Hartford Financial Services Group 2008 Guidance Update Call Transcript

The Hartford Financial Services Group (HIG)

2008 Guidance Update Call

December 10, 2007 10:00 am ET

Executives

Ramani Ayer – Chairman & CEO

Tom Marra – President & COO

Neal Wolin – President & COO, P&C Operation

Liz Zlatkus – Co-COO, Life Operations

John Walters – Co-Coo, Life Operation

David Johnson – CFO

Alan Kreczko – Executive Vice President & General Counsel

J.R. Riley

Analysts

J. Paul Newsome – A.G. Edwards

Tom Gallagher – Credit Suisse

Thomas Cholnoky – Goldman, Sachs & Co.

Jeffrey Schuman – Keefe, Bruyette & Woods, Inc.

Bob Glasspiegel – Langen McAlenney

Eric Berg – Lehman Brothers

Ed Spehar – Merrill Lynch

Nigel Dally – Morgan Stanley

Dan Johnson – Citadel Investment

Presentation

Operator

Good day ladies and gentlemen. At this time I would like to welcome everyone to The Hartford investor conference call. (Operator Instructions) Mr. Riley, you may begin your conference.

J.R. Riley

Thank you very much and good morning. On behalf of the management team at The Hartford, I’d like to welcome you and thank you for joining our December investor call. Earlier this morning we issued a press release announcing our 2008 earnings guidance. A copy of that press release, along with a version of today’s slide presentation can be found at the Investor Relations’ section atThe Hartford website atwww.thehartford.com.

Before we get into today’s agenda, I’d like to cover a few items. First I need to remind you that we will make certain statements during this meeting 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 The Hartford’s Quarterly Report on Form 10-Q for the quarter ended September 30, 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 third quarter of 2007 and in the Investor Relations section of The Hartford’s website at www.thehartford.com.

Now moving to slide three, here’s a brief look at what we have in store for this morning. Ramani Ayer, our Chairman, CEO will kick off the meeting with some opening remarks. Following Ramani is Tom Marra our President and COO. Tom will provide a review of The Hartford’s 2007 performance along with a summary of key 2008 priorities for both our Life and P&C Operations. Then we’ll turn the microphone over to Neal Wolin, President and COO of our Property Casualty Operations and Liz Zlatkus and John Walters Co-Chief Operating Officers of our Life Company. Neal, Liz and John will provide you with more detail on our operating plans and strategies. Wrapping up the formal presentation is David Johnson, The Hartford’s Chief Financial Officer. David will cover earnings guidance as well as an update on FAS 157, our fourth quarter investment portfolio performance as well as capital management. I would like to also mention, participating on today’s call is Alan Kreczko, General Counsel of The Hartford.

As you listen to the speakers, please jot down your questions because we’ll have plenty of time for Q&A following the prepared comments. Now I’d like to turn the call over to Ramani Ayer. Ramani?

Ramani Ayer

Thank you J.R. Good morning and thank you for joining us today. Our purpose here today is to provide you with our guidance for next year as well as review the key priorities for each of our lines of business. But before jumping into the operating outlooks, I’d like to give you some insight as to how we see the environment and how we intend to capitalize on our key opportunities and challenges.

We’re entering 2008 from a position of great strength. We have delivered strong fundamental performance to date in 2007 with each of our businesses contributing to our great results. We have also been fortunate with benign catastrophes, a positive DAC unlock and a better than expected net income for this year.

Our strong businesses and experienced management team will continue to serve us well into 2008. Our plan is to grow the businesses in the areas where it makes sense; where we can meet or exceed our target returns. But before getting into the operating portion of the presentation, I’d now like to spend a few moments on a couple of key themes for The Hartford.

By now you’ve all heard me talk about the tremendous opportunity for us in the retirement space. On January 1, 2008 the U.S. will hit a major milestone. The first of the baby boomer population will be eligible to begin collecting Social Security Benefits. We believe The Hartford is very well positioned from a brand identity, product and distribution perspective to serve the nation’s growing retirement needs. We view this market in three phases and our plan for next year will help us capitalize on the opportunity in each phase.

