Hartford Insurance Group Inc (HIG) 2012 Q3 法說會逐字稿

Good morning. My name is Felicia and I will be your conference operator today. At this time, I would like to welcome everyone to the third-quarter 2012 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

I would now like to turn the conference over to Ms. Purtill. You may begin.

Thank you. Good morning and welcome to The Hartford's third-quarter 2012 conference call. Our speakers today are Liam McGee, the Hartford's Chairman, President, and CEO, and Chris Swift, our CFO. Other members of our executive management team present today include Beth Bombara, Doug Elliot, Brion Johnson, Alan Kreczko, Andy Napoli, and Bob Rupp.

As detailed on page 2 of the presentation, statements concerning the Hartford's future results or actions should be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance. Actual results may be materially different. We do not assume any obligation to update the forward-looking statements.

You should consider the important risks and uncertainties that may cause the Hartford's actual results to differ including those discussed in our press release, our third-quarter 10-Q, 2011 10-K, and other filings we make with the SEC.

Please note that our presentation includes financial measures that are not derived from generally accepted accounting principles or GAAP. Definitions and reconciliations of these measures to the most directly comparable GAAP measures are provided in our financial supplement, press release and 10-Q.

I will now turn the call over to Liam.

Thank you, Sabra. Good morning, everyone, and thank you for joining us today. Before I begin, on behalf of all of us at The Hartford, our thoughts and prayers are with those who have been affected by storm Sandy. On a personal note, we at The Hartford hope that each of you and your family are faring well during these very challenging times, because clearly this was a devastating storm with a large footprint and tropical force winds that impacted a highly populated area.

At The Hartford, our catastrophe team has been on the ground working 24/7 to help our policyholders and I want to express my deep appreciation to our claims teammates and others in the field. In addition, we are also very thankful for the emergency personnel and volunteers who are providing basic needs in critical services.

I know you all are interested in loss estimates, but it's much too early for us to provide data with any level of certainty. We are still waiting for clearance from local authorities to access some areas. Yesterday for example was the first day we were able to get adjusters into Long Island.

Now clearly this is a significant event for those who suffered losses. But storm Sandy is well within the planning scenarios we use to manage catastrophe risk at The Hartford. This is a major storm, but it is a manageable exposure for The Hartford. As we have more certainty around The Hartford's losses, we will provide you with details.

Now let's cover third-quarter results and activities. I am pleased with The Hartford's third-quarter achievements. First, we announced the sale of the three wealth management businesses we committed to sell last March ahead of our year-end target. The businesses are going to strong strategic buyers and the sales are expected to generate about $2.2 billion of statutory capital benefit for The Hartford.

Second, The Hartford generated strong overall financial results in the third quarter with core earnings of $378 million, significantly better than the $50 million last year. Net income was also up strongly, rising from $60 million to $401 million.

Third, The Hartford's go-forward businesses demonstrated increasing earnings momentum benefiting from strong pricing trends along with improved retention in property and casualty commercial and new business growth in consumer markets. Mutual Funds also showed improved net flows. Core earnings from the three go-forward segments totaled $294 million this quarter compared with $121 million last year. Now while much of that improvement was due to last year's high catastrophe losses, combined ratios excluding cats in prior-year development improved in both property and casualty commercial and consumer markets, as did the loss ratio in Group Benefits.

In property and casualty commercial, we continued to generate sustained written price increases with an 8% increase in standard commercial lines this quarter, up from 7% for the first half of 2012. Our focus on pricing discipline will continue in the fourth quarter and into 2013.

Doug and his team are doing an excellent job balancing margin expansion with retention and pricing. Our primary goal particularly in middle market is to drive to acceptable levels of profitability so there will continue to be a dampening effect on the top line as less profitable accounts move to other carriers.

We are pursuing similar tactics in Group Benefits. The Hartford was among the first to recognize and respond to the adverse incidents and termination trends. However given the three-year contract terms in this line, it takes longer for the results of pricing actions to fall to the bottom line.

In the third quarter, core earnings trends benefited slightly from an improvement in termination rates although they do remain lower than historical levels. Improving terminations combined with our pricing initiatives should slowly expand margins.

In consumer markets, Andy and his team are focused on maintaining margins in auto, expanding margins in homeowners, continuing new business growth, and improving retention. We recently enhanced the pricing segmentation in our open road advantage auto product, which has helped lift conversion rates. New business production is up and we feel good about the mix of business.

Homeowners continues to need rate and we have been diligent in pursuing it. Efforts to improve retention are yielding positive results with continuing quarterly improvements in auto and home.

