Standard & Poor s Insurance 2004 Seminar, Structuring for Success Ramani Ayer Chairman and Chief Executive Officer Bernstein s Strategic Decisions Conference David M. Johnson June 3, 2004 Chief Financial Officer
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 1995. These include statements about our future results of operations. We caution investors that these forwardlooking 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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 and the 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 financial measures is available in the Investor Relations section of The Hartford s website at www.thehartford.com. 1
HIG Financial Performance ($ mil) Total Revenues ($ mil) Operating Income [1] $20,000 $18,000 $16,000 $14,000 $12,000 13,945 15,312 15,980 16,417 18,733 $1,500 $1,250 $1,000 $845 $961 $1,078 $1,185 $1,485 $10,000 $8,000 $6,000 $4,000 $2,000 4,331 5,732 $750 $500 $250 $340 $501 $- 1999 2000 2001 2002 2003 Q1 03 Q1 04 $- 1999 2000 2001 2002 2003 Q1 03 Q1 04 Total Revenues Operating Income ($ bil) $300 $250 Total AUM 250 264 18% 14.9% 15.2% 15.0% 15.2% ROE [2] 13.8% 13.1% 14.8% 14.3% 16.8% 19.1% $200 173 183 199 199 205 12% 11.0% 9.4% $150 6% 6.5% $100 $50 $- 1999 2000 2001 2002 2003 Q1 03 Q1 04 0% -6% -0.9% 1999 2000 2001 2002 2003 5 Year Avg. Rolling Q1 04 Total AUM Operating Income Net Income Please see Appendix for footnotes. 2
Capital Strength and Risk Management 40.0% The Hartford Insurance Financial Strength Ratings Standard A.M. & Poor s Best Fitch Moody s Hartford Fire AA- A+ AA Aa3 Hartford Life Insurance Company AA- A+ AA Aa3 Hartford Life & Accident AA- A+ AA Aa3 Hartford Life & Annuity AA- A+ AA Aa3 Hartford Life KK AA- - - - 30.0% 32.1% 29.4% 28.1% 26.5% Target Range 20.0% 20.5 18.4 20.3 20.7 10.0% 0.0% 2001 2002 2003 Q1 04 Please see Appendix for footnotes. Debt-to-Total Capitalization [3] Debt, Equity Units and Trust Preferred Securities-to-Total [3, 4] Capitalization 3
The Hartford Balanced Portfolio A Balanced Portfolio of Commercial and Consumer Businesses Balanced Sources of Earnings 2003 Operating Income [5] P&C 49% Life 51% Risk 59% Equity-Linked 41% Large Enterprises & Government 19% Individual 49% Small and Middle Markets 32% 4
Life Financial Performance Operating Income [6] AUM $1,000 $800 1469 1320 $774 $761 $846 1600 1400 $220 $200 210 223 ($ in billions) $600 $425 1229 $515 $647 1148 880 1112 1200 1126 1000 ($ in billions) $180 $160 155 168 165 $400 848 $256 800 $140 145 $200 $176 600 $120 $0 1998 1999 2000 2001 2002 2003 Q1 03 Q1 04 400 $100 1999 2000 2001 2002 2003 Q1 04 HLI S&P 500 Please see Appendix for footnotes. 5
Property & Casualty - Financial Performance $800 Operating Income [7] $830 ($ in millions) $700 $600 $500 $400 $610 $559 $531 $509 $597 $297 $300 $209 $200 $100 $0 1998 1999 2000 2001 2002 2003 Q1 03 Q1 04 113.0 Combined Ratio 110.0 107.0 104.0 101.0 98.0 95.0 92.0 89.0 1997 1998 1999 2000 2001 2002 2003 1Q04 Industry Avg Ongoing P&C Please see Appendix for footnotes. 6 * Source: Industry estimate by A.M Best Co.
