Hartford Insurance Group Inc (HIG) 2012 Q4 法說會逐字稿

Good morning, my name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to The Hartford's fourth quarter conference 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. Sabra Purtill, head of Investor Relations, you may begin your conference.

Thank you, and good morning, everyone. Welcome to The Hartford's 2012 financial results and 2013 outlook conference call. Our speakers today include Liam McGee and Chris Swift, as well as Doug Elliot, President of Commercial Markets and Andy Napoli, President of Consumer Markets. Other members of our executive management team are also available for the Q&A session.

Today's prepared remarks are longer than normal, in order to cover the 2013 outlook as well as Doug's and Andy's presentations about their businesses. We will still have about 30 minutes for Q &A at the end of our prepared remarks. As detailed on page 2 of the presentation, today's statement concerning future results or actions are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance, and actual results may differ in a material manner from these statements. In addition, we do not assume any obligation to update the forward-looking statements. Furthermore, you should consider the risks and uncertainties that may cause actual results to differ, including those in our press release, our 2012 10-K and other filings we make with the SEC. Finally, please note that our presentation includes financial measures that are not derived from GAAP. Definitions and reconciliations to the most directly comparable GAAP measures are provided in the financial supplement press release and 10-Q available on our website.

I will now turn the call over to Liam.

Thank you, Sabra. Good morning, everyone, and welcome. As you saw from our release last night, The Hartford had a strong finish to 2012, and the fourth quarter completed a successful year of strategic transformation as well as execution for the Company. Following the life divestitures, we enter 2013 with a sharper focus on the property and casualty, group benefits and mutual funds businesses. We are transforming and profitably growing the organization with the continued goal of delivering greater shareholder value. As Sabra mentioned on today's call, Chris and I will speak. And then Doug Elliot and Andy Napoli will review the commercial and consumer markets results and preview their 2013 outlooks. We are going to use this format going forward, so Doug and Andy can share greater detail about the operating fundamentals of their businesses. Chris will provide an update on the impact of Storm Sandy, but I do want to express our deep appreciation for the professionalism and excellence demonstrated by our claims team in their response to the storm. Their dedication to serving our customers is a hallmark of the Hartford about which we are all very proud.

Before we start, I also want to say thank you for the many wishes of good luck and good health. I am feeling great, as well as very fortunate and we are back to business as usual. Since I arrived at The Hartford in 2009, our top priority has been to restore the operating performance of the Company and deliver increased shareholder value. We have taken significant steps to improve the Company's financial strength and stability. As examples, we repaid the TARP funds, refinanced the Allianz debt, successfully repositioned the investment portfolio, implemented the tail hedge in Japan, and executed a series of necessary expense actions.

As you know, to accelerate our progress last March we announced a sharper strategic focus that returns The Hartford to its historical strength in underwriting, distribution, and claims management. The strategy aligns the Company's resources with ongoing businesses that have competitive market positions, strong capital generating ability, and lower sensitivity to capital markets. Roughly nine months later, on January 2, we closed the last of the life divestitures. The transactions were executed at attractive valuations, with strong strategic buyers. I am proud of what the team has accomplished. We made difficult decisions, then executed them as planned. These changes position the Company to continue to grow shareholder value in the years ahead.

With the sales successfully closed, we are pleased to share our capital management plan with you. The capital plan is accretive to shareholders and is the culmination of a thoughtful, comprehensive process that effectively balances several critical goals. We have reviewed the plan with the rating agencies and have received approval from the Connecticut Insurance Department. In the first quarter of 2013, we will make a $1.2 billion extraordinary dividend from our Connecticut domiciled life insurance companies, and also aligned our Vermont life insurance captive, and moved about $300 million up to the holding company as well. First, we are allocating $500 million to a share repurchase program, which we will execute over 2013 and '14. Looking ahead, our intention is to continue a consistent capital management approach of returning excess capital as appropriate to our shareholders. Second, as part of the plan we will reduce holding Company debt by $1 billion. This will save about $55 million pre-tax of annualized interest expense by the end of 2014.