The Mutual Funds business also made good progress during the quarter as it's balanced and fixed income funds posted more favorable net flows. Overall flows remain negative due to continuing industrywide withdrawals from domestic equity funds. However, the Company's third-quarter flows were the best we've seen since the first quarter of 2011.

Several funds generated particularly strong performance in the quarter. For instance the balanced Income Fund had top quartile [LIPR] performance both for the quarter and year-to-date and was one of our top funds in gross sales at $385 million for the quarter. In addition, our World Bond Fund was recently recognized as a Newcomer of the Year by the Wall Street Journal.

In the Runoff division, third-quarter financial results were in line with our expectations with core earnings ex DAC unlock declining 6% from the prior year, reflecting lower earnings from US annuity. Beth Bombara and her team have been examining a range of options to address the legacy annuity blocks. One area of focus is on contract holder initiatives such as the enhanced surrender value option offer that we filed earlier this week with the SEC. This option will be offered to contract holders who represent about 15% of our US GMWB book in terms of account value but more importantly, nearly 45% of the US GMWB net amount at risk. Similar to programs introduced by several other companies, it offers the contract holder the option to surrender the policy at a premium to the current account value.

We continue to aggressively examine other options to accelerate the runoff of the US and international annuities and look forward to updating you on our progress. With any actions we take, we will continue to honor our obligations to contract holders.

Finally, I am pleased that we reached definitive sales agreements for Individual Life, Retirement Plans, and Woodbury Financial Services this quarter, ahead of our year-end target. We are selling these businesses at good values that will generate an estimated net statutory capital benefit of approximately $2.2 billion. Furthermore, they are being sold to market leading strategic buyers who saw value in our innovative products, strong distribution, and employee expertise.

We expect to close the Woodbury transaction by year-end and Individual Life in the first quarter of 2013. We're working to close Retirement Plans by year-end but it may slip a little into the new year as we work through the necessary regulatory approvals.

Chris will discuss the Company's expense initiatives. The bottom line however is that we would reduce about $850 million in expense, the vast majority of which relates to the elimination of all expenses of the divested businesses. Moreover, approximately 90% of the expenses will be eliminated by the end of 2013.

With the sales announced, I know investors are interested in our capital management plans. We are developing holistic capital management plans which we will discuss with regulators and rating agencies and which we will share with you in early 2013 after the transactions are closed. Our goal in managing capital is to pursue accretive actions for shareholders while both maintaining a balance sheet sufficient for adverse economic environments and the current ratings of our go-forward businesses and preserving financial flexibility to be opportunistic in taking future actions to address the Company's annuity liabilities.

Therefore, we expect that our capital management plans will include debt prepayment to reduce leverage and improve our interest coverage ratios over time, share repurchases which at current prices are very accretive, and retaining some capital to take future actions for permanent solutions to reduce the size and risk of the legacy annuity liabilities which should create significant shareholder value.

To conclude, The Hartford had a successful third quarter. We reached agreements in all three of the plan sales ahead of schedule at attractive prices and with strong buyers who value the skills and expertise of our teammates. We had strong core earnings. We demonstrated pricing and margin momentum in our go-forward businesses. And our Life Runoff team is considering options to accelerate the runoff of the legacy annuity blocks including the recent filing of the enhanced surrender value program offer.

The Hartford is becoming a more focused Company that has the potential to create greater shareholder value while providing policyholders with the protection and service that they depend on. I am confident that we are on the right path and I look forward to communicating our continued progress.

I will now turn the call over to Chris, who will cover our financial results in more detail. Chris?

Thank you, Liam. Good morning, everyone. This morning I'm going to focus on three topics. First, I'll cover key aspects of this quarter's financial results. Second, I will provide an update on our expense initiatives, including efforts to remove all the direct and indirect expenses of the businesses we are selling. Third, I will provide an outlook for fourth quarter and full year 2012 results.

I will begin on slide 5. Third quarter 2012 core earnings were $378 million or $0.78 per diluted share. These results were in line with our outlook of $0.75 to $0.80. On a run rate basis, core earnings were $0.77 per share, which excludes the items summarized on slide 5, which totaled $0.01 per share. These items included a modest charge for re-estimating current accident year prior quarter loss reserves for workers' compensation and commercial auto of approximately $0.05 per share.

Restructuring expenses totaled $34 million after-tax or about $0.07 per share, slightly above our August estimate.

