The Hartford had an exceptional 2006, and thanks to the culture of execution, service, and innovation fostered by our 31,000 employees, we are well-positioned for more success in 2007. Many of our insurance and investment businesses are market leaders, and we have the right strategies for profitable growth.
In fact, 2006 was the best year in The Hartford’s history. Net income rose 21 percent year-over-year to $2.7 billion, earned premiums topped $15 billion, revenues reached $26.5 billion, and assets under management surpassed $377 billion.
Return on equity was a healthy 16 percent, and book value per share increased 15 percent year-over-year, to $57.83.
Wall Street has acknowledged The Hartford’s consistently strong performance. Our share price hit all-time highs several times throughout 2006, closing the year at $93.31.
Our shareholders’ one-year return was 10.8 percent, lagging the S&P 500 by almost five points but remaining even with the S&P Insurance Composite Index. Our total return over the past three years was an annualized 18.6 percent, considerably out-performing the insurance composite index and the major U.S. stock indices.
Our Growth Opportunities
The story behind The Hartford’s numbers is a compelling one. In recent years, two trends have been creating significant growth opportunities for The Hartford.
First, American Baby Boomers, as widely reported, are approaching retirement in great numbers. In the next five years, more than 17 million Boomers will turn 60. This enormous wave of opportunity is compounded by an emerging “longevity bonus.” In just two generations, life expectancy at birth has increased almost 10 years. The chances of living into your 90s – and spending as many years in retirement as in the workplace – are greater than ever.
Second, the U.S. economy is being fueled by the broad and consistent expansion of small and mid-sized businesses. Small businesses, for instance, now number 7.5 million, and they generate two of every three new jobs. In fact, small businesses account for nearly half of the nation’s private sector employment, and their total spending is growing at a rate of 8 percent annually. Accompanying this broad business formation is a growing need to service the diverse needs of an enterprise as it grows and competes.
Both of the aforementioned trends are influenced by a new marketplace reality: Consumers have come to expect more choice and flexibility, especially with insurance and investment products and services. They now can choose between the high-touch service of advisers and agents or the convenience of a call center or web site.
Still, with such wide choices, consumers and business leaders may feel more on their own than ever. But The Hartford’s expertise in understanding individual customers, families, entrepreneurs, and business decision-makers – as well as the marketplace’s key distribution partners – positions us to assist them all as they seek the most informed financial solutions.
Growing and Ensuring Your Lifelong Wealth
The Hartford’s personal wealth management products include mutual funds, life insurance, and annuities. We’ve grown our reputation by providing smart financial solutions to investors in at least three ways: through the wealth accumulation phase of pre-retirement; in retirement, as they seek security with a lifelong guaranteed income stream; and finally, as they prepare to pass along their estate to heirs.
Mutual funds are the simplest ways for Americans to save for retirement, and The Hartford’s family of mutual funds is more attractive than ever.
Early in 2006, our family of mutual funds celebrated its 10-year anniversary by becoming the fastest retail mutual fund family to hit $30 billion in assets under management.*
We had retail mutual fund deposits of $11 billion, an increase of 92 percent over the prior year. Strong fund performance – 93 percent of our funds with 10-year records beat the Lipper average – and the growing experience of our wholesale team deserve much of the credit for our success in this high-growth segment. At the close of 2006, total mutual fund assets under management surpassed $40 billion, an increase of 34 percent over 2005.
In 2006, The Hartford was again among the U.S. market leaders in variable annuity products, with our guaranteed lifetime income options becoming a popular choice for those customers seeking to secure supplemental income throughout their retirement years. With longevity increasing, ensuring a lifelong income stream is more important than ever. In 2006, variable annuity sales and deposits increased 8 percent over the prior year. Total domestic variable annuity assets under management reached $114 billion, 9 percent higher than the prior year.
In Japan, the market for variable annuities is growing at a rate of more than 20 percent each year, attracting more intense competition from stronger domestic and international players. The Hartford added new products and maintained its lead over its competitors in variable annuity assets, with a 26 percent share of the market. Sales topped $6.1 billion, and total assets under management in Japan reached $31 billion at the close of 2006, up 20 percent from the prior year.
In addition to mutual funds and variable annuities, The Hartford offers a full suite of life insurance products: term life, whole life, universal life, and variable life, each backed by excellent service. We’re positioning our suite of individual life insurance products as key components of our retirement solutions, especially for estate planning and succession planning for entrepreneurs.
Growth rates in the individual life insurance industry are near zero, and yet The Hartford’s individual life insurance business set sales records for 2006. We grew by expanding sales efforts in many of our distribution channels, particularly among life insurance professionals, where sales have increased 28 percent. In 2006, life insurance in-force rose 9 percent, and account values were up 10 percent over the prior year.
Protecting Your Personal Property and Assets
The Hartford has demonstrated success in helping consumers, especially Baby Boomers, navigate their many choices with its customer-friendly approach to personal lines insurance. We distribute auto and homeowners insurance through not one, but two channels. We sell via independent agents, and we sell direct to customers through our exclusive partnership with AARP, a growing organization with 38 million members, all 50 years and older.
In the personal lines marketplace in 2006, prices were flat and competition intensified. But the new features found in The Hartford’s key auto and home protection product – called Dimensions – offer more flexibility and better pricing for consumers. We saw written premium in both distribution channels grow faster than industry growth rates.
In agency sales, we grew 8 percent to $1.1 billion, largely from business generated by our newly appointed agents. We’ve invested heavily in our agency distribution platform, doubling our national network of agencies in the past four years. In our AARP direct channel, we expanded marketing efforts and provided auto and homeowners insurance to 2.6 million AARP members, generating $2.6 billion in written premium, a 9 percent increase over the prior year. Excellence in our products and service helped us to extend The Hartford’s contract to 2020, securing AARP’s exclusive endorsement and enabling our partnership to grow through the end of the next decade.
