The Hartford Financial Services Group June 13, 2007 Investor Day

Transcription

1 The Hartford Financial Services Group June 13, 2007 Investor Day The Hartford Financial Services Group, Inc.

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 March 31, 2007, 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. Information regarding these non-gaap and other financial measures is provided in the Investor Financial Supplement for the first quarter of 2007, in The Hartford s press release issued on April 26, 2007, and in the Investor Relations section of The Hartford s website at The Hartford Financial Services Group, Inc. 2

3 Today s Agenda 9:00 9:30 The Hartford Overview Ramani Ayer 9:30 10:00 Financial Overview David Johnson 10:00 10:20 Corporate Q&A Ayer & HIG Leadership 10:30-12:00 Property and Casualty Operations Dave Zwiener & Team Presentation and Q&A 12:00 1:00 Lunch in the Versailles and U.S. Paralympic Bronze Louis XVI Rooms (2 nd floor) Medalist Sandy Dukat 1:00 3:30 Life Operations Presentation Tom Marra & Team and Q&A 3:30 Wrap-up Ramani Ayer The Hartford Financial Services Group, Inc. 3

4 The Hartford Financial Services Group Ramani Ayer Chairman and Chief Executive Officer June 13, 2007 The Hartford Financial Services Group, Inc.

5 The Hartford is a diversified insurance and investment company $26.5 billion in 2006 revenues $2.7 billion of net income in % net income ROE in 2006 Innovative solutions for individual consumers and businesses 2006 Revenues 47% 53% Property and Casualty 47% 53% Life We help our customers create a secure and prosperous future by protecting their assets and building their wealth The Hartford Financial Services Group, Inc. 5

6 Diversification extends to sources of earnings and the profile of our customer base and risks 2006 Core Earnings by Source Protection Solutions 63% 37% Asset Management and Income Solutions Large Enterprises & Government 2006 Core Earnings by Customer Segment Small & Mid-size Businesses 24% 27% 49% Individuals & Families Capital Attribution by Risk Type International 10% Market risks 25% P&C losses & expenses (non-cat) 32% 12% 10% 11% Other Mortality & morbidity Natural & manmade catastrophe The Hartford Financial Services Group, Inc. 6

7 The Hartford s diversified business model benefits our shareholders Diversification provides more stable earnings and returns Is a positive factor in credit and financial ratings Facilitates financial discipline and dynamic capital redeployment if returns become inadequate in any one segment Improves the likelihood of sustaining growth in book value per share Diversification also enables us to act on profitable opportunities Capital from P&C initially fueled growth in life operations and provided the flexibility to fund the start-up in Japan A large capital base and diversified risk profile provide capacity for risk taking Enterprise risk management is key We consistently monitor and manage risk aggregations and correlations across the enterprise Capital allocation to businesses and product lines is based on a consistent view of risk and return The Hartford Financial Services Group, Inc. 7

8 The Hartford has a track record of building our franchise throughout various market cycles ($ billions) Total Assets Under Management Total P&C and Life Earned Premiums $133 $153 $174 $ % CAGR $198 $199 $250 $292 $323 $ % CAGR $11.9 $10.2 $10.8 $9.4 $9.0 $8.9 $8.3 $13.6 $14.4$15.0 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 The Hartford Financial Services Group, Inc. 8

9 Over time, profitable growth has driven double-digit increases in book value per share and competitive dividend yields Book Value Per Share (x-aoci) $57.83 $22.26 $24.68 $ % CAGR $31.35 $34.54 $37.77 $36.67 $43.55 $50.41 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 Time Period Ending 12/31/06 CAGR of Book Value per Share (x-aoci) Average Annual Dividend Yield 1 year 14.7% 2.0% 3 year 16.4% 1.7% 5 year 10.9% 1.9% 10 year 12.7% 1.7% The Hartford Financial Services Group, Inc. 9

10 Our long term goal is to deliver double-digit growth in book value per share plus dividends at a 13% - 15% ROE 25.1% Net Income ROE Return on Equity Core Earnings ROE (excl. unusual items*) Over the past 3 years, The Hartford s net income ROE averaged 15.9% 16.2% 14.5% 15.1% 10.1% 16.3% 15.4% 16.1% 13% Over 10 years, net income ROE averaged 13.4% Excluding unusual items, core earnings ROEs have been 13% or better 6.2% -0.8% * A reconciliation of Core Earnings as adjusted to Net Income can be found in footnote [1] in the appendix. Management incentives are aligned with shareholders Core earnings per share Return on equity Long term growth in book value per share plus dividends The Hartford Financial Services Group, Inc. 10