Turning to slide 6, The Hartford's book value per diluted share rose 10% over the past year to $48.13 including a $2 billion increase in net after-tax unrealized gains on fixed maturity investments as a result of continued low interest rates and tighter credit spreads over the last year. It also includes the approximately $900 million or $1.83 per share reduction in shareholder's equity due to the Allianz debt refinancing and warrant share repurchase in the first half of 2012.

Book value excluding AOCI was $41.35 per diluted share, flat with prior year as net income over the past year was largely offset by the impact of the Allianz transactions. For the last 12 months, our core earnings ROE was 7.2%, up from 6% for the 12 months ended September 30, 2011.

Slide 7 has a high-level summary of P&C commercial results. Core earnings were $160 million, up 84% from prior year. Catastrophe losses came in at $7 million after-tax compared with $60 million last year. In addition, the increase in core earnings reflects improved margins in middle market.

The third-quarter 2012 combined ratio ex cat ex prior-year was 97.5%, down from 99.4% in prior year. Favorable expenses and better experience in property lines were partially offset by a deterioration in commercial auto liability results.

Third-quarter 2012 included $39 million of current accident year prior quarter loss re-estimation or 2.5 points on the loss ratio. This compares to $47 million or 3 points on the loss ratio last year. This year's changes were due to higher severity in commercial auto particularly in small commercial and a slight adjustment for lost time workers' compensation claims.

Even with this change, the 2012 workers' comp accident year loss ratio was approximately 4 points better than 2011 accident year. This reflects the pricing and underwriting actions we have taken over the last 12 to 18 months.

Our pricing and underwriting discipline in P&C commercial has resulted in pricing increases across the portfolio and we remain committed to driving actions necessary to improve margins in the fourth quarter and beyond.

Middle-market workers' compensation is a key contributor to our achieved pricing increases with rate increases averaging 15% this quarter, consistent with the rate achieved in the second quarter. In middle market property, rates increased 10% compared with 8% in the first half. Our team is proactively managing renewal rate increases, account retention, and new business growth to optimize overall profitability. While aggregate rate increases may level off, our focus on margin improvement will continue.

Group Benefits results are summarized on slide 8. Although below historic levels, we are pleased with the trends we are seeing in this segment. Core earnings were $23 million, up 15% due to improved loss trends. The loss ratio was 79.3%, an improvement over prior year's 80.1% and reflected better LTD results offset by less favorable mortality in Group Life this quarter.

As a result of our sustained pricing actions over the past two years, Group Benefits premiums declined 7% year over year. We expect this trend will continue into 2013 due to the impact of our renewal pricing strategies on persistency. Year-to-date, persistency's averaged 62%.

Turning to consumer markets on slide 9, core earnings were $93 million, a turnaround from core losses of $10 million in the third quarter of 2011, which had a significant level of catastrophes. This quarter had no net catastrophe losses as the $16 million of after-tax losses from the third quarter event including Hurricane Isaac, were offset by favorable development on catastrophes from the first half of 2012.

We continue to be pleased with the progress that Andy Napoli and his team are making balancing probability and growth. Consumer markets, underwriting margins excluding catastrophes have expanded as we take rate increases. The third-quarter combined ratio excluding cats and prior-year development was 93.3%, down more than 2 points from 95.5% last year, largely because of improved homeowner results. Auto results were comparable to the prior year.

We remain focused on achieving rate increases consistent with the loss cost trends. Loss costs continue to be slightly higher in auto due to physical damage severity, although it moderated from the first half of 2012. The increase in physical damage severity was largely offset by favorable trends on auto liability frequency this quarter. We achieved written rate increases of 6% in homeowners and 4% in auto this quarter.

On the growth side, new business premiums are up 9% this quarter and 18% year-to-date. AARP Agency is a strong growth source. In the first nine months of 2012, written premiums in AARP Agency were $96 million, almost double that of the prior-year period. Retention has also improved, up 2 points in auto and 3 points in homeowners compared to a year ago.

Mutual Fund results are summarized on slide 10. Core earnings were $18 million, down from the prior year but flat with the second quarter of 2012. The principal reason for the decline was lower fees reflecting lower average assets under management and higher distribution and marketing expenses as we execute our strategy with Wellington. Net flow performance has significantly improved from the past several quarters as a result of stronger deposits into our fixed income and balanced fund choices. We are optimistic about the prospects for this business as we work with Wellington to expand marketing for The Hartford funds.