Capital Resources In May 2003, The Hartford articulated a year-end 2004 goal of $500-$600 million of statutory capital in excess of rating agency AA category FSR targets We have already reached that goal in 2004 Voluntarily funded $312 million to pension plan in April 2004 Reducing financial leverage, achieving Moody s debt-to-cap of 26.5% at end of March 2004 Will retire $200 million of HLI senior notes in June 2004, positioning The Hartford for continued debt-to-cap improvement for the balance of 2004 The Hartford is not currently contemplating a share repurchase program or an unusual dividend increase in 2004 7
Asbestos Update In May 2003, The Hartford reported the outcome of a thorough and comprehensive grounds-up study of asbestos exposures, adding $2.6 billion to net asbestos reserves Methodology represented best practice (as evaluated by an internationallyranked actuarial firm) for a grounds-up asbestos study In first quarter of 2004, we re-performed our grounds-up analysis of our gross asbestos exposure Evaluation indicated no change in overall required gross asbestos reserves We are evaluating reinsurance recoverables for all older, long-term casualty liabilities in the second quarter 8
Asbestos Update Summary of Gross Asbestos Reserves Number of Accounts [8] As of Most Recent Reserve Evaluation [ 11] All Time Paid Total Reserves % of Asbestos Reserves All Time Ultimate 3 Year Gross Survival Ratio [ 9 ] [10] (in years) 3 Year Gross Survival Ratio [ 9 ] [ 10 ] before MacArthur (in years) M ajor asbestos defendants Structured settlements 7 $ 257 $ 358 6 % $ 615 9.1 9.1 (includes 2 Wellington accounts) Wellington 31 682 281 5 % 963 5.3 5.3 (direct only) Other major 27 178 443 8 % 621 27.3 27.3 asbestos defendants No known policies 5 (includes 3 Wellington accounts) Accounts with 106 369 1,210 20 % 1,579 16.7 16.7 future exposure > $2.5 Accounts with 930 152 135 2 % 287 12.9 12.9 future exposure < $2.5 MacArthur 1 32 1,150 20% 1,182 settlement Unallocated [12] 100 896 15 % 9 96 Total direct 1,7 70 4,473 76 % 6,243 22.0 16.8 Assumed 560 931 16 % 1,491 15.5 15.5 reinsurance London market 373 480 8 % 853 13.6 13.6 Total 2,703 5,884 100% 8,587 19.7 16.1 First Quarter 2004 MacArthur payments 1 1,162 ( 1,162 ) First Quarter 2004 Activity, excluding MacArthur 82 (78) 4 Total as of 3/31 /04 [ 10] $ 3,9 47 $ 4,644 $ 8,591 6.6 14.8 9
The Variable Annuity Franchise $20 $15 $10 $5 $6.9 Individual Annuity - Sales CAGR = 11.5% $11.6 $9.8 $10.2 $10.9 $10.7 $10.0 $10.0 $16.5 Growth = 34.3% $3.5 $4.7 $120 $100 $80 $60 $40 CAGR = 16.2% Individual Annuity - Assets $97.5 $89.0 $87.2 $84.2 $74.9 $70.8 $56.3 $41.7 $29.4 $101.7 $20 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 1Q 03 1Q 04 ($ in billions) $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 1Q 04 10
The Variable Annuity Franchise 1Q 04 Market Share of Industry VA Sales by Channel Bank Channel 1. Hartford 33.8% 2. Pacific Life 12.6% 3. Equitable 7.5% 4. Nationwide 6.4% 5. AIG/Sun America 4.9% Regional B/D Channel 1. Hartford 21.2% 2. Lincoln National 16.5% 3. ING 7.6% 4. Nationwide 6.0% 5. Met Life 5.4% Wirehouse Channel 1. Hartford 17.6% 2. Met Life 13.3% 3. Equitable 12.3% 4. Manulife 8.3% 5. ING 8.2% Independent Channel 1. Hartford 15.3% 2. Prudential 9.7% 3. Pacific Life 9.3% 4. Met Life 9.1% 5. ING 7.5% Variable Annuity Net Flows 4Q02 $1,382M 1Q03 $1,338M 2Q03 $2,465M 3Q03 $2,268M 4Q03 $1,638M 1Q04 $2,201M Source: VARDS/Hartford 11