11 The Hartford s excellent track record has translated into strong total returns* for our shareholders 1-Year Total Return 3-Year Annualized Total Return HIG 19.8% HIG 18.1% S&P % S&P % S&P Financial 18.9% S&P Financial 12.7% S&P Insurance 21.0% S&P Insurance 10.5% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 5-Year Annualized Total Return 0.0% 5.0% 10.0% 15.0% 20.0% 10-Year Annualized Total Return HIG 11.5% HIG 12.3% S&P % S&P % S&P Financial 10.1% S&P Financial 10.6% S&P Insurance 7.8% S&P Insurance 8.8% 0.0% 5.0% 10.0% 15.0% * Total return data is calculated through 5/31/07 0.0% 5.0% 10.0% 15.0% The Hartford Financial Services Group, Inc. 11

12 We are competing from a position of strength as a market leader in many of our businesses The Hartford is among the top 5 in many business areas #1 in retail variable annuity assets under management in the U.S. and Japan A market leader in small commercial #2 in variable life sales #2 in group disability in force, #4 in group life insurance in force #5 commercial lines writer in the U.S. #5 in U.S. workers compensation direct premium #5 direct writer of personal lines in the U.S. through our AARP partnership We also have a rapidly growing presence in mutual funds, retirement plans and personal lines #9 in non-proprietary mutual funds sales in the U.S. #10 in new retirement plans sold #10 in total personal lines written premium (including Agency and AARP) The Hartford Financial Services Group, Inc. 12

13 Looking ahead, The Hartford has significant opportunities for continued organic growth We are a market leader in the two top retirement markets in the world We are uniquely positioned to become the premier solutions provider to small businesses and their owners We have broad and powerful distribution in independent channels and direct response The Hartford is a well-respected brand among consumers, intermediaries and business owners The Hartford Financial Services Group, Inc. 13

14 We are a market leader in the two top retirement markets in the world Life & Pension Premiums Rest of Europe 29% Rest of World 16% 3 UK 10% 1 Source: Sigma Swiss Re, 2006, Figures as of U.S. 26% Japan 19% A global retirement crisis is looming Aging populations Diminishing support from employers and government programs Increasing longevity The Hartford is well positioned with broad product offerings in the U.S. Annuities with lifetime income options Mutual funds Retirement plans Life insurance for estate planning and business succession In Japan, we are the market leader in variable annuities assets under management We also offer unit-linked bonds and pension products in the U.K. The Hartford Financial Services Group, Inc. 14

15 We are uniquely positioned to be the premier provider of insurance and investment solutions to small businesses 7.6 million U.S. Small Businesses Small business is a growth market Nearly 672,000 new businesses were formed in 2005, 12% higher than at the height of the dot-com era in 1996 Small businesses generated 60% to 80% of net new jobs over the past decade The Hartford has the full circle of protection and asset management solutions for small businesses, their owners, and employees Small commercial coverages Business owner s policies Group life and disability for employees 401(k) plans for sole proprietors and employees Life insurance for business continuity and estate planning The Hartford Financial Services Group, Inc. 15

16 The Hartford is a recognized leader in independent distribution with broad market reach The Hartford s Field Sales Teams 233 Personal Lines and Small Commercial Sales Representatives 417 retail investment products wholesalers (U.S. and abroad) 234 Life Insurance Account Execs 163 Group Benefits sales force 107 Retirement Plan Sales Directors 21 Sales Execs for Institutional Solutions Independent Distribution 9,800 P&C agents and brokers 1,500 broker-dealers and 500 banks in the U.S. 54 banks and securities firms in Japan Over 100,000 brokers and independent financial advisors in the U.S. 12,400 group benefits brokers and consultants The Hartford Financial Services Group, Inc. 16

17 We are the 5 th largest direct writer for personal lines through our strategic business partnership with AARP AARP exclusively endorses The Hartford s auto and home insurance A proven partnership AARP and The Hartford have been working together since 1984 Premiums have grown at a compound rate of 9% per year for the last 4 years to $2.6 billion With significant market potential Nearly 38 million members One American turns 50 every 8 seconds Our marketing with AARP creates millions of positive brand impressions each year to target audiences over age 50 The Hartford Financial Services Group, Inc. 17

18 The Hartford is a well-known and trusted name with consumers, intermediaries, and business owners The Hartford is the third most recognized logo among key insurance and financial services competitors based on a broad survey of consumers Small business decision makers have high aided awareness of The Hartford s P&C and group benefits lines State Farm Prudential The Hartford Logo Recognition 88% 81% 74% Source: 0 Knowledge Networks Small Business Decision Makers Awareness The Hartford s P&C The Hartford s Group Benefits 94% 93% Source: Brand Monitor 2006 Insurance and investment professionals who have worked with The Hartford are highly likely to recommend the company Active Intermediaries Intent to Recommend Highly Active Investment Brokers Active Life Brokers Best P&C Agents The nearly 200-year-old Hartford brand stands for strength, integrity and trust 90% 73% 81% Source: Brand Monitor 2006 The Hartford Financial Services Group, Inc. 18