The results of our combined Life and P&C Runoff division are on slide 11. Core earnings ex DAC unlock were $168 million comprised of $147 million from Life other operations and $21 million from P&C. The DAC unlock included in core earnings for the quarter totaled a charge of $11 million compared with a $126 million charge in the third quarter of 2011. For the quarter, surrenders averaged 14.7% on the US variable annuity book and 3.6% for Japan's VA, slightly higher than historical levels but lower than the 17.5% and the 4.5% respectively we saw in the second quarter.

We recently filed for approval with the SEC an enhanced surrender value option which Liam discussed. This represents our first of initiatives to provide contract holders with additional choices for their contract that also meet our objectives of reducing risk with reasonable economics.

Turning to the impact of the VA book and capital resources, slide 12 provides a summary of the VA hedging results for the quarter. During the quarter, the net statutory impact of our VA liabilities and hedges was a negative $4 million before tax excluding fees earned in the quarter and other impacts to surplus. It has been about a year since we've completed the buildout of our Japan hedging program. The goal of all our hedging programs is to manage our economic exposure, which is our continued focus and which is performing as we expect in these market conditions.

We have retained some market risk although throughout 2012, we have increased interest rate protection. You can find our updated sensitivities in our 10-Q.

Slide 13 is a new slide that combines our statutory surplus roll forward with our total capital resources. Total US statutory surplus before dividends to the holding company increased by approximately $100 million from June 30, reflecting $215 million of increased P&C surplus that was offset by a slight decrease in US Life surplus.

After $200 million of dividends from the P&C companies to the holding company, surplus was essentially flat. Year-to-date, Life statutory surplus is up about $150 million. We perform our annual cash flow testing at the end of the year which will impact full-year results given sustained low interest rates and tighter credit spreads. Consistent with our prior outlook, we continue to expect US Life statutory surplus to be flat or slightly down for the full year.

Our capital resources, which includes US statutory surplus as well as the $1.3 billion in Japan Capital, were equal to the $18 billion we had at the end of June 30. Holding company cash and short-term investments totaled $1.4 billion.

Looking forward, the three sales transactions are expected to increase our statutory surplus by approximately $1.4 billion for a total net statutory capital benefit of about $2.2 billion based on current estimates. As Liam mentioned, we are working on our capital plans and we look forward to sharing them with you in early 2013.

Turning to the second item on my agenda, slide 14 sets forth our updated expense initiatives. As Liam mentioned, we expect to reduce expenses by approximately $850 million before tax, most of which will be completed in 2013. Slide 14 breaks out the components of the expense reductions.

In the addition to our prior efficiency commitments, we will reduce expenses by another $100 million related to putting US VA into Runoff and $615 million related to the three businesses being sold. We have detailed plans for execution and have begun reducing expense levels in 2012, which will continue into 2013.

As a result of these initiatives, we expect to incur a restructuring charge of approximately $45 million to $50 million after-tax in the fourth quarter. This charge will accrue for all planned 2013 severance costs for approximately 500 [positions] affected over the course of 2013 as well as other fourth-quarter items such as retention payments.

At year-end, we will have expensed about 85% of ultimate restructuring costs we anticipate. In 2013, we currently expect to have approximately $30 million after-tax of additional restructuring and other expenses. Bottom line, we have significant expense reduction goals and have a high degree of confidence in our ability to achieve them.

Finally, my last item before I take some questions is to look at our year-to-date results and our fourth-quarter outlook. As summarized on slide 15, our core earnings excluding DAC unlock, prior-year development, cats above budget, and restructuring charges for the first nine months of the year, totaled $1.2 billion or $2.40 per diluted share. Our current fourth-quarter outlook projects core earnings of approximately $375 million to $400 million or $0.77 to $0.82 per diluted share based on an estimated diluted share count of approximately 486 million shares. This outlook does not include any estimate of DAC unlock or prior-year loss development and is also before previously mentioned restructuring charges which approximates $0.10 per diluted share.

This outlook includes a budgeted cat load of approximately $68 million before tax. This cat load does not include an estimate of expected losses from Sandy. Our plan is to update you on the impact of this major storm event when we have good estimates.

Combined with year-to-date results, our current 2012 outlook excluding the DAC unlock, prior-year development, and other items listed on slide 15 totals approximately $1.5 billion to $1.6 billion for the year, slightly less than our December '11 outlook of $1.6 billion to $1.7 billion. We are pleased with this result given the challenging macroeconomic environment as well as the significant strategic actions we took this year which were not anticipated in our December outlook.

We are currently working on our 2013 plan, which we expect to share with you in February on our fourth-quarter 2012 earnings call.