In the accumulation phase, The Hartford has been rapidly expanding its mutual fund and retirement plans offerings and we intend to continue this effort. These businesses are among our fastest growing segments. I’m also pleased with their performance in 2007 and I’m optimistic about the opportunity for 2008 and beyond.

In the income phase, insurers are the only companies today giving a product that can actually guarantee income for life. The Hartford can do this and deliver on our promises because we understand risk, we understand longevity and we understand what our customers need. We believe the market for the guaranteed products will accelerate in the future as the baby boomer population ages and looks to ensure they have a dependable source of income in their retirement.

And lastly, as baby boomers age they will be increasingly looking for estate planning assistance and life insurance continues to be one of the most attractive vehicles for fulfilling this need.

Moving internationally, we continue to see Japan as a significant opportunity. Though the velocity of facet in the Japan variable annuity market is much faster than what we saw in the U.S., it is still in its infancy. Our plans for next year will capitalize on our strong wholesaling and distribution as well as our product development initiatives. And while FIEL is presenting some short-term challenges, it will help in creating a more educated and sophisticated financial consumer in Japan. We’re bullish on this market for the long-term.

In the property and casualty space, industry profitability has been at an all time high. It looks like 2007 will be another very strong year for the industry and that this trend may continue into 2008. That being said, we do expect competition to be intense with attractive opportunities in certain segments of the market. The industry has been attentive to maintaining their books of business, while fighting to attract and write new business. Meanwhile, lost cause trends have moderated and are not as favorable as they were over the past couple of years. With investment income likely to be less of a contributor to industry results in 2008 than it did in recent years, we expect that companies will place an even greater focus on underwriting discipline.

This environment plays well to The Hartford’s strengths. We intend to capitalize on the market opportunities and are planning for growth in personal lines and small commercial. Our underwriting performance in these lines has been excellent and we remain disciplined and focused on maintaining our target returns in the more competitive middle market and specialty commercial lines.

Our discussion of 2008 is not complete without a comment on the credit and equity markets. From where I sit as head of a large diversified investment insurance company, clearly we have a perspective on the market’s performance. We have a strong team of professionals running our investment management company and believe the portfolio is [prudely] constructed in a manner that supports the fundamental operation of our businesses. But that doesn’t mean we’re immune to the volatile affects of these markets. You saw that in the third quarter and David Johnson later in this call, will discuss our outlook for the fourth quarter.

That being said, none of this is material to our strong capital position and we are confident The Hartford will continue to provide shareholders with long-term value. With that, let me turn it over to Tom to run through our operating outlook for 2008. Tom?

Tom Marra

Thank you Ramani. Good morning everybody. I’m going to start on page five or its page six rather and which is a basic summary of our 2007 performance through the third quarter. Obviously we are very pleased with how the company has performed. We’ve had all core businesses operating successfully this year. As you can see our growth, net income and core earnings were strong. The third quarter did include the DAC unlock affect. Book value per share is up; (x-AOCI) is up 12% to $62.53 at the end of the third quarter. A measure we have been looking at more recently is what we’ll call the “all in net income” ROE so capital gains and loses go against this measure and that was a very strong 17.1% for the 12 months ended at the third quarter.

Interestingly if you look over the past 10 years, that “all in net income” ROE is 13.4% so even over that 10-year period with all the things that are measured including our strengthening of the [inaudible] reserves, and all the market events over 10 years, we’ve enjoyed a 13.4% return on equity all in.

So moving to page seven, this is a different way of looking at our assets under management, where we’re looking at our retail retirement and investment operations in kind of one grouping. As you can see over this three-year period we’ve had a 17% growth rate in this AUM. We decided to look at it this way, in that, in some sense these businesses all came from the same origin. Certainly in the U.S. our success with the annuity business led to our expansion into mutual funds in 1996, which has been a big part of that overall growth. And then we have viewed our international foray as an export operation where we’re exporting our VA business model to places like Japan and the U.K. So, these are not the way we present our business segments, but I think if you look at it from a related standpoint in that they’re all in the retail investment asset management and retirement space, it’s a good growth story.