19 An investment in The Hartford is an investment in. A diversified insurance and investment company with a strong track record of financial performance A market leader in multiple life and property and casualty markets with significant growth opportunities A disciplined manager of risks across the enterprise A prudent financial manager with a strong balance sheet and a disciplined approach to capital management An experienced management team that is ready to tackle the challenges of an increasingly competitive environment The Hartford Financial Services Group, Inc. 19

20 The Board has undertaken a thoughtful and orderly succession planning process Ramani Ayer Chairman and CEO David Johnson Chief Financial Officer Tom Marra President & COO David Znamierowski Chief Investment Officer John Walters President U.S. Wealth Management Liz Zlatkus President International Wealth Management and Group Benefits Neal Wolin President Property and Casualty Operations Alan Kreczko EVP & General Counsel Eileen Whelley EVP Human Resources The Hartford Financial Services Group, Inc. 20

21 The Hartford Financial Services Group David Johnson Chief Financial Officer June 13, 2007 The Hartford Financial Services Group, Inc.

22 The Hartford s strong balance sheet provides capacity for prudent risk-taking 40% 30% 20% 10% 0% Debt to Total Capitalization X-AOCI 35.3% 27.8% 23.8% 18.0% We have achieved our target capital margin and leverage Completed $800 million of share repurchase in the first quarter of 2007 We expect to generate at least an additional $500 million of capital resources in excess of needs in 2007 Capital will be deployed based on defined priorities Organic growth at 13%-15% ROE Opportunistic acquisitions Dividends Share repurchase The Hartford Financial Services Group, Inc. 22

23 At the end of 2006, The Hartford had $14.4 billion of total statutory capital HFSG Domestic Life Japan Property - Casualty $4.7 B $1.4 B $8.3 B The Hartford Financial Services Group, Inc. 23

24 Ongoing capital management is driven by rating agency requirements and distributable earnings Solvency Margin Ratios (SMR) Ratios of statutory surplus and earnings to targets usually calculated as a function of premiums, liabilities or assets in the business HIG capital goals (in aggregate) are calibrated to maintain AA ratings plus $1.5 billion capital margin Target Solvency Margin Ratios NAIC Life RBC = 300% S&P P&C CAM = 150% Distributable Earnings Statutory net income less the change in capital required to maintain target solvency margins (usually caused by either writing new business or external factors) The Hartford Financial Services Group, Inc. 24

25 We generated $1 billion in capital in 2006 and used it to raise dividends, repurchase shares, and solidify our capital margin GAAP Net Income $2, STAT Net Income 2,176 Other Surplus Benefits 525 Surplus to Maintain SMRs (858) Distributable Earnings $1,843 Common Dividends (464) (600)+ Debt Service (304) (250) Pension Contributions (400) (200) Core Capital Production $675 Sources / Uses: Net Effect of Securities Issuance $335 - Share Repurchase* (300) (500) so far Increased Capital Margin (500) * All share repurchases were completed during the first quarter of 2007 The Hartford Financial Services Group, Inc. 25

26 Forecasting distributable earnings can be challenging Statutory accounting is less predictable than GAAP GAAP accounting is accrual based, STAT is cash or solvency based STAT has more opportunity for mismatched valuation on assets and liabilities Equity markets will impact STAT capital under C3-Phase II Other surplus benefits are both volatile and unpredictable (similar to AOCI under GAAP) Rating agency models continue to be refined Distributable earnings are heavily linked to volume and mix of premium and assets The Hartford Financial Services Group, Inc. 26

27 The Hartford is a disciplined risk manager with an enterprise-wide view of risks We are employing increasingly sophisticated risk mitigation strategies Traditional and non-traditional risk transfer in P&C operations Hedging, reinsurance, and innovative product design in life operations Advancements in risk modeling are providing an in-depth view of the risks we face across the enterprise Enhanced capability to evaluate and aggregate risks (e.g., terrorism) Ability to project the risk profile of the business over multiple years Risk assessment is fully integrated in pricing, product design, and underwriting Economic capital is attributed to each business and product on a consistent basis for disciplined risk/reward analysis The Hartford Financial Services Group, Inc. 27

28 Changes in markets and deployment of additional risk management has slightly improved the impact of significant events on capital ($ millions) Scenario Est. After-tax Statutory Net Loss Additional Increase in Required Capital Today s Estimate of Total Impact on Capital Position 12/06 Estimate 15% U.S. Equity Market Drop* $200 $300 $500 $500 30% U.S. Equity Market Drop* $500 $1,000 $1,500 $1,600 Category 5 Florida Hurricane $625 $125 $750 $1,050 Terrorism Event $525 $100 $625 $600 * Best estimate of emerging regulatory and rating agency rules The Hartford Financial Services Group, Inc. 28