To conclude, I am pleased with both our business results and our strategic accomplishments this quarter and this year. Despite the weak economy and low interest rates, our businesses performed largely in line with our expectations. Our capital resources remain strong and stable and our hedging programs continue to protect us against adverse economic and market conditions.

At this point, I would like to turn the call over to Sabra to begin our Q&A session.

Thank you, Chris. We have about 30 minutes of time for Q&A. Felicia, could you please give the instructions for asking a question?

(Operator Instructions). Mark Finkelstein, Evercore Partners.

First, a quick question on the enhanced surrenders that you're doing on the variable annuities. I'm just curious if the offer is -- how do the offers in the kind of the premium that you're going to be offering, how would that roughly compare to the reserves that you are holding against those guarantees?

Mark, this is Liam. I'm going to have Beth Bombara who runs our Runoff division answer that question.

Thanks, Mark, for the question. The way I think about it is obviously with the enhanced surrender value option, we are paying a premium above the current account value. That might be slightly higher than the reserves that we carry today but the way that we really look and evaluate these programs is we look at what it does to the requirements in our stress scenarios because as you know, we hold capital for our stress scenarios and we would anticipate that the cost of the program would be less than what the benefit is we would see from reductions in required reserves in those stress scenarios.

Okay, second question is for Chris. I guess on slide 12 you kind of gave a comparison of the hedge mark-to-market asset versus the change in the VACARVM liability which was essentially flattish in the quarter despite markets obviously being a little bit higher. I'm just kind of curious from a broad perspective, are we at that kind of point where we should start to see if markets continue to cooperate if we should start to see statutory earnings in the variable annuity business?

Mark, thanks for the question. I think your point is a good one. This quarter was negative $4 million as we talked about and I remind you that again, our hedge programs aren't I will call it managing all the economics, so we still have risk positions on, so you are always going to have I will call it differences between your VACARVM liabilities and your changes in fair value of hedge assets.

But as we have said before, generally at the 14.50 S&P level, we start to feel very good about the performance of the VA block going forward. You could see it -- I will call it the net amount of risks coming down this quarter so we are at that inflection point where if markets can continue to improve and it won't happen overnight, Mark, where we generate a lot of statutory surplus off the VA block. But over time with steady market performance, it is very positive for us.

I would have to point out, though, offsetting that is really the continued low interest rate environment, so as much as equity markets are positive around the world, low interest rates in the US, Europe and Japan are still a significant headwind for our statutory surplus creation on the Life side.

Okay, then just one quick follow-up to that point. In your last year presentation, you kind of gave an estimated long-term economic cost of hedging kind of 40 basis points on the US block, 15 dynamic, 25 macro. As you look out, does that change at all with kind of with how the block has moved in the markets?

Not really. If I look at -- I will call it the cost, what we are expending and sort of the path-dependent performance of our hedges, it's fairly consistent with what we started the year at. So as we head into 2013, Mark, if we're going to modify any of our hedging programs, which we are always considering how to make them more economic beneficial, we will update you but right now as we head into the fourth quarter, I would say those estimates are still the best ones we have.

Okay, thank you.

John Nadel, Sterne, Agee.

Hello. I'm sorry about that, we are working without phones. So a couple quick questions. I'm looking at slide 14 on the expense reduction target. Obviously two pretty large pieces of that pie won't really start to come through until the sales close, but with respect to the remaining $235 million of expense reductions, I'm wondering how much of that is already in your run rate earnings currently?

I will have Chris give you a little more detail, John. Thanks.

Thanks, I hope you're doing okay.

Thanks.

I would say, let's take the pieces, the $100 million for US annuity shutdown, there's probably -- we are probably 30% achieved on our mission through 2012, so there is some in there. There will be more that will come out particularly as we shrink shared services in 2013. The $135 million of I will call it expense efficiencies, I would say most of that will relate to our 2013 plan. So I wouldn't say that there is very much in our run rate at this point in time. That's the incremental goal that we established for 2013.

Okay, very helpful. Thank you. Separately from the variable annuity business for a moment, thinking about the fixed annuity business, I am just interested in whether you've seen any interest in that business given the continued M&A activity in that particular product line industrywide? And if you could just remind us how much statutory capital approximately you currently have supporting that business?

John, if I understood your questions, it's called the fixed annuity transaction market. I know Beth and her team, we work closely with her on those opportunities. We are aware. We have Intel. We've got advisers that are working with us. I think our simple analysis right now of what we see appetite in the marketplace compared to our book of business, we just see a disconnect particularly given the low interest rates.