The Variable Annuity Franchise Industry Variable Annuity Market Share The Hartford #1 Since 1993 1Q 04 Market Share of Industry VA Sales Hartford 13.37% TIAA-CREF 9.69% Met Life Equitable AIG/SunAmerica Pacific Life ING Prudential Lincoln National Manulife 6.65% 6.59% 5.51% 5.29% 4.97% 4.61% 3.76% 8.58% Change in Market Share vs 1Q 03 Change in Market Share vs 1Q 02 Hartford 1.71% 5.02% TIAA-CREF -1.36% -0.77% MetLife 1.18% 3.06% Equitable -1.27% 2.79% AIG/Sun America 0.43% -1.05% Pacific Life 1.22% 1.55% ING 0.93% -0.14% Prudential 1.55% 0.57% Lincoln National 1.75% 0.77% Manulife 0.54% -0.06% Source: VARDS (Ranked by New Sales) YTD 3/04 12
The Variable Life Franchise Individual Life Net Income ($ in millions) 160 140 120 100 80 60 40 20 0 $37 $44 1995 CAGR = 18% 1996 $71 $65 $56 1997 1998 1999 Notes: Excludes impact of September 11 th, 2001 of $3m. Includes Fortis results as of April 1, 2001 $79 2000 $124 $133$143 2001 2002 2003 250 $32 $34 1Q 03 1Q 04 Assisted Sale Life Sales Offices Broad Distribution Wholesale Wirehouses Regional Firms Banks Independent Broker Dealers Life Agents P & C Agents Total Variable Life Sales* as of Year End 2003 35 offices 200 Sales Professionals 10 Inside Sales Support Among Top shelf space in focus firms 54% of ILD sales are from VL products Premiums in Millions 200 150 100 50 0 * Tillinghast Value Survey Hartford Life Pacific Life 13 IDS Life Nationwide Life Equitable MetLife Allstate Financial Prudential Financial Lincoln National ING Life
The Group Benefits Franchise Net Income $160 $148 $140 $128 (in millions) $120 $100 $80 $60 $40 $58 CAGR = 17% $71 $79 $90 $108 Growth = 38% $34 $47 $20 $0 1997 1998 1999 2000 2001 2002 2003 1Q 03 1Q 04 A/T Profit Margin 4.2% 4.5% 4.5% 4.7% 5.0% 5.6% 6.4% 5.9% 5.1% (excluding buyouts) 14
The Group Benefits Franchise Group Benefits 2003 Market Share Disability* Life** Market Market UnumProvident Hartford Pro-Forma Hartford MetLife Standard CIGNA Prudential CNA Assurant (Formerly Fortis) Guardian Aetna Rank 1 2 2 3 4 5 6 7 8 9 10 Share 26.0% 14.2% 9.3% 9.2% 7.3% 5.5% 5.5% 4.9% 3.3% 2.7% 2.6% MetLife Prudential UnumProvident CIGNA Aetna Hartford Pro-Forma Hartford Minnesota Life New York Life Standard ING ReliaStar Rank 1 2 3 4 5 6 6 7 8 9 10 Share 24.5% 14.5% 8.8% 7.0% 6.5% 6.4% 4.8% 4.4% 3.4% 3.0% 2.7% CNA 15 1.5% Source: LIMRA s U.S. Group Disability and Life Sales and In Force: 2003 Annual Results * Includes LTD & STD Fully Insured Premiums ** Excludes BOLI, COLI, TOLI 15
The Business Insurance Franchise 110 105 100 95 90 85 Business Insurance Combined and Expense Ratios 35% 34.4% 105.4% 104.7% 34 33.2% 33.5% 101.2% 33.0% 33 98.7% 32.7% 97.0% 95.7% 32 31.8% 92.4% 31 30.3% 30 1998 1999 2000 2001 2002 2003 1Q04 Combined Ratio* Expense Ratio ($ in millions) $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 $2,200 $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 Small Commercial Net Written Premium 18% CAGR $1,447 $1,169 $971 $1,862 $1,678 17% growth $480 $560 1999 2000 2001 2002 2003 1Q03 1Q04 Middle Market Net Written Premium $1,439 $1,256 $1,236 14% CAGR $2,095 $1,734 13% growth $510 $576 1999 2000 2001 2002 2003 1Q03 1Q04 * 2004 combined ratio excludes the impact of the Q1 reserve actions and prior year development. 16
The AARP Franchise Well positioned to win with unique product and service capabilities Net Written Premium 2,000 11% CAGR 1,500 (in millions) 1,000 10% 500 0 1999 2000 2001 2002 2003 1Q03 1Q04 17
Product Development The Mutual Funds Example $60 $50 $46.0 2003 Sales for Select Distributors VA Sales ($ in billions) $40 $30 $26.0 $21.2 MF Sales $20 $10 $0 $7.7 $7.4 $5.8 $2.5 $3.6 $3.8 $2.9 $2.7 $0.6 $1.3 $1.8 Distributor 1 Distributor 2 Distributor 3 Distributor 4 Distributor 5 Distributor 6 Distributor 7 Hartford VA Share 8% 51% 18% 23% 20% 60% 39% Hartford MF Share 0.1% 5% 0.5% 1% 2% 2% 2% Hartford Mutual Funds Top Selling Funds In 2003 5 Yr. Lipper Qtle Ranking Fund 2003 Sales 2003 Return Capital Appreciation $955 M 40.40% 1 Mid Cap $723 M 35.84% 1 Dividend & Growth $556 M 25.66% 2 Inflation Plus $439 M 6.68% N/A Advisers $365 M 17.85% 2 Global Leaders $211 M 34.86% 2 Total Return Bond $186 M 7.14% 1 High Yield $183 M 24.29% 2 Stock $170 M 25.34% 2 Growth $122 M 32.60% 1 18