If you turn to page eight, I’m going to just briefly cover the 2008 priorities for Hartford Life. Liz and John are going to cover these in greater detail. Obviously we intend to build out our retail product position in the U.S., Japan and the U.K. In businesses such as group benefits and individual life underwriting, we’re going to maintain the discipline in our claims excellence and group benefits, which has led to many, many years of success with that business. We are looking to really expand our international presence through both exploring new countries and expanding product lines in countries where we already exist. Liz and John will cover more on that.

Moving to page nine, we do have a very strong presence in the property casualty businesses led by our long-term brand and relationships with top agents and brokers. Our AARP, Auto and Home Owners program has been a top performer. This is an exclusive arrangement that we’ve renewed through 2020 which is fantastic, and we have a market distinction in the small commercial business. How are we playing the current market cycle? As you would expect we are playing it intelligently, picking spots and then driving business from there and driving it aggressively where we can get our margins. I am pleased to say that we are getting our margins in each of the business segments that either meet or exceed our return targets.

Looking at page 10, I’ll actually leave this for Neal to go over the property casualty detail. What I thought I would do in my concluding remarks is – having been on the job now for six months as Chief Operating Officer, give you areas where I look to the future as to where we can build out our business.

First as Ramani mentioned, the retirement space is just a massive opportunity for our entire industry. I think it’s not an overstatement to say the next 10 to 25 years are going to be boom years for the retirement industry both in the U.S. and abroad. Also, as Ramani mentioned, I think the insurance industry, with our ability to offer guarantees particularly for lifetime income, is going to position the insurance industry and companies such as ours in the seat to really get the most out of this retirement opportunity. For The Hartford also, international is going to be a big part of the next several years’ agenda. We are pleased with the results and we’re prepared to invest more in the future, as I mentioned both in new countries and [wide] extensions. On thing you’ll see for the first time today is that Liz Zlatkus will show numbers of our recent success with our U.K. program, which is really coming on like gangbusters. We’re pleased with that.

Our personal lines are going to be another area of focus for us. The AARP franchise is a real stalwart franchise and we have a growing position in agency personal lines and we’re going to find new ways to continue that growth and to grow further into overall personal lines. It’s a great compliment to the overall company. And finally, another agenda item or opportunity is we have real cross-sell opportunities that a lot of us at the company are putting renewed focus on. A great example of this is in the small business arena where we offer a small commercial group life and disability 401(k) and individual life business planning. We’re leaders in each of those, but that’s through separate plans of attack, and while we’re going to continue to operate those organizations somewhat independently, we’re also going to build out some cross-sell capabilities to attack them as a group.

Enabling all this is going to be our brand. We’re real excited. We’re just a short two years away from our 200^th anniversary coming up in 2010. We’re going to invest in technology, as you would expect, but we’re making this a top priority for the current operating plan period. Our risk management has been a great tool and we’re going to continue to build that out, both offensively and defensively, and we’re certainly open to acquisitions as kind of a final way to build out the game plan where we can gain either scale or capabilities or both. So, that’s how I see things after six months on the job. Let me now turn it over to Neal Wolin and he’ll cover property and casualty. Neal?

Neal Wolin

Thank you Tom and good morning everyone. At slide 12, across our property and casualty operation, our pursuit of profitability and growth is unyielding. Ours is a story is of consistently strong execution. Our strategies, broader market access, product and pricing refinement and relentless focus on improving the customer experience are proving affective in the marketplace. The result of these strategies as well as our discipline and selectivity can be seen in our 2008 guidance. Overall net written premium will be flat to 3% up in 2008, falling in a range of $10.4 billion to $10.9 billion. Our ongoing operations combined ratio will be within the 90% to 93% range as we continue to meet or beat our target returns.

Slide 13 - Personal Lines. Execution on our initiatives is essential to sustaining our momentum for profitable growth in this business. In 2008, we will be further expanding our agency plant with the addition of another 1,000 new agents, continuing to fine tune our dimensions rate plan providing the ability to take the actions necessary to maintain overall rate accuracy and leveraging The Hartford’s strong brand, bringing increased energy to our AARP marketing campaigns. The resulting 2008 guidance net written premium will increase between 2% and 5% in the year and the combined ratio will be within a range of 88.5% and 91.5%.