And as far as the capital, I haven't provided capital by product line. We might do that going forward but historically we have it. How I think about capital in total, John, is think of the $7.5 billion of capital we have in the blue books. We have approximately 150 -- excuse me $1.5 billion of that capital allocated to Group Benefits and the rest would be supporting VA, fixed annuities, and our institutional annuities blocks going forward.

And that $7.5 billion, some of that, Chris, is related to the Life business, no?

Yes.

Okay and then last quick one for you is just given the recent move lower in longer-term new money yields, plus you combine that with the fact that you're going to sell a few businesses that are at least somewhat rate-sensitive, I was just wondering if you could just update for us your outlook for how we should think about rate pressure on your go-forward businesses into 2013? Because I think previously you had talked about something along the lines of $50 million in 2013, another $50 million on top of in 2014, etc. Is it fair to assume that that has changed a bit given the sales and given rates?

Thank you for the question, John. There's two aspects of rates that I just will touch upon. One, we touched upon from a statutory cash flow testing and approaching year-end, so there is going to be some pressure on that as far as additional reserves, cash flow testing reserves, C3 Phase I impacts, so that would be the first pressure point.

As we look forward then after we sell retirement in Life and we'll talk more about this when we provide you the full 2013 plan, we have about $4 billion of cash flows to reinvest in 2013 and 2014 for our ongoing businesses . And so I would say that the new pressure point for continued low interest rates on a run rate basis is probably in the $20 million range for 2013 and then it would jump to $50 million in 2014.

Perfect, that's all I have. Thank you very much.

Thanks, John. Be well.

Tom Gallagher, Credit Suisse.

I wanted to come back to the expense plan reduction of -- Chris, I think you said $850 million all in. Just so I understand it correctly, I heard in response to John's question what you said about the 2013 plan which was you have only achieved 30% so far on the VA $100 million, so that's an incremental $70 million there and $135 million on other various initiatives so let's just add this up to $200 million. That still leaves another $650 million.

Should we assume the $650 million incremental is being offset by all the lost revenues that are going away with these asset sales? I just want to think about the other $600 million plus and eventually does any of that come through to the bottom line or not?

Tom, it's Chris. I think on the slide if you had a chance to look at it, the $450 million of your $600 million number is really going to the new owners, so it's the employees. It's the infrastructure, so really when we close those transactions, $450 million comes out immediately. Then what we are left with is it really represents $165 million which represents I will call it reducing our shared service platforms, IT operations, finance, that approximates the 500 positions that we will eliminate in 2013. That will come out somewhat ratably in 2013.

Okay, that explains that perfectly. Another follow-up on the variable annuity filing for the buyouts, can you just give a little more color for what the target is here? I presume it's going to be the contracts that have the largest in the money type benefits that you would be going after and the biggest VACARVM reserves. Can you frame a bit in terms of size? Are you targeting -- is it 10% or 20% of your book? Is it bigger, a little more color on the scope of this and what you are sort of hoping for?

We will have Beth do that. She will give you a little more color in addition to the comments I made about it being about 15% of the book, about 45% of the NAR. So go ahead.

A couple things just to frame it as to what policies this impacts. So it's about in total about $5 billion of account value and it's related to policies that have our be LIB II rider associated with them, which is a lifetime income benefit rider. Again, the way that these programs work as I'm sure you know is that they are made available to all policyholders that meet the criteria that is in the filings.

So as far as targeting certain policyholders again, it's open to all. When we think about the benefit that we might see, currently this book, we see about a 5% lapse rate. When I look at what might be reasonable expectations as to what we might see for sort of an increase in the take rate, I think to the extent that that doubles or triples, I think that's a reasonable expectation because we would never think that this choice would be right for all policyholders that have this benefit.

So again, that's how we are thinking about it right now and then as we go through the approval process and we're able to actually offer this benefit to policyholders, we will trip those estimates as we see actual take rates from the program.

Is there -- when you say 45% of the NAR, is it also approximately 45% of the reserves in capital or is it not that linear?

I think in all things VA, things are never linear so I would not look at it exactly that way but again, given the fact that it does have the profile that it has, you would expect that the reserves allocated to it are higher than maybe other reserves associated with other portions of our block.

Okay, thanks. That's helpful. Just one last if I could sneak it in. Chris, just on Japan, the main concern I've been hearing on that lately is rates are low. You know, is there a risk because of how deep in the money those contracts are in terms of the VA that there's going to be a higher utilization than you have modeled so there is fear that you might have to add to capital and reserves in Japan?

