 30, (Trillion Yen)

17 The Hartford is positioned well to compete for the growing Japanese annuity business Recent product enhancements address customers desires for shorter guarantee periods New variable and fixed annuities 75 sales consultants are serving over 50 distribution partners in banks and securities firms Service initiatives aim to deliver best-in-class support for distributors and customers The Hartford's Sales by Channel June 2006 YTD Regional Banks 37% Securities Firms 15% The Hartford has the scale to compete Over 3.3 trillion yen in AUM as of June 30, 2006 Over 650 employees in Japan Evaluating ways to leverage brand and distribution to bring new products to market Trust Banks 29% Mega Banks 19% 17

18 The Hartford Mutual Funds: a young fund company with strong growth prospects $33 billion of retail mutual funds under management 10 th largest non-proprietary mutual fund seller through June dedicated mutual fund wholesalers Strong fund performance 86% of funds with 10 year records beat the Lipper average 67% of funds with 5 year records beat the Lipper average Expanding products 48 fund offerings Funds started in the past three years drive 40% of total sales 2006 Sales Rank 2005 Sales Rank YTD June 30 Manager Name New Sales ($Mil.) Market Share 1 1 American Funds $66, % 2 2 Franklin Templeton $23, % 3 3 OppenheimerFunds $21, % 4 5 Columbia Mgmt Grp $11, % 5 4 PIMCO/Allianz Glbl $9, % 6 10 Eaton Vance $6, % 7 7 MFS $6, % 8 6 Van Kampen $5, % 9 9 Goldman Sachs $5, % The Hartford $5, % All Other $113, % Total Sales $275, % Source: ICI 18

19 The Hartford 401(k): Has significant potential with $11 billion of assets under management 401(k) Industry Assets Under Management: $2.0 Trillion (in billions) $1,400 $600 Mid-to-Large Plans (over 1000 employees) Micro and Small-to-Mid Plans Source: LIMRA International The 401(k) scorecard Key Growth Strategies Target micro and small-to-mid size plans (under 1000 employees) Deepen relationships and leverage our brand with financial advisors PLANCO wholesaling 80 Retirement Plans Specialists Expand products for sole proprietors and small-to-mid size plans Provide broad investment choices Drive persistency with award-winning service 19

20 Group Benefits: A rapidly expanding voluntary market is fueling growth (In Billions) $4 $3 $2 $1 $0 Group Benefits Premiums $2.3 $3.6 $3.7 $ YTD 2Q05 Employer Paid Voluntary Market (Consumer Paid) $2.0 YTD 2Q06 After-tax margins 6.4% 6.3% 7.2% 6.6% 6.9% Top LIMRA rankings in 2005 and 1 st quarter 2006 #1 in group disability sales #3 in group life sales #2 in group disability in force #6 in group life in force After-tax margins and returns are excellent, and improving Expanding capabilities and penetration in voluntary markets Consumer self-service technology On-line enrollment and claims Expanded on-site enrollment support 20

21 Individual Life: Growth in life insurance in-force and earnings are outpacing the industry Individual Life Net Income Tillinghast ranked The Hartford #2 in Variable Life sales for 2005 $200 $150 $100 $50 $145 7% CAGR $156 $166 $78 $93 LIMRA ranked The Hartford #11 in life insurance sales through June 2006 Targeting affluent and emerging affluent customers and small business owners Broad portfolio of products including variable life, universal life, whole life and term $ YTD 2Q05 YTD 2Q06 Diversified distribution Independent financial advisors Banks and CPAs Life insurance brokers 21

22 As we pursue these opportunities, The Hartford s life operation is growing and becoming more diversified (Millions) $800 Net Income by Segment (Excluding Life Other) $700 International $600 $500 $400 $300 $200 $100 Group Benefits Individual Life Institutional Solutions Retirement Plans Retail Products (US Annuities & Retail Mutual Funds) $0 YTD 2Q04 YTD 2Q05 YTD 2Q06 22

23 The insurance industry is facing several macro-trends that challenge traditional models 2. In the property and casualty industry, accident year underwriting profitability is at its peak and strong companies are getting stronger 23

24 Today s environment: Moderating top-line growth, softening pricing, and solid underwriting results Cat-exposed property pricing continues to rise sharply Casualty lines experiencing rate declines, with greater downward pressure on large accounts Property and Casualty Industry Historical Results Combined Ratio, X-Cats Premium Growth % Percent Change 14% 12% 10% 8% 6% 4% 2% 0% 1Q02 2Q02 3Q02 Personal Lines Pricing 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 Auto (CPI) Homeowners (PPI) Source: ISO FastTrack, Bureau of Labor CPI & PPI 4Q04 1Q05 2Q05 3Q05 4Q05 1Q % Commercial Lines Pricing % 6.0% 3.0% 0.0% Percent Change 30% 25% 20% 15% 10% 5% 0% Commercial Auto Workers Comp General Liability Combined Ratio, X-Cats Written Premium Growth Source: Conning Property-Casualty Forecast & Analysis. -5% -3.0% -10% -15% Source: CIAB 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06