Debt reduction is an important capital use for two reasons. First, it is appropriate to reduce debt levels for the lost earnings from the divestitures. In addition, given The Hartford's increasingly P&C centric businesses, our goal is to reduce the Company's debt leverage ratios to levels that are more consistent with the capital structure of other leading P&C companies. Our year-end 2014 target for debt-to-capitalization is in the low 20's range. Third, we are retaining additional capital in the life companies to supplement our financial flexibility to take actions to reduce risk in the legacy annuity blocks, ranging from customer-oriented offers and exchanges, to transactions with third parties. We have the necessary resources to take future economical actions to address the legacy annuity liabilities, which should create significant shareholder value.

As we look to 2013, we are focused on achieving profitable growth in each of our go-forward businesses, primarily by driving margin improvement. We saw good progress in 2012 particularly in P&C commercial and personal lines homeowners. In standard P&C commercial, we achieved 9% renewal written price increases in the fourth quarter and 8% for the year. This contributed to improvement in the combined ratio ex CAT and ex prior-year, and we expect these positive pricing trends to continue through 2013. We are also better balancing our mix of P&C commercial business, building on our historic strengths in workers compensation. We've expanded our property capabilities significantly over the past year which positions us to be a broader risk-taker in the marketplace. In Consumer Markets, I am pleased with the progress Andy and his team have made in improving margins and growing new business. And Andy will talk more about that later in the call.

In Group Benefits, our disciplined repricing of the book has resulted in the shedding of some unprofitable accounts, but it has also improved margins and returns. We think this is a good trade off, and we are encouraged by the profitability trends in this business. We saw nice recovery during the fourth quarter, and the 2013 outlook is positive. Our mutual funds business is positioned for profitable growth through its expanded relationship with Wellington Management. We saw improved sales and net flows in the fourth quarter, and fund performance for 2012 was outstanding with 80% of our funds beating their peers. So we took significant steps in 2012. And the goal for '13 is to continue to drive profitable growth in the go forward businesses.

We are determined to reduce the size and risk of the legacy annuity liabilities. As you know, last year we put the annuity business into runoff, and named Beth Bombara to lead that effort. She and the team have been evaluating a number of contract holder initiatives and other actions to reduce the risk embedded in these liabilities, with the ultimate goal of being able to isolate or separate them from The Hartford. As you know, as an initial step, we are launching the enhanced surrender value offer for a subset of US VA policyholder's. Communications about the offer started in January. We believe this offer will be attractive to certain policyholders and will result in an increase in surrender activity in this block.

As you know global equity markets posted strong results in the second half of 2012, and that continued in January. In addition, the yen has weakened significantly against the dollar and the euro over the past several months. These market conditions have positive economic implications for The Hartford, and have significantly improved the in-the-moneyness of the US and Japan VA blocks. For example, the net amount at risk for the Japan income benefit has declined significantly from $6.1 billion at the end of the third quarter to $1.9 billion at the end of January. And the general consensus is that the yen will continue to weaken, which would be positive for us. Our goal is to maximize shareholder value by effectively managing the runoff of these liabilities and reducing the amount of capital needed to support them. Improving market conditions may make it more attractive for policyholder's to take actions such as surrender or annuitization, and should also create expanded opportunities for us to explore risk transfer transactions with third parties. All of these actions would reduce our exposure to this business, and result in lower capital required to support these liabilities.

As Chris will detail, we will hold an Investor Day in April and much of the agenda will focus on our runoff annuity operations, which we have named Talcott Resolution and how we will maximize shareholder by managing these liabilities, particularly in the context of the recent market improvements. Chris will cover our 2013 earnings outlook of $1.375 billion to $1.475 billion, which reflects lost earnings from the life company sales, better margins in the ongoing businesses, declining assets under management at Talcott, an increase in the budgeted CAT load in our P&C businesses, and the elimination of expenses from the divested life businesses, 90% of which will be taken out by year-end 2013. So to close, the fourth quarter was a strong end to a transformational year for The Hartford. We feel very good about what we have accomplished. With our focus on driving profitable growth in the ongoing businesses, and reducing the size and risk of the annuity liabilities, we are confident in our ability to execute our plan and drive increasing shareholder value.

With that, now I will turn the call over to Chris.

Thank you, Liam. Good morning, everyone. This morning I will focus on four areas. First, I will briefly cover fourth quarter and full-year 2012 results. Second, I will provide an update on our life runoff operations which we have named Talcott Resolution. Third, I will discuss our capital management plan. And last but not least, I will cover our 2013 core earnings outlook.