Can you just give us some idea for over the next two to three years whether Japan is likely, more likely to be a consumer or a returner of capital or just something that's kind of neutral?

On low rates in Japan, I would say right now in sort of our baseline scenario out the next couple of years, we don't see the need to inject capital into Japan but as you have pointed out, there are obviously pressure points from low interest rates. All I could say is that our assumptions as I looked at them and again we updated all our policyholder behavior assumptions this quarter, I think are very, very prudent. We do assume a high utilization of that benefit going forward.

So I think we planned for it but again in a baseline scenario, I don't think they are going to consume capital but on the other hand, I don't think they're going to be releasing capital back to the US in any short period of time either.

Okay, that's helpful. Thanks.

Brian Meredith, UBS.

A couple questions here for you. I'm great, thank you. First one, can you just clarify your cat reinsurance program? I believe you've got a $350 million deductible on it. Is there anything else we should think about as we kind of look at Sandy and the potential loss impact here?

At a high-level, Brian, you've got it. At our maximum, loss retention is $350 million.

Great, great, also then from where Sandy hit, how can we kind of think about your market share? Is it disproportionately larger there? Something like that, anything you can kind of give us color on that?

Brian, Doug Elliot and his team have done an incredible amount of detailed work on that so again while it's very early, I think he can give you a flavor.

Good morning, Brian. This is Doug. I would say from a commercial perspective, we don't see ourselves at a pattern in any of the areas. Obviously these are early days but as we go through both our zip code and our territorial analysis across all the affected areas, I think you'll see us in line relative to market footprint across the states.

Great, then I would like to ask a question on some of the workers' comp reserve actions you continue to take here. I am just curious what's the challenge here in actually getting kind of loss picks right and reserves right with that line of business? Is there anything you are doing that going forward we are not going to see some of this current year development and adverse development on this line?

Let's separate the current and the prior let me see if I can add some color and give you some confidence about some of the actions we are taking which we feel very good about. Number one on the prior accident year, when we look at $18 million against a base of $6 billion, I look at that, Brian, really as tuning. We did do some minor strengthening to the accident years 2011, 2010, and 2009 and we had some releases 2005, 2004, and 2003, but $18 million and $6 billion really given what we've gone through in the last five quarters, I feel very good about our position and we will continue to monitor aggressively and there might not be little bumps in the road but we are in a completely different spot than we were five quarters ago.

When I think about the current year, a little bit of -- two stories. One is, two-thirds of our comp actions in the year were in small commercial. When you step back and think about small commercial, our returns and combined ratios in small are really, really outstanding and I think they will stack up with pretty much anybody in the industry. We saw a little bit of medical severity in the quarter and a little bit of larger cases, so nothing major but enough so that we made some minor modifications to our current accident year pick and comp and small.

It's the first time we've had to do that in several years but we are watching and staying very careful again albeit you see the combined ratios in our -- very solid returns and aligned with outstanding rate adequacy across small commercial.

Different story in middle. We've talked aggressively about the rate actions we were taking in our middle-market book the last five, six quarters. We feel good about those rate actions. They do not stop in third quarter 2012. We continue to march on and as Liam mentioned, we are marching on into quarter four.

So we are out beyond our trends both on a frequency and severity standpoint and we now are improving margins. The prior actions had a little bit of mettle to them but as I look at the current accident year, there isn't anything that concerns me and I feel good about the actions we are taking in the marketplace and reflected in the balance sheet.

So maybe some bumps along the way and a few bumps in the quarter but really very, very steady progress and our behavior in the marketplace both from a new business perspective and a rate retention I think is a completely different spot than where we were third quarter of 2011.

Great, and then just one last quick question for you, Doug. New business, small commercial actually declining this quarter. Anything going on? Is that something we should continue to see going forward?

So for us in small commercial, we clearly are looking at our dials and we're making some adjustments. Our pricing in small commercial moved up in the quarter. That was a good thing. We've got a little bit of pressure in automobile. We're watching that carefully and so we've adjusted pricing and I think that has affected some of the top line. Nothing at this moment that concerns me but clearly you are right, not at the run rate that we had for the first six months.

So we will stay on top of that. I want to make sure our margins stay very strong in that business but we also are mindful that it's a business we'd like to grow and we are thoughtful as we move forward.

Great, thank you for the answers.

Chris Giovanni, Goldman Sachs.