25 Industry balance sheets have become considerably stronger 25 P&C industry utilized most recent hard market to shore up balance sheet reserves Although still deficient, core reserves have strengthened since 2001 Current accident years are developing favorably and are offsetting the problem accident years (Billions) $70 $60 $50 $40 $30 $20 $10 $0 $25 $20 $15 $10 $5 $0 -$5 -$10 -$15 $2.3 $0.3 $2.2 $ $58 $ Source: A.M. Best (Billions) P&C Industry Core Reserve Deficiency (Excludes A&E) P&C Industry Prior Year Reserve Development $1.5 -$3.7 -$6.7 -$8.5 -$7.5 -$ Source: I.I.I., A.M. Best, Lehman Brothers $29 $25 $0.4 $11.0 $22.7 $ $13.9 $9.9 $ E

26 2006 may be the P&C industry s best underwriting year for the foreseeable future Combined Ratio Property and Casualty Industry Projections % Combined Ratio, x-cat Written Premium Growth % % % E 2007E 2008E Premium Growth 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% Future underwriting margins are likely to deteriorate Pricing will continue to soften but not fall dramatically Rating agencies increasing capital requirements Sarbanes Oxley increasing company transparency Tiered pricing models provide timely profitability metrics Loss costs are expected to increase as frequency returns to historical levels Source: Conning Property-Casualty Forecast & Analysis. 26

27 Top P&C companies are winning through product, pricing and distribution capabilities 70% 60% 50% 40% 30% 20% 10% Written Premium and Pre-tax Operating Income Peer Group* as a Percentage of Total P&C Industry 35% 22% 38% Est. Net Written Premium 64% Operating Income Top players continue to increase their share of industry written premium Leveraging pricing capabilities Top players are capturing a greater portion of industry profits Finding pools of profits in a traditionally difficult industry Creating efficiencies, reducing costs and building scale * Peer group defined as HIG, ACE, Allstate, AIG, Chubb, Cincinnati Financial, CNA, Geico, MetLife P&C, Progressive, Safeco, St. Paul Travelers and XL. Source: FirstCall, SNL Financial, Conning and Company data. 27

28 The Hartford will succeed by leveraging distinctive competencies in Personal Lines and Small Commercial (In billions) $12 $10 P&C Written Premium by Market Segment $10.5 By 2010, we expect small commercial and personal lines to account for 75% of premium $8 $6 $4 $2 $7.3 48% 52% 41% 59% These businesses have similar keys to success Competitive product offerings Granular, segmented pricing Strong agency management Technology enabled service and distribution $ Personal Lines Small Commercial Middle Market Specialty Commercial Other In 2006, small commercial and personal lines were put under common management 28

29 Personal Lines: We continue to see profitable growth opportunity in both AARP and Agency Written Premiums (In billions) $ % 98.6% $3.3 $3 $2.9 $ % $2 $1 $0 Personal Lines Written Premiums and X-CAT Combined Ratio $ % $ % Combined Ratio 100% 95% 90% 85% 80% Key Personal Lines Strategies Investing in increased marketing to a growing AARP membership base Broaden distribution through increased field presence and agency relationships Fine-tune underwriting pricing models and segmentation Enhance product development and speed to market Net Written Premium Combined Ratio 29

30 Small Commercial: As a market leader, The Hartford is pioneering segmented pricing Key Small Commercial Strategies Expanding risk appetite for new and existing business Small Commercial Written Premiums and X-CAT Combined Ratio Written Premiums (In billions) Combined Ratio 100% Increasing pricing granularity Increasing speed to market on new products $3 $2 96.5% $ % $ % $1.9 $ % $2.5 95% Focusing on customer service and ease of doing business $1 87.9% 90% Expanding distribution through efficient access to smaller agents $ Net Written Premium Cmbined Ratio 85% 30

31 Agency expansion: In today s pricing environment, our growth is driven by broader distribution reach The Hartford has a strong value proposition for our agents Broad product offering Ease of doing business Service support New agency appointments and expanded local presence are helping to reach under-penetrated markets Expanded regional offices to 30 Added over 60 new sales representatives and appointed more than 2,000 new agents in the last 18 months The Hartford expects to have over 9,000 agents by year-end ,000 8,000 6,000 4,000 2,000 0 Independent Agencies Selling The Hartford s P&C Products 6,300 7,400 9, Estimate 31

32 Middle Market and Specialty Commercial: Focus is on profitability not growth Larger accounts are most prone to the cyclicality of the overall market Growth opportunities are much more selective/opportunistic Must demonstrate underwriting discipline throughout the cycle We are willing to shed business if renewal pricing is not adequate 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% Middle Market and Specialty Commercial Written Premium Growth 1Q Q Q Q Q Q Q 2005 Middle Market Specialty Comm'l 4Q Q Q