29 The Hartford s GAAP GMWB hedging program has performed well and continues to evolve $ millions Mar- 05 Apr- 05 May- 05 Jun- 05 Jul- 05 Volatility of After-Tax/DAC Realized Gain (Loss) $ Millions Volatility of After Tax/DAC Realized Gain (Loss) - Monthly Slippage Aug- 05 Sep- 05 Oct- 05 Nov- 05 Dec- 05 Jan- 06 Feb- 06 Mar- 06 After tax/dac Net Gain (Loss) post-hedging Apr- 06 May- 06 Jun- 06 Jul- 06 Aug- 06 Sep- 06 Oct- 06 Nov- 06 Dec- 06 Jan- 07 Feb- 07 Before tax Liability Gain (Loss) Mar- 07 GAAP economic hedge effectiveness continues to be very good We have made additional model enhancements in our GMWB FAS133 liability valuation model Capital markets inputs Actuarial assumptions on behavior Under current market conditions, the likely impact is an after-tax net capital loss that can not be hedged (similar to Dec. 2005) Continuing to analyze impact of adoption of FAS157 The Hartford Financial Services Group, Inc. 29

30 Our approach for DAC is likely to generate additional volatility in GAAP earnings In 2006, we initiated an annual comprehensive review of expected gross profits (EGPs) that impacts: DAC (deferred acquisition costs) Guaranteed minimum death and income benefit reserves And other SOP 03-1 items This study will be completed annually in the third quarter Key assumptions underlying projected EGPs include the impact of expected equity market performance, lapses and other policyholder behavior, mortality, etc. Total Life DAC balance as of 3/31/07 was $9.2 billion Additional sensitivity disclosures on the DAC unlock will be included in 10-Q for the second quarter The Hartford Financial Services Group, Inc. 30

31 We actively seek to reduce potential volatility from asbestos and environmental liabilities ($ billions) $8.0 $6.0 $4.0 $2.0 $0.0 Gross and Net Reserves for Asbestos and Environmental $6.4 $4.2 Gross $4.8 $2.9 Net $4.3 $2.7 $3.6 $ Asbestos and environmental reserves have declined significantly as claims have been paid or settled Since 2003, the majority of our payments have been related to agreements that fully resolve our exposure to the insured Net reserves as of 12/31/06 were 15% of total P&C net reserves compared to 26% in 2003 Risks associated with reinsurance recoveries also declined significantly with the 2006 Equitas settlement Comprehensive ground-up reviews for A&E and reinsurance recoveries completed annually The Hartford Financial Services Group, Inc. 31

32 We have completed our second quarter reserve reviews in P&C Other Operations Asbestos review complete: No net reserve action Reinsurance recoverable review complete: No net reserve action We will record a $99 million pre-tax charge primarily related to an adverse arbitration decision vis-à-vis a former ITT captive insurer Total reported P&C Other Operations 2Q underwriting loss is expected to be $120 - $125 million pre-tax The Hartford Financial Services Group, Inc. 32

33 Capital flexibility and ERM are core strategic assets for The Hartford Capital management is shifting from building capital strength to deploying capital resources Future developments in ERM and economic capital should benefit HIG over the intermediate term In the absence of attractive alternatives, share repurchases should accelerate in the future The Hartford Financial Services Group, Inc. 33

34 Corporate Q&A Panel The Hartford Financial Services Group, Inc.

35 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 is in the Investor Relations section of The Hartford s website at A reconciliation of net income to core earnings for follows: YEAR ENDED DECEMBER 31, (in millions, except for per share data) Net Incom e (loss) $ 1,332 $ 1,015 $ 862 $ 974 $ 507 Less: Net realized capital gains (losses) (1 64) Less: Cum ulative effect of accounting change (34) Less: Tax related item s Less: Restructuring (11) Less: Septem ber 11th (4 40) L ess: E qu ity G ain on H LI IP O Core earnings, as adjusted for the foregoing item s $ 749 $ 816 $ 837 $ 936 $ 1,026 W eighted average com m on shares outstanding and d ilu tiv e p o ten tial c o m m o n sh a res Diluted earnings per share Net Incom e (loss) $ 5.58 $ 4.30 $ 3.79 $ 4.34 $ 2.10 Less: Net realized capital gains (losses) (0.68) Less: Cum ulative effect of accounting change (0.14) Less: Tax related item s Less: Restructuring (0.05) Less: Septem ber 11th (1.82) L ess: E qu ity G ain on H LI IP O Core earnings, as adjusted for the foregoing item s $ 3.14 $ 3.45 $ 3.68 $ 4.17 $ 4.25 The Hartford Financial Services Group, Inc. 35 F-1