Slide 14 - The Hartford has long been a strong leader and innovator in the small commercial space and this tradition continues into 2008. In 2008, we will be enhancing the pricing and underwriting sophistication of our flagship Spectrum business owner’s policy allowing us to target better the most profitable risks. We’ll be streamlining our underwriting and sales processes making it easier for agents to place business with us. We will be pioneering real-time workflow with our agents. The Hartford’s commercial lines ExpressWay system will bridge our distribution’s agency management systems to our own systems streamlining the sales processes both for the agent and ourselves. Our guidance in this segment, net written premium will come in between the 2007 level and a 3% increase. The combined ratio will remain below 90% coming in within the 86% to 89% range as reflected on this slide.

Slide 15 – In the middle market we will continue to work to retain our profitable in force book of business while we strengthen our ability to target growth opportunities. In 2008 we will be raising the bar relative to the sophistication of our accounts growing models allowing us to price business to reflect an increasing number of individual risk characteristics and to monitor and calibrate pricing on an ongoing basis. We will be deepening our understanding of our agents’ and brokers’ needs through finer granular segmentation affording us the ability to target and capitalize on a greater number of potential opportunities. We will also be leveraging the strength of our technology practice and we have developed industry specific expertise to align ourselves with the emerging specialization we are seeing amongst our brokers. Our guidance for the middle market in 2008 is net written premium projected within a range of 1% to 4% below that of 2007, combined ratios that will be in the range of between 94.5% and 97.5%.

Slide 16 – Specialty. In specialty as in middle market, we will remain diligent in our underwriting discipline identifying and capitalizing on opportunities for profitable growth where possible. Our 2008 guidance for specialty is flat to 3% growth for written premium, generating a combined ratio of between 96% and 99%.

Slide 17 – In 2008 The Hartford property and casualty operations will execute a strategy to win in the competitive marketplace. We are leveraging our experience and expertise to pursue every opportunity we see for profitable growth while maintaining our focus on targeted returns. We are accomplishing this through a strong focus on increasing access to markets, improving our competitive advantage with new products, enhancements of our already successful existing products and the speed with which we can deliver these changes to market. And lastly we are committed to making it easier for our agents and customers to do business with us through both process and automation improvements.

Now I’d like to turn it over to Liz Zlatkus, Liz?

Liz Zlatkus

Thank you and good morning. I’m going to begin my remarks today a discussion of our international operation. I’d first like to comment on the overall industry opportunity. As the Hoken Mainichi Shimbun Newspaper reported last Friday, industry variable annuity assets in Japan grew by 30% to $150 billion as of September 30^th, and yet variable annuity assets are still just a little over 1% of total personal financial assets in Japan while 7 trillion yen or 50% of these assets remain in cash and deposits. Of the 14 trillion yen, 80% of these assets are controlled by our target markets, consumers aged 50 and above. Given those statistics, a tremendous market opportunity still remains ahead of us.

Now turning to The Hartford’s results, as you can see in the charts we continue to maintain our market leadership position based on assets under management, with variable annuity assets of 4 trillion yen, and over 1.5 trillion yen or roughly $14 billion ahead of our nearest competitor. This represents a growth of 20% on a yen basis or 23% on a dollar basis over the same period last year.

Now turning to the next slide, our goal remains to be a market leader in Japan. For 2008 we expect to launch two new variable annuity products. One to address lifetime income and the other to address estate planning needs. We are targeting the first half of 2008 for both product launches. We are also exploring new product lines in Japan to broaden our product suite and begin to diversify our risks. We are currently in discussions with the FSA regarding an offshore mutual fund product. We also plan to continue to build on our strong aided brand awareness amongst our target markets, consumers aged 50 and older. We will continue our successful sponsorship of the Chiba Lotte Marines baseball team which played a key role in our brand awareness which increased over 16 percentage points since September of 2006, to 52.6%.