Let's begin on slide 7. Fourth quarter 2012 core earnings were $265 million or $0.54 per diluted share. This quarter we changed our definition of core earnings, which now excludes restructuring and other costs and DAC unlocks. We believe this definition gives a better view of fundamental operating results. Storm Sandy generated significant CAT losses this quarter. Two months have passed since we released our preliminary estimate, which is the same as what we recorded in this quarter's results. This quarter, this storm generated more claims than any other CAT event in our history.

To date, we have closed about 80% of property claims, and 90% of auto claims. For the quarter, total pre-tax CAT losses were $335 million, including the $350 million for Sandy. This means that fourth quarter CATs after-tax were $174 million higher than our original guidance. Core earnings in the quarter, after excluding CATs, prior year development, and a small retiree tax benefits were about $0.87 per diluted share, above our November outlook of $0.77 to $0.82 per diluted share. Improved group LTD results, lower expenses in Talcott Resolution, and favorable non-CAT weather results were the principle drivers of this out-performance.

Slide 8 summarizes full-year 2012 results. Core earnings were $1.4 billion or $2.88 per diluted share. Excluding prior-year development and the retiree tax benefit and catastrophes above forecast, 2012 core earnings were $1.6 billion or $3.27 per diluted share. Turning to slide 9, The Hartford's book value per diluted share rose by 5% to $46.59 over the past year. Net income and higher AOCI were partially offset by charges for the Allianz debt refinance and warrant share repurchase in April of 2012, both of which reduced shareholders equity. Excluding AOCI, book value per diluted share declined slightly to $40.79 principally due to the Allianz transactions. The 2012 core earnings ROE was 7%, a strong improvement from the 5.6% in 2011. We continue to focus on improving core earnings ROE. This quarter we also realigned our financial reporting to reflect the Company's focus on its P&C, Group Benefits and mutual funds businesses. In order to help you reconcile your models to prior recording, we posted a schedule on our website for both the new core earnings, and the line of business presentations.

On slide 10 you can find our consolidated P&C results, which include P&C commercial, Consumer Markets, and P&C other operations. P&C results improved significantly in 2012. 2012 P&C core earnings totaled $714 million, compared with $279 million in 2011, reflecting improved underwriting results and lower prior-year development. Our accident year P&C underwriting margins improved over 2011. The P&C combined ratio excluding CATs and prior year development declined to 94.8% versus 95.5% in 2011. We achieved underwriting margin improvements in both P&C commercial and consumer markets, although we still have work to do. The P&C full-year combined ratio was 101.9%, almost 5 points better than the 106.8% in 2011. We had much lower prior-year development and slightly lower current accident year CATs in 2012. 2012 prior-year development was favorable by $4 million before tax, compared with unfavorable by $367 million in 2011, which had significant charges for legacy asbestos exposures and workers compensation.

Let's turn to results for mutual funds, which are summarized on slide 11. So far in 2013, we are pleased to see positive momentum in key areas of the business, including sales, net flows, fund performance, and market appreciation. Fourth quarter retail mutual fund sales were good, rising 34% from prior year. Net outflows, while still negative improved significantly versus the prior year as redemptions slowed. Overall, the team is making progress on its distribution and product expansion goals which are key tactics for generating profitable growth in this segment. Fund performance also improved substantially in 2012, with 80% of our funds ranked in the top half of their Morningstar peers. In particular, the capital appreciation fund went from bottom quartile performance in 2011 to top quartile in 2012, outperforming the S&P 500 by about 400 basis points. These metrics are very important to retail broker sales, and we are optimistic that this will help to improve 2013 net flows compared with the last two years.

Talcott Resolution results, my second topic are on slide 12. The principal goal for Talcott is to reduce the size and risk of its liabilities. As a result, between the business sales and the decline in annuity blocks, we expect reduced core earnings in 2013 and thereafter as fee income shrinks. Consistent with this outlook, Talcott's account values shrank during 2012, although core earnings were up 7% compared to the fourth quarter of 2011, primarily due to lower expenses. Year-over-year, US variable annuity account values declined 6%, as surrenders more than offset strong US equity market appreciation. The surrender rate rose to approximately 16% for the year, and US variable annuity net outflows totaled $11.4 billion. The full surrender rate which excludes partial surrenders and withdrawal benefits was 10.9% for 2012, about a half -- excuse me, 1.5 points higher than 2011.