Competitive Edge Outstanding Customer Service Unprecedented eight consecutive DALBAR annuity service awards Introduced Group Benefits Customer Bill of Rights 90% or more of Group Benefits claimants completely/mostly satisfied with STD & LTD service for the 5th straight quarter Bourget Claimant Satisfaction Survey 100% 90.4% 90.8% 90.1% 88.1% 89.4% 90.2% 90.9% 91.7% 80% 2002 2003 60% 40% 1st Qtr 2nd Qtr Three Individual Life DALBAR awards for outstanding service 19 3rd Qtr 4th Qtr
Property & Casualty Industry Margins Auto Pricing & Loss Costs, 2000-2004 Homeowners Pricing & Loss Costs, 2000-2003 12.0% 30% 20% 8.0% 10% 4.0% 0% -10% 0.0% -20% -4.0% 2000 2001 2002 2003 1Q04 Sources: Bureau of Labor Statistics, ISO Fast Track Written Pricing -30% 2000 2001 2002 2003 Loss Costs Source: ISO Fast Track Workers Compensation Pricing & Loss Costs, 1998-2003 Commercial Property Pricing & Loss Costs 2000 2003 50% 20% 15% 10% 5% 0% 40% 30% 20% 10% -5% 0% -10% -10% -15% 1998 1999 2000 2001 2002 2003-20% 2000 2001 2002 2003 Source: NCCI 20 Source: ISO Trend Circular
Competitive Edge Product Development - Xpand Enhance product offerings and risk selection through segmentation Customer Revenue New Select Customer $5m $10m $15m $500M Select Customer $35 billion market Select Customer Xpand $22 billion market Middle Market $47 billion market Business Owners policy product for larger risks Dedicated underwriters specializing in this size market Local sales support Home product rollout in 36 states by end of 2004 New Web-based submission tool ICON 2.0 21
Competitive Edge Product Development - Dimensions Definition Granularity How many pricing cells are there? Pricing sophistication Dispersion Interactions How many of your risks receive the same rate? How much insight is extracted by using variable interactions? One or more of these 4 factors need to be improved to increase pricing capabilities Territory Credit Occupation Military Variables How innovative are the variables? Source: McKinsey & Company 22
Competitive Edge Product Development - Dimensions Significantly broadens underwriting capability Private Passenger Auto Insurers Ranked by Underwriting Sophistication Illinois 1Q04 Rank Company Granularity Dispersion Interactions Variables Average 1 Progressive 4 1 3 2 2.50 2 Hartford 3 1 3 0 1.75 3 Geico 1 3 1 2 1.75 4 Allstate 1 1 2 2 1.50 5 Safeco 2 1 2 1 1.50 6 MetLife 3 2 0 1 1.50 7 Travelers 2 3 0 0 1.25 8 Farmers 1 2 0 1 1.00 9 State Farm 0 2 0 1 0.75 10 Nationwide 0 1 0 1 0.50 Source: McKinsey & Co., InsurQuote, Lehman Brothers New policies (000 s) 90 80 70 60 50 40 30 20 10 0 Dimensions Product Cumulative New Business Impact Apr 03 Sept 03 Dec 03 Mar 04 Apr 04 23
Dimensions Update 12 Home Dimensions States 36 Auto Dimensions & QTI States Sales have risen 250% increase in Auto policies in Dimensions states through 12/31/03 Early indication of increased Auto sales attributed to cross sell from Dimensions Home Agents embrace QTI* One common system for standard auto, nonstandard auto, home 90% of standard new business arriving electronically * Quote to Issue as of 5/11/04 24
Competitive Edge Local Market Presence Increased local presence and enterprise growth strategy positions us as a market leader Recent Developments: Solidified our position with existing agents by establishing the Regional Vice President (RVP) as single point of contact Increased local presence in 13 locations Hartford presence as of mid-2001 (14) Strengthened presence in the middle of the country Increased local market presence to date (13) Added Sales Staff (15) 25