Now with respect to our 2008 guidance, our outlook for VA sales is between $5 billion and $7 billion. Our best guess is that FIEL will continue to impact sales through the first quarter of 2008. That coupled with increased competition in 2008 from both new product introductions and new competitors is reflected in our guidance. On net flows, our guidance is for flows between $2.5 billion and $4.5 billion. As our book of business continues to mature we do expect a slight uptick in our lapse rate as policies come out of this render charged period. Our outlook for 2008 ROA is consistent with 2007 levels at a range of 72 to 77 basis points.

Now on page 21, we wanted to take the opportunity to provide you with a brief update on our U.K. operations. We will provide you with another update at our June investor [day]. As you can see in this chart, our sales have grown sequentially every quarter since we opened our doors and our assets under management as of September were closing in on the $1 billion mark. The [April] interest 2007 introduction of our unique pension products has boosted sales momentum, such the sales this past quarter increased 89% on a sequential basis and actually exceeded total sales for all of 2006. The pension product has been well received in the U.K. marketplace and was recently awarded Best Innovation for 2007 by Money Facts magazine. We believe our sales momentum is also a result of the service levels we provide in the U.K. Last month our U.K. operation won two Financial Advisor Five Star Service Awards, the U.K. equivalent of the Dow bar and the highest rating a provider can attain. As a result of our building sales momentum, we expect the operation to reach break even in 2010.

Now let’s turn to group benefits. As we have demonstrated throughout the years, you can count on The Hartford to deliver strong after tax margins as we maintain our underwriting and pricing disciplines and our claims management. Now being successful in a mature market requires continuous refinement in all facets of the business, investment distribution and the customer experience. Our 2008 plan calls for just that. We will invest in services such as expanded absence management and [SML] capabilities for employers and improved online services and capabilities for our producers, employers and our end customers, our employees.

With respect to 2008 guidance, we expect fully insured premiums to grow only slightly over 2007, however, excluding [Stop Loss] a business we sold in April of 2007, we expect 2008 fully insured premiums to grow by approximately 5%, what we believe is a better measure to look at. You also may have noted a lower range for after tax margin as compared to our 2007 original guidance. We have updated our calculation of after tax margin for 2008 and going forward. We will now use total revenues in the denominator as compared to our prior calculation which included only premiums and fees. We believe the inclusion of net investment income provides for a better measure of total return on this business. On this basis our 2007 guidance would be 6.9% to 7.2%.

And now I will turn it over to John Walters who will discuss U.S. wealth management.

John Walters

Thanks Liz and good morning everyone. I’ll spend a few minutes talking about U.S. wealth management and our outlook for 2008. As we look at our U.S. business, I’ll start with our retail group. Retail has had a strong year in 2007 with assets reaching $183 billion as a result of strong investment results and positive overall cash flow. As we look at ’08 we have several priorities; to introduce first, a refresh living benefit lineup. We have a very competitive market today and we need to keep our products fresh. We intend to introduce our new living benefit options in May and we should have a positive impact on sales results in the second half. We will be filing these products early in ’08 and should be able to discuss them more fully with you at that time.

Second is that we want to leverage the good investment results that we’ve had this year both in the variable annuity business and the mutual fund business. Investment results are the most valuable feature, if you want to call it that, of either product. This is what the customer actually gets to spend and I’ve very pleased that we’ve had excellent results this year especially in some of our most popular equity funds.

Third we want to expand our mutual fund wholesale force to drive additional gains in the mutual fund business. The focus of our mutual fund wholesaler expansion will be the independent channel primarily, although there will also be selective additions in other channels. The independent channel is the largest channel in the mutual fund business and we will have one of the largest wholesaling forces in the industry focused on that so we believe it’s a big opportunity.

Finally we want to expand the breadth and depth of our mutual funds sales. Today 82% of our funds beat their [lipper] peer group over the last five years and 95% of our equity funds beat their [lipper] peer group over the last five years. We need to convert that investment success into broader momentum across the fund family and we’re confident we’ll be able to do that.

As to our guidance for ’08, as you’ll see at the bottom of this page, we’re showing VAs flat to our Q3 run rate and we expect more momentum in the second half of the year. Mutual funds we feel will be strong in ’08 based on current market environment and the momentum that we see. In net flow, VA net flow will be somewhat worse and it will be lower due to slightly slower top line growth, higher assets due to the market performance that we’ve had this year and the natural aging of the business. In mutual funds, net flow continues strong and is 8% to 10% of the beginning assets, which is excellent.