As Liam mentioned, we are now beginning to launch the ESV program. In our initial phase, we will reach about 45% of eligible policyholders. Contract holder outreach began in late January, but it will take a few months for us to gauge customer response.

I would now like to turn to VA results. And slide 13 provides a summary of the 2012 VA impacts including hedging. The significant driver of the $716 million GAAP loss was the yen hedge losses for our Japan VA book, where the corresponding liability is not fair-valued under GAAP. As we have shared with you previously, our hedging programs are focused on economics for which neither GAAP nor statutory are a good estimate. Nevertheless, we know you are keenly interested in our statutory results. The negative statutory impact in the quarter was $439 million pre-tax and before fee income. Net of hedging, we expected a modest negative statutory impact due to the improving market environment, which generated hedge losses. The final impact was higher due to about $300 million of non-market related impacts for assumption changes on reserves, from increased expenses, and a duration extension of the macro hedge program. I would note the cost of that structure of our macro hedge program has improved, which is now estimated to be approximately $75 million to $100 million annual cash spend down from the previous $200 million to $250 million.

Before moving on, I wanted to talk about the yen We are encouraged by the weakening of the yen, which reduces net amount at risk, and improves the net economics of the book. We also expect this may influence policyholder behavior at annuitization. Based on the January 31 closing price of JPY91.7 to the dollar, our net retained death benefit NAR declined 31%, from $4.8 billion at year-end to $3.3 billion. While the net income retained benefit NAR declined 42% from $3.3 billion to $1.9 billion. These are significant moves in the month of January. The weaker yen will reduce the book's in-the-money-ness and could accelerate the runoff of this block which ultimately reduce our economic liability to contract holders. We are encouraged by this trend, and will continue to maintain our dynamic hedging program for Japan.

Now I am going to cover our capital position, which is summarized on slide 14, along with our capital management plans. The Hartford's capital resources totaled $16.6 billion at December 31, 2012. This was a decrease from September, but was more than offset by the $1.7 billion statutory gain from the sales transactions. The far right-hand column of slide 14 shows that we would have reported an approximate $500 million increase in surplus, if the transactions had closed by December 31, versus early January. Further down that column, you can see the pro forma capital position after the $1.5 billion dividend and return of surplus. Pro forma life statutory surplus would be about $6.6 billion, and total capital resources would increase to $18.3 billion. The end result is our capital position remains strong.

We estimate that the pro forma RBC for The Hartford life entities would be approximately 420%, taking into account the net reduction in required capital due to the business sales and the dividend payment. We intend to keep that life companies well-capitalized for their business risk and consistent with our current ratings. In addition to the transactions and the VA impacts, we moved the mutual funds legal entities out of the life stack to the life holding company which reduced life surplus by about $200 million. Finally, other statutory impacts include deferred tax assets and additional reserves for fixed-rate liabilities in this low interest-rate environment. Total holding Company cash and short-term investments at year-end totaled $1.4 billion, equal to last quarter. This will increase to $2.9 billion after the dividend associated with the capital management plan. Let me turn to that now.

Last night, we announced that our capital plan had been reviewed and approved with the Connecticut Insurance Department and the four rating agencies. We expect to dividend $1.2 billion from our Connecticut domiciled life insurance companies in the first quarter of 2013. In addition, as a result of the Individual Life sale, we expect to dissolve our Vermont life reinsurance captive in the near-term, and return approximately $300 million of surplus to the holding company. Let me now cover the capital management plan. As mentioned in the press release, we are launching a $500 million share repurchase program. We expect to execute the program ratably between now and year-end 2014 at about $50 million to $100 million per quarter. Second, we will reduce the outstanding by approximately $1 billion. We currently expect to pay about $320 million July 2013, and the $200 million March of 2014 maturities when due. Our goal is to lower the Hartford's debt to total capital ratio into the low 20% range, and over time to improve the fixed charge coverage ratio to about 5 to 6 times.