33 RMS version 6.0 catastrophe model drastically increased modeled hurricane losses Catastrophe loss expectations will increase drastically in both Personal and Commercial Lines Pricing and capacity in vulnerable areas will be greatly impacted As insurers and rating agencies reassess coastal exposure, there will be rebalancing of portfolios and realignment of capital 150% 100% 50% 0% 300% 250% 200% Average Annual Loss Increase 75% Personal Lines 130% Commercial Lines Average Annual Loss Increase by Region 225% 150% 130% 135% 100% 50% 50% 80% 50% 50% 75% 95% 80% 33 Personal Lines Commercial Lines Source: Guy Carpenter Instrat Briefing July 18, Mid Atlantic Gulf Florida Southeast Northeast 0%

34 Property Casualty operations are executing to win through the cycle Managing catastrophe risk through disciplined underwriting and a multi-faceted risk transfer strategy Aligning Small Commercial and Personal Lines to enable profitable growth in a softening market Striving for a world-class sales and distribution organization Maintaining underwriting and pricing discipline in middle market and specialty businesses 34

35 The insurance industry is facing several macro-trends that challenge traditional models 3. Prudent risk-taking requires enterprise-wide risk management and disciplined capital management 35

36 Through ERM, we manage significant exposures and correlated risks across the enterprise The Hartford has a strong, ingrained risk management discipline Life operations Property and casualty operations HIMCO (investments) Enterprise risk management (ERM) provides the framework to: Aggregate and consistently manage risks across the enterprise Develop and share risk mitigation and risk transfer methods ERM facilitates the management of the company s overall risk profile and capital 36

37 A strong balance sheet provides capacity for prudent risk-taking 35% 30% 25% 20% 15% 31.9% Financial Leverage X-AOCI [2] 29.5% 28.1% 23.5% Enterprise Goal Low 20 s 20.0% 19.0% Q 2006 We have achieved our target capital margin and leverage ratio Capital margin is now $1 billion in excess of rating agency minimums We expect to generate an additional $500 million of capital resources in excess of needs in Please see Appendix for footnotes.

38 Why own The Hartford? 38

39 2006 is likely to be another strong year for earnings and book value growth at 15%+ ROE Book Value Per Share Excluding AOCI 10% CAGR $50.41 $ Expectations* Core earnings per diluted share is expected to be $ $8.80 $34.54 $37.77 $36.67 $43.55 Strong book value growth and 15%+ ROE Q06 Potential uses of excess capital Invest in growth Acquisitions Dividends Share repurchase * Assumptions for 2006 guidance are outlined in The Hartford s earnings press release dated 6/27/06. 39

40 The Hartford is well positioned to capitalize on future opportunities The Hartford is a diversified insurance and investment business with leadership in key markets Variable Annuities Small Commercial Group Benefits AARP Personal Lines Variable Life We are executing with discipline to deliver shareholder value and a strong balance sheet The Hartford is a leader in Enterprise Risk Management We have made strategic investments to capitalize on macrotrends in both life and property casualty Retirement initiatives 401(k) and mutual funds International Small commercial and personal lines 40

41 The Hartford Financial Services Group Keefe, Bruyette & Woods 2006 Insurance Conference

42 Footnotes [1] The Hartford uses the non-gaap financial measure core earnings as an important measure of the Company's operating performance. The Hartford believes that the measure core earnings provides investors with a valuable measure of the performance of the Company's ongoing businesses because it reveals trends in our insurance and financial services businesses that may be obscured by the net effect of certain realized capital gains and losses. Some realized capital gains and losses are primarily driven by investment decisions and external economic developments, the nature and timing of which are unrelated to the insurance and underwriting aspects of our business. Accordingly, core earnings excludes the effect of all realized gains and losses (net of tax and the effects of deferred policy acquisition costs) that tend to be highly variable from period to period based on capital market conditions. The Hartford believes, however, that some realized capital gains and losses are integrally related to our insurance operations, so core earnings includes net realized gains and losses such as net periodic settlements on credit derivatives and net periodic settlements on the Japan fixed annuity cross-currency swap. These net realized gains and losses are directly related to an offsetting item included in the income statement such as net investment income. Core earnings is also used by management to assess our operating performance and is one of the measures considered in determining incentive compensation for our managers. Net income is the most directly comparable GAAP measure. Core earnings should not be considered as a substitute for net income and does not reflect the overall profitability of our business. Therefore, the Hartford believes that it is useful for investors to evaluate both net income and core earnings when reviewing Company performance. A reconciliation of net income to core earnings for the periods presented herein is in the Investor Relations section of The Hartford s website at [2] Includes 75% equity credit on forward purchase contracts underlying the equity units excludes the impact of the CNA transaction. 42 F-1