Now let me move on to page 25 where we talk about our institutional businesses. In ISG we also a very strong ’07 ending Q3 with over $60 billion of AUM and we see continued opportunities across the businesses as we go through ’08. A couple of businesses that I’ll point out specifically; in the COLI market we find that corporate-owned life insurance, particularly for banks, the interest remains robust. The only question as we go into ’08 is whether there will be as many large transactions in ’08 as there were in ’07, but we see the core business as very strong right now. We also want to broaden, as we go into ’08, our institutional and retail notes program which is a spread-based business where we can price opportunistically and earn our 13% to 15% target returns in a very consistent fashion and with a different risk profile than some of the other businesses that we have.

In our institutional mutual fund business, we continue to see very strong momentum and believe that the same investment results that helped us in our retain mutual fund business will also translate successfully into this business. As you look at the institutional businesses you should expect a stable return on assets, 20 to 22 basis points, and so long-term earnings should follow the growth of assets adjusted for unusual items.

As we look at the retirement business on the next page, page 26, we continue to be in a very strong growth area in retirement. Double digit growth in 401(k) s and a stable 457 business are what are behind this growth. In ’08 we will be further investing in this business to drive continued double digit growth for the future. We want to expand the success of the mid market 401(k) and 403(b) programs which we launched in late ’06. We’ve had good early results with both of these initiatives and will continue to grow them in the year ahead. We also, consistent with something that Tom mentioned earlier, want to better leverage Hartford’s financial small business relationships across the enterprise to drive incremental growth. There’s a natural opportunity for us in small business 401(k) and taking those 401(k) capabilities and introducing them to our key property casualty and group benefits small business clients which are two of our strengths.

As you look at our guidance, you’ll see that both deposits and net flow are strong in ’08 and the return on assets is somewhat lower than it’s been to date mostly because as we launch more mutual fund oriented businesses, there is a lower margin on those businesses although they take less capital.

The final business I’m going to comment on is our life insurance business which is on page 27. We’ve had a solid year in ’07 as we’ve made investments in people, products and infrastructure to drive future growth. 2008 is year of execution for us. We want to finish aggressively redoing our product lineup which we will complete a complete revamping of the lineup over a two year period. We also want to expand our distribution to compete more directly in the [BGA] market that we have largely ignored up to now. Going forward, we think that we can get to double digit growth of life in force which is the best indicator of business strength in this business and we are confident that we can get there.

That covers the businesses and U.S. wealth management, so now let me turn the call over to David Johnson.

David Johnson

Thanks John. First I’m going to talk about earnings per share. As stated in our press release, our guidance for 2008 for EPS is between $9.80 and $10.20 per fully diluted share. Slide 29 shows some of the key assumptions underlying the ’08 guidance. First, we are assuming the S&P 500 grows at a 9% total annualized return starting with November 30^th level of 1,481. As a rule of thumb core earnings for 2008 will vary $6 million for every 1% change in the level of the S&P at the beginning of the year. Obviously if it changes sometime during the year, you’d take quarter or half your convention in order to prorate that. We’re assuming no impact, positive or negative, from our third quarter DAC study. If you want to know the sensitivities there, our third quarter 10-Q details the impact on the DAC unlock of changes in market returns and other assumptions.

As usual, we are estimating $160 million pre tax and underwriting losses in P&C and other operations and I think we have a fairly consistent track record of delivering actual results which are different than our guidance. As a reminder, we study asbestos and reinsurance recoverables in the second quarter and environmental liabilities in the third quarter.

In 2008 we will begin a major two-year data center migration that we expect to cost in total about $100 million pre tax, roughly $60 million of that or $0.12 per share will come in 2008. That is incorporated in our guidance. And our OA EPS assumes weighted average shares outstanding of 315 million. The principal exogenous driver of that is the assumption of a $1 billion share repurchase executed in the fourth quarter of 2008 as I will talk about later, that’s just a modeling assumption. I’m not saying that’s our plan.