I would now like to cover our 2013 outlook and summarize the key assumptions. These assumptions and other macroeconomic factors are included in the table on slide 15. Our outlook for 2013 core earnings is $1.375 billion to $1.475 billion, which includes the impact of lower investment yields and the $260 million to $280 million decline in Talcott Resolution's earnings due to the continued shrinkage of the VA books and the sale of Individual Life and retirement plans. In our P&C and Group Benefits business, we expect to see improvements in our accident year combined ratios before catastrophe losses based on the pricing and underwriting margins we have achieved in 2012 which we expect to continue into 2013. In P&C commercial, our outlook calls for a 92.5% to 95.5% combined ratio, compared with the 96.6% actual in 2012. The Consumer Markets outlook is 89.5% to 92.5%, compared with 90.8% in 2012. Keep in mind that we have increased the budgeted CAT loads for both commercial markets and consumer markets in 2013, as compared to 2012.

In Group Benefits, our loss ratio outlook is 77% to 80%, compared with a 79.5% in 2012. We expect a mid to high teens increase in core earnings, as the impact of our pricing and underwriting initiatives flow-through an additional year of earned premium. Doug will talk about this in a minute. On a consolidated basis, our outlook assumes that corporate core losses decline by approximately $40 million in 2013, reflecting the sale of Woodbury and the reduction of interest expense although actual amounts will depend on debt repayment timing and results. We will update you on our progress in the debt plan as it is completed. With respect to the share repurchase program, we plan to be active each quarter, and we will start buying back shares once the 10-K is filed.

Finally, I would like to briefly review first quarter expectations. Our current outlook is for core earnings of $0.75 to $0.80 per diluted share, including budgeted CATs of $57 million after-tax. The first quarter is normally a light CAT quarter, and so far that trend is holding. This amount does not include restructuring and other costs which we expect to be in the range of $15 million to $20 million after-tax. We expect to report first quarter earnings in the last week of April. And as Liam mentioned, we look forward to seeing you in April for a financial and risk review of Talcott Resolution. A formal invitation will be sent out soon, but we will have that meeting on April 11, here at our Hartford campus.

To wrap up, we ended 2012 with significant accomplishments, and we begin 2013 with momentum. We are focused on continuing our transformation of the Hartford by strengthening profit margins, and improving operating efficiencies, and we have a balance sheet with increased capital flexibility. Finally, we are preparing to launch our capital management plan.

I will now turn the call over to Doug to talk about the P&C commercial and Group Benefits results and outlook. Doug?

Thank you, Chris, and good morning, everyone. I am going to cover our P&C commercial and group benefits results for the fourth quarter and full-year 2012. I will also provide some commentary on the marketplace and our 2013 business objectives and outlook. The P&C commercial segment made strong pricing progress during 2012 including a very solid fourth quarter. We are confident that our end market actions are driving improvement in our underwriting margins. And while these actions put pressure on our new business and retentions, our continuously improving risk analytics convince us that we are making the right trade-offs on a daily basis. Our all-in combined ratio for the year was 102.9%, a decrease of 1.7 points from the 104.6% in 2011. This margin improvement reflects our focus on pricing and targeted underwriting actions, as well as lower unfavorable prior-year development versus 2011. I will cover each of these shortly.

Catastrophes were a major contributor to losses during the fourth quarter due almost entirely to Storm Sandy. Current accident year CATS were 5.2 points on the full-year 2012 combined ratio, which coincidently is the same as 2011. For the year, CATs totaled $325 million pre-tax, with Storm Sandy contributing $207 million in the fourth quarter. Excluding prior-year development and catastrophes, the combined ratio in P&C commercial improved to 96.6% for the year, down slightly compared to 97.3% in 2011. Our fourth quarter results further highlight the significant improvements we are seeing and the depth and speed of our actions since the year ago. The ex CAT ex prior year combined ratio for the quarter was 97.8% versus 101.1% for the prior year period, a solid improvement. Our cumulative rate change in middle market over the last six quarters positions us among the more aggressive companies in the industry, and sets us up well for margin improvement in 2013.