Projected 2004 Operating Income EPS Range Low High Earnings per share $ 6.30 $ 6.60 Enterprise Goals Double digit diluted operating income per share growth Operating return on equity of 13% to 15% Capital cushion and de-levering the balance sheet 26
Appendix [1] In order to provide a consistent basis of comparison, this excludes the impact of realized gains and losses, goodwill amortization of $8, $25, and $52 for 1999-2001, tax benefits of $26, $130, $76 and $30 for 2000-2003, September 11, 2001 terrorist attack of $440, Bancorp Services litigation charges of $11 and $40 in 2002 and 2003, the 2003 asbestos reserve addition of $1,701 and severance charges of $27 in 2003. [2] Operating income ROE excludes September 11 impact, asbestos reserve addition and Accumulated Other Comprehensive Income (AOCI). Results for years 1999-2003 also excludes unusual tax benefits, Bancorp litigation charges, severance charges and goodwill amortization. Net income ROE excludes AOCI. [3] 2003 excludes impact of the CNA transaction. Also excluded from all years are fair market value adjustments related to interest rate swaps. [4] 2002 & 2003 include 75% Moody's equity credit on Convertible Securities. [5] Excludes asbestos reserve addition of $1,701. [6] Excludes unusual tax benefits for years 2000, 2001, 2002 and 2003 of $32, $130, and $76 and $30, respectively. Excludes Bancorp Services, LLC litigation costs of $40 and $11 in 2003 and 2002, respectively. For 2002, Life includes $8 after-tax benefit due to favorable development related to Life s September 11 Terrorist Attack exposure. For 2001, Life excludes $20 after-tax expense due to September 11 Terrorist Attack. The years ended 1998, 1999, 2000 and 2001 exclude after tax goodwill amortization of $1, $4, $4 and $16, respectively. [7] Excludes goodwill amortization of $4, $4, $4 and $3 for 1998-2001, September 11, 2001 Terrorist Attack of $420, the 2003 asbestos reserve addition of $1,701 and severance charges of $27 in 2003. [8] An account may move between categories from one evaluation to the next. Reclassifications were made as a result of the reserve evaluation completed in the first quarter of 2004. There was no impact on total all-time paid losses or total reserves. [9] Survival ratio is a commonly used industry ratio for comparing reserve levels between companies. While the method is commonly used, it is not a predictive technique. Survival ratios may vary over time due to numerous factors such as large payments due to the final resolution of certain asbestos liabilities, or reserve re-estimates. The survival ratio presented in the table is computed by dividing the recorded reserves by the average of the past three years of payments. The ratio is the calculated number of years the recorded reserves would survive if future annual payments were equal to the average annual payments for the past three years. The 3-year gross survival ratio as of March 31, 2004 is computed based on total paid losses of $2,105 for the period from April 1, 2001 to March 31, 2004. All other 3-year gross survival ratios presented are based on total paid losses for the 3-year period ended December 31, 2003. [10] As of March 31, 2004, the one year gross paid amount for total asbestos claims is $1.5 billion resulting in a one year gross survival ratio of 3.1. If the ratio was calculated without considering the $1.16 billion in payments for MacArthur in the first quarter of 2004, the one year gross survival ratio would be 13.7. [11] The information presented by account category reflects the first quarter 2004 reserve evaluation of gross asbestos losses incurred as of December 31, 2003. [12] Includes closed accounts, exclusive of Major Asbestos Defendants, and unallocated IBNR.