Turn to slide 30. As most of you know, we are required to implement FAS 157 in 2008. FAS 157 affects our evaluation and disclosure process for every item on our balance sheet that we are currently required to carry at fair value. For the most part, that’s going to be a disclosure exercise, of the biggest real impact for The Hartford will be a change in the fair value of the GMWB derivative imbedded in our U.S. variable annuity contracts. At November 30^th, we had approximately $46.3 billion in assets in hedged VA contracts with fair value living benefit riders. Today this fair value is determined pursuant to FAS 133 and beginning on January 1^st, it will be subject to FAS 157. Under today’s approach we calculate our GMWB liability as the average net present value of the expected payments we would make to insured’s based on 4,000 stochastic scenarios we generate of market behavior for the next 40 years. The dispersion of market results in the stochastic is generated using a 40-year implied volatility surface that we create by incorporating the longest tenors and implied volatility we can observe in derivative trading of contracts against the major equity indexes.

In addition, we superimpose on the stochastic tree, detailed assumptions about how different classes of policy holders will behave at each point in each stochastic scenario. These policy holder behavior assumptions are an important part of the valuation and there is not current observable trading market in policy holder behavior optionality. Under FAS 133 we are then directed to use our best available information to incorporate that into the valuation. In this case, the best information is our own actuarial models and studies.

Under FAS 157 we are required to value the GMWB liability using a market proxy input for all parts of the valuation, even when no market inputs are available. We currently believe the most significant change for us will be adding a risk charge to the valuation of our GMWB derivative that guesstimates what a third party would charge us for assuming the risk that policy holder behavior differs from the assumptions that we currently use.

Now there are three major implications of this change for The Hartford. First, we will record a one-time transition adjustment from applying this methodology to the roughly $46 billion affected in force book. In our third quarter 10-Q we provided illustrative ranges detailing the impact of a 15, 20 or 30 basis point increase in the liability as described above. After-tax, after-DAC, those changes would result in a one-time charge of between $170 million and $450 million. We are still calculating the actual transition charge and will of course have to recalculate the number again based on the final market conditions on December 31^st. But barring a major change in either our methodology or market condition, I think our charge will be within that range.

Second, renewed contracts written in 2008 and beyond, the amount of the rider fee we ascribed to the imbedded derivative will increase to reflect the increased risk charge and the portion of the rider reported as VA fee income in core earnings will decrease. We’ve reduced our 2008 outlook and this is in our guidance, by $15 million to $20 million after tax as a proxy for this affect. The final number could vary a bit. All things being equal, this earning stream would emerge as a higher capital gains, or lower capital losses, over time assuming we don’t increase our risk management expenditures above their current levels.

Third, adoption of FAS 157 will create an instantaneous change, not just in the size of our liability but it has risk characteristics; the three Greeks that you’ve heard us speak about, Delta - stock prices, Roe – interest rates, and Vega – implied volatility. In a nutshell, the new liability will be more sensitive to Delta, Roe and Vega, changing the head ratios and the amount of options and other hedge instruments we need in order to offset the fair value sensitivity of our liability. Now this won’t be a problem for Delta and Roe, these are very liquid markets and we have a great deal of flexibility in trading. Vega on the other hand is a challenge. The price of long-term volatility, at five year [put] and longer tenors, is now at nearly record levels and [inaudible] is extremely difficult to come by. Changing our Vega in response to these changes in our hedge ratios requires months not days. For at least the first quarter of 2008 we will be under hedged for volatility and you could see further impacts below the line depending on market conditions.

Our plan is to make virtue of necessity and use this opportunity to re-evaluate our hedging strategy. There may be ways to produce roughly equivalent amounts of long-term economic protection at a lower hedging cost if we are willing to accept increased quarter to quarter gain-loss volatility. We will keep you posted on our thinking as we reassess our hedging approach.