On an ex CAT basis only, the fourth quarter combined ratio was 98.9% versus 107.8% for the same period in 2011. Last year's fourth quarter included significant prior-year reserve development in our workers compensation line. Our pricing and underwriting actions have taken hold and are now beginning to earn through to the bottom line. We continue to refine our reserve position, as we evaluate new data to make sure we are on top of our indications. We see current actions very much as business as usual, compared to last year's more significant prior and current accident year adjustments. Unfavorable prior-year development for the quarter was $18 million, while full-year was $72 million pre-tax. Both numbers compare favorably with 2011 actions.

Workers compensation and auto liability were the primary drivers of loss development, while our general liability lines continue to release favorable news. We achieved margin improvement across most lines of business, but with a more intense focus on middle market worker's compensation. In this line we achieved 15 points of written price increases for the fourth quarter, and 14 points for the full-year. Using our risk analytical tools, we aggressively managed our mix of business as well to retain our better performing accounts while shedding our least performing, increasing margins overall. Middle market results, which are heavily influenced by our workers compensation book of business, improved 3.6 points in 2012 to a full-year combined ratio ex CAT ex prior of 99.3%. Still more work to be done, but terrific progress. Another area for us of focus was in middle-market has been the expansion of our property line.

Despite the increased CAT losses over the last several years, we continue to see property as a strategic opportunity, balancing our portfolio and providing us an account-based value proposition to our agents and customers. David Carter who joined us in late 2011, and our property team spent a good part of the year refining our property underwriting approach, updating our pricing and coverage and driving the enhanced offering throughout our front-line organization. As you may recall at our December 2011 Investor Day, I talked about our long-term goal of moving property premiums from about 10% of our middle market commercial book to closer to 20% over time. We have made major strides to set the foundation for this change. This year, our new business writings in property were up nearly 28%, and the total combined ratio for our property line was down more than 14 points.

Our small commercial segment had another strong year in 2012. As an aside, our small commercial business has not posted a combined ratio over 100% in 20 plus years. And even with the weather events of 2012, that record remains intact. Worker's compensation in small commercial has performed extremely well over these years. However, this book of business while still providing strong returns has experienced margin compression in 2012, driven by not only the economic downturn, but also some class and territorial factors. We have been aggressive in taking corrective actions. Written pricing was 6% for the full-year and nearly 8% for the fourth quarter, double our target just 12 months ago. We have adjusted our appetite in certain industry classes and implemented rigorous underwriting standards.

2012 also presented some challenging trends in auto liability for our small commercial segment. Similarly, we are addressing these trends with rate increases and tightening underwriting standards as well. Even with these headwinds, small commercial posted a 2012 full-year ex CAT ex prior-year combined ratio of 91.1%, a strong result but not quite at the 89.5% we achieved in 2011. For the quarter, the small commercial combined ratio ex CAT ex prior was essentially flat at 92.8%. In specialty, national casualty had an outstanding year with double-digit growth on both the top and bottom line. Our Program & Captive area, had mixed results, with some fine-tuning occurring on under-performing accounts, and implementation of tighter underwriting standards for our auto liability programs. Efforts to reposition our financial products business continue to be successful as we become a more middle market focused insurer, driven less by the Fortune 500 and large financial institution segments.

Now let's turn back to overall P&C commercial. Written premium was up 1 point in 2012, which is in line with our expectations and consistent with the pricing and underwriting actions we took during the year. While policy retentions held up well at 83% in small commercial and 77% in middle-market, new business premium was down 8% and 21% respectively, consistent with our margin objectives. We are very comfortable with this trade-off, and will continue to balance retention, new business and pricing to improve margins in 2013.

Turning to 2013 overall, our goals remain consistent with 2012, continued focus on margin improvement, drive greater product diversification in property and general liability, and build on our momentum across the business portfolio. We expect flat to modest growth in net written premiums across our standard commercial lines in 2013, as we continue to balance underwriting, price and retention on our renewal book, and exercise discipline in our new business efforts. In specialty commercial, we expect the top line to decline by 7% to 10% as we continue to streamline our Programs business and adjust the mix of our D&O book. We expect to see further improvement in underwriting results in 2013 as we continue to earn in 2012 rate increases and focus on overall profitability. Our current outlook is for a 2013 ex CAT ex prior-year combined ratio range of 92.5% to 95.5%, compared to 96.6% in 2012. Offsetting some of the improvement in underwriting results is the increase in CAT load that Chris mentioned. In P&C commercial our 2012 CAT budget was 1.9 points, but the actual results were 5.2. We are raising our CAT budget assumption to 2.5 points in 2013, reflecting higher loss assumptions as well as the expected growth of our property business.