Protecting and Growing Your Business
The Hartford is one of just a few financial services companies in the United States that offer a suite of financial solutions for all businesses. From property and casualty insurance to group benefits and retirement plans, The Hartford is a key resource for growing businesses in a very competitive world.
The Hartford’s centerpiece is its small business insurance product, which offers a comprehensive set of coverages to businesses with annual revenues under $15 million.
Our small business insurance franchise now boasts more than 1 million policies, a national market leader in a segment that’s adding more opportunity for The Hartford every year. The growth we experienced in the marketplace is the result of the business’ strategic plan, set in motion two years ago. The Hartford increased distribution through newly endorsed agencies, and we also pioneered more sophisticated data-driven underwriting capabilities. In spite of a competitive pricing environment in 2006, written premium topped $2.7 billion, a 7 percent increase over 2005.
In middle market business insurance – generally serving those businesses with annual revenues of more than $15 million – The Hartford has more than 54,000 business customers. Our specialty commercial insurance group offers large national companies a range of customized protection solutions, including risk management services and workers’ compensation.
In the past year, middle market and specialty commercial saw increased competition. Our strategy in this softening market is to continue to emphasize underwriting discipline, retain our most attractive customers, and selectively write new business where we can achieve long-term profitability. The strategy is working. In 2006, The Hartford’s middle market and specialty commercial insurance results were strong. They posted written premium of $2.5 billion and $1.6 billion, respectively, and continued to maintain strong profitability.
Across the United States, small and mid-sized businesses are being challenged by competitors to attract and retain employees with comprehensive retirement and insurance benefits.
In 2006, when the Pension Protection Act was signed into law, it acknowledged that planning for retirement through the workplace had changed dramatically for most Americans.
In the past 25 years, the number of traditional defined benefit pension plans – previously a key source of retirement income for many of our parents and grandparents – has decreased precipitously, from a high of 112,000 to fewer than 29,000.
Defined contribution plans such as 401(k), 403b, and 457 plans – employer-sponsored but employee-owned – have become the de facto primary retirement savings vehicles for the majority of Americans. With only one-fifth of small businesses offering their employees a 401(k) plan, The Hartford is perfectly positioned for this growing market opportunity. We specialize in the micro and small retirement plan markets, and are moving into larger market segments as we grow our capabilities.
Our reputation for excellence in plan administration is also growing. In fact, PlanSponsor magazine has awarded The Hartford its best-in-class designation. Our retirement plans’ deposits rose to $5.5 billion in 2006, a 23 percent increase over the prior year. Total assets under management in all of our plans reached $24.7 billion at the end of 2006.
A key offering in our suite of business solutions is group benefits, which includes group disability, life, and accident. These products, offered at the work site, provide financial security to millions of American families. Ensuring income continuity is particularly important to those many individuals and families living paycheck to paycheck.
We have a positive outlook on the group benefits market. Employment and wages in the United States have been steadily increasing, and the “voluntary” group benefits market – where employees either pay 100 percent of the coverage or purchase supplemental insurance – has doubled in just eight years.
The Hartford’s group benefits business – a market leader in group disability and group life – posted fully insured sales of $861 million, up 11 percent over the prior year. Cross-selling has been one of the keys to The Hartford’s success: 42 percent of 2006 employer sales were new, additional products sold to existing group benefits customers.
Looking Ahead
As I have noted, The Hartford’s growth opportunities are exciting. Of course, any discussion of growth opportunities in our portfolio of businesses wouldn’t be complete without a few remarks about the outlook for the equity markets and the property and casualty insurance pricing cycle.
In 2006, we were favored by the tailwinds of an expanding U.S. and global economy, with positive forces – strong corporate earnings reports, low unemployment, solid domestic growth, and increasing wages and consumer spending – outweighing the negatives: a slumping housing market, volatile oil prices and interest rates, instability in the Middle East, and the threat of rising inflation.
In 2006, we began to see some erosion in property and casualty pricing, and competition is likely to pick up in the coming year. However, I don’t believe we will see the irrational competition that we saw in earlier decades, due to the disciplining force of ratings agencies and the improved transparency in insurance company financial statements.
Looking forward to the rest of 2007, industry analysts believe we are in for more of the same – modest growth in the equity markets and flat or eroding pricing in the property and casualty markets. Of course, these are predictions, not guarantees. At The Hartford, we are making decisions that place our businesses in a position of strength, to deliver value in almost any market and in all cycles, to be ready for risks as well as opportunities.
In 2007, we will expand our growing expertise in insurance and investment solutions for individuals, families, and businesses, especially Boomers and small businesses. Our operational strategy is straightforward. We will grow by continuing to build scale and expanding product and distribution capabilities. We will also manage our processes and expenses to competitive levels.
As always, The Hartford’s nearly 200-year-old reputation for delivering on its promises will be our calling card. I am confident that this disciplined approach will assure us success in the marketplace, and that profitable growth will underscore The Hartford’s performance next year and going forward.
In reviewing 2006 and looking ahead to 2007 and beyond, there’s so much at The Hartford that makes me proud and optimistic. Special thanks, of course, go to The Hartford’s employees and Board of Directors for all that they do to help us win in the marketplace.
In a relatively short period, we have built a growing, diversified financial services company, and we’ve positioned ourselves for sustainable growth well into the future. I look forward to more success in 2007.
Sincerely,
Ramani Ayer
Chairman and CEO
*Strategic Insight, May 2006.