I’d like to turn to some of the capital losses we expect to record in the fourth quarter. I am now on slide 31. First I’ll turn to fixed income investments. The appendix to these slides contains what should now be a familiar exhibit for our shareholders; the November month end walk forward of the valuation of our residential mortgage backed securities portfolio. We now see an approximate $380 million gap between book and fair value of these securities that has widened from approximately $200 million at the end of the third quarter. Some notes on how we’re valuing these securities in our non-prime portfolio are first we continue to see some trading in AA and above ABS securities. The values in the appendix are consistent with those observed trading levels. Trading in single A and below continues to be non-existent. In response, we have valued the 2007 and 2006 cohorts of single A and below at levels consistent with the values of the ABX indexes for those years supplemented by fundamental DCF valuation using alternative cash flow scenarios.

For 2005 and before, where there are no ABX indexes, we are using pricing service data again, supplemented by fundamental modeling. The values for single A and below in the appendix reflect those valuations. Under current market conditions, we would anticipate putting approximately $150 million of this change in fair value through the P&L, pre-tax pre-DAC, as an impairment in the fourth quarter. The rest would remain as an unrealized loss in AOCI because we expect a [holds] recovery.

In addition based on current market conditions, we expect to record a roughly $45 million impairment for our investment in securities of Northern Rock and roughly $75 million of additional impairments for drops in the values of other fixed income securities, primarily corporate data [inaudible] heavily associated with the housing and mortgage markets. A number of these securities have been previously impaired. While no one likes to record credit losses, we fully expect that if any sector of the economy gets hit, we will record some losses. The key is to be diversified and avoid concentration so that no loss is material. I’d also like to stress that we believe we will ultimately receive full interest and principal from most of these impaired securities. The impairment in most cases is price not loss of principal. For example, a AA security that is now BBB and we don’t see it being upgraded in the foreseeable future, it will now always trade wider because credit is deteriorated and our impairment recognizes that. It doesn’t mean it’s going to default.

The very volatile markets of the past two months [inaudible] slippage in our GMWB hedging program. The price of S&P 10-year implied volatility has soared to over 30% and is very illiquid. As of November 30^th we were at roughly a $130 million pre-tax pre-DAC loss in our hedging program for the fourth quarter. We obviously have another month to go so this is not the final accounting. Should long volatility come down, we will get some of this back. In fact, as of last Friday, this loss had come down to $97 million.

Finally I’d like to update you about results in our credit derivative portfolio. In this portfolio we sought to assume credit exposure, generally AAA, through derivatives rather than through ownership of the underlying bonds. Through this mechanism, we sought to add yield to the portfolio through taking small amounts of incremental credit risk in sectors and areas where we felt we had credit risk capacity and it was more efficient to do so synthetically. Synthetic credit investment strategies have not performed well in the second quarter of 2007. As of November 30^th our position had generated a $153 million fourth quarter loss, pre-tax pre-DAC.

First, corporate spreads have widened dramatically. If we had held the equivalent corporate bonds the impact of spreads would have been substantially offset by lower treasure yield. Credit derivatives have no such offset. Second, changes in bond valuations generally are recorded in an AOCI. All changes in the value of these derivatives go through gain loss. And third, many derivatives have moved further than their associated reference securities as they have been relatively oversold by investors seeking liquid vehicles to hedge cash security exposures. In our case, roughly half of our loss flows from the owners hip of a [CMBS] which has moved farther than the reference CMBS securities due to it’s value as a hedging vehicle. We certainly hope and except that we will recover some portion of our credit derivative loss but with the caveat that the CMBS index investment will crystallize into a loss on expiration in the near to intermediate term, as these are typically six month investments. The rest of the investments are generally 10 year [CDS] so we have the opportunity to recover should credit improve.

In aggregate and again assuming no further change in market conditions, good or bad in December and of course markets will change in December, we would expect to record realized losses in the fourth quarter of around $500 million pre-tax pre-DAC higher than the $363 million we saw in the third quarter.

Slide 32 – A brief summary on capital, we currently believe 2008 will play out in a similar manner to 2007. Our capital margin of $1.5 billion is intact. Based on the plans that support our guidance, we currently expect to generate at least $1 billion of capital in excess of our needs in 2008. We would expect to use the capital in our traditional hierarchy of preference:

(1) invest in the business

(2) acquisitions

(3) dividends

(4) share repurchase

Our total 2007 share repurchases stand at approximately $1.2 billion to date. Tom?

Tom Marra

Let’s open the call up for questions, thanks.