Good morning. Just a few series of questions I guess on the VA buyout plans, I think last quarter when I asked about sort of the buyout opportunity, there was a comment that we don't know if there's evidence yet that consumers will actually kind of make that trade. So have you seen evidence now that consumers will make that trade?

And then if you achieve some of the targets that Beth talked about, I guess what would be the next most logical step for further runoff of the VA book? Are there conversations or extensions you may be having with other participants that some of the more deep in the money contracts if those can get cleared out that additional opportunities would free up or is that just too optimistic?

Chris, let me make just a high-level comment. I will let Bev comment on the market intelligence of others that have done it. Beth and her team to your second part of your question, are examining every single possibility we can reasonably consider to accelerate the runoff of the book. As I said in my remarks, eventually a permanent resolution to the size and risk of some of the books as well.

So we have a variety of things in the pipeline. Some will materialize because they will make sense. Some won't, but there's no stone being left unturned in our Life Runoff business. So with that, Beth, I will turn it over to you for any additional context that you want to give.

Sure, as relates to the first part of your question, Chris, as to the success of some of these programs by others, anecdotally we have heard that there has been some success but really the way we looked at designing our program was really more about looking at our book and the characteristics of the policies that we are targeting through this and so because of that and when we look at the offer that we are making, we do think that this will be attractive to some of the policyholders. So we do expect to see some take rate as it relates to this program once it's launched.

Okay, thank you. Then Liam, just one quick follow-up, I'm not asking for specifics around the deployment of the $2.2 billion but did I understand you correctly that the $2.2 billion will be used for debt pay down buybacks as well as some action on further runoff of the VA book?

Chris, let me take a step back first of all. Our capital management plan will be a holistic plan including the $2.2 billion and as I said, our current intentions, we certainly don't want to get ahead of our regulator and our other constituencies and we are in conversations with them, so our current intentions would be to do debt repayment. At these share prices, repurchases are very accretive, as you know.

And third, to preserve some capital so that we could be opportunistic when opportunities to permanently reduce the size and risk of the legacy annuity liabilities which we believe will be very attractive for shareholders.

Great, thanks so much.

Randy Binner, FBR.

Good morning, everyone. This is Dan Altscher on for Randy. A question for either Chris or Doug, on some clarification on the workers' comp accident year loss ratios. I think, Chris, you said that 2012 is running about 4 points better than 2011. Could you maybe give what the 2012 and 2011 accident year loss ratios are looking like, the actual numbers?

Right, let me -- Dan, this is Doug. When you think about accident year 2011, what we are referring to is accident 2011 as it sits right now, which is a seven quarter look at 2011 and that is correct that our view about accident year 2012 versus 2011 is about 4 points different. At the moment, their quarter 2012 accident year is in the high 60s, 68, and I would say again that's our combined standard workers' comp ratio, so includes middle and small. They're different dynamics inside each but those are the components that roll up to the total. Also a little bit of national over the top.

Okay, that's great. Then just a quick follow-up for Beth. You said the premium option or that the takeout of the VA buyout, the premium that's being offered is relatively attractive. Can you size that little bit? Is it 5% above account value, 10% account value? Now with the NAR being so much lower with the equity markets higher, what does that take? Like are policyholders really going to be interested in that now that their accounts are much closer to being made whole?

Sure, so a couple things as it relates to that. As it relates to the program, the way that it works is that if a policyholder were to elect this option, they would be able to take out their account value with a waiver of any surrender charges that might still be applicable and about 55% of this book still has some portion of a surrender charge that is applicable.

And then the enhancement that they get above that account value is that they get a payment of 20% of what the benefit base is or think about that as the guarantee amount subject to a cap of an overall 90%, so it does provide an enhancement. Again as we look at this book, a significant portion of it is in the money so that there are several policyholders that if they elected this benefit, they would receive an amount greater than their current account value.

Okay, great, thanks. That was very helpful detail.

Dan, let me add one other detail to you. I want to make sure that when you look at quarter to quarter you go back and actually look at when we roll out our quarterly triangles. You make sure that the seven quarter look at accident 2011 is there. The year-to-date September comp all in three quarter look will be 64, 64.2. So there are lots of questions coming where the quarter to date change is 68 but the year-to-date will be 64.

Got you, okay. Thank you.

Felicia, I believe we are running out of time. We have another company who has a call starting at 10. So I would like to thank you all for joining us today on the call. I know many of you are dealing with telecommunications and commuting challenges. Please feel free to reach out to the IR department at The Hartford for any follow-up questions and we look forward to talking to you soon. Thank you and have a good day.

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