Let me now turn to our Group Benefits segment, which ended the year on a high note, with core earnings of $39 million in the quarter. As you know, we have been focused on improving the margins of this book of business for about two years now, through rate increases, underwriting discipline, and overall improvement in our sold price to target on new and renewal business. Given the multi-year contract terms and long-term disability incident rates that remain at elevated levels, we still have work remaining to return our performance to more acceptable levels. However, we are pleased with progress to date and believe our actions are beginning to pay off.

In 2012 Group Benefits core earnings were $101 million, up 17% over 2011. The improvement has been driven by our pricing actions on both STD and LTD, as well as improving claim trends on our disability business. High unemployment levels continue to put pressure on disability experience. However, we are confident that our actions address margin challenges we face, and any improvement in the US economy will add momentum to our efforts. Our disciplined rate actions have impacted the top line of this business, declining by 7% in 2012. We are intently watching the balance between renewal rate actions and persistency, as well as new business pricing and close rates as we continue to target improved profit margins. Although our core margins improved during 2012 to 2.4% from 1.9% in '11, we are still not at target levels of performance.

We had a very strong fourth quarter with earnings of $39 million. Adjusting for favorable disability seasonality and a one-time expense benefit, we ended the year at a quarterly run rate more in the $30 million range, still very solid. We have more work ahead, but I am encouraged that we are starting to see a more rational marketplace and confident we are taking appropriate steps to drive continued improvement in our performance.

Turning to 2013 for Group Benefit, we expect the top line to continue to decline. The early 2013 pricing view is extremely positive, with rates increasing in the 15% to 18% range for long-term disability. However, we did not renew our largest account effective January 1 after being unable to agree on terms, and have non-renewed a segment of our Program business. These two decisions will contribute to an overall top line decline in 2013 of approximately 10% to 15%, but will have minimal impact on our bottom line performance. In fact, we expect core earnings growth in the mid to high teens despite the top line decline. Improved disability results, both STD and LTD will be the primary driver behind our 2013 earnings growth. Overall, we think the loss ratio in 2013 will be in the range of 77% to 80%, compared to with 79.5% in 2012.

Taken together, I am very proud of the work our Commercial Markets team has done in the past year. We have improved alignment and accountability across our property and casualty divisions. We have made seamless leadership changes in three of our four divisions, all while continuing to build momentum in the market. Our outstanding claim operation continues to be a market leader. And we dealt with two years of significant CAT activity, but kept our focus on the fundamental blocking and tackling needed to improve P&C commercial and Group Benefits results. That focus will remain unchanged, and we expect you will see continued progress in 2013.

I will now turn the call over to Andy Napoli.

Thanks, Doug. 2012 was a year of significant progress for consumer markets in which we improved profitability and established the foundation for return to growth in 2013. Our financial results for the fourth quarter and the full year were strong, and demonstrate the effectiveness of our strategy. In 2011 and in 2012, our primary focus was restoring profitability to auto and homeowners, in both our AARP direct and agency channels. In 2010 and 2011, we were willing to accept decreases in retention and new business levels, as we implemented above market rate increases across the board. As our margins improved, our pricing moderated and we saw retention and new business begin to recover nicely in 2012.

Now let's shift to our fourth quarter results. Both auto and homeowners were significantly impacted by Storm Sandy, as current accident year catastrophes accounted for 13.8 combined ratio points in the quarter. Excluding CATs and prior-year development our combined ratio improved to 90.0% in the fourth quarter, a 2.4 point improvement from last year. A result, we are very pleased with. In homeowners, the improvement was driven by strong earned pricing, coupled with favorable non-CAT weather frequency. Homeowners loss cost also dropped in the quarter due to lower severity of fire losses. Auto margins also improved, driven by earned pricing increases and favorable liability frequency. The physical damage severity trends increases that began in the second half of 2011 appear to have leveled off, increasing only slightly in the fourth quarter.

In the quarter, written premium was flat over last year. Auto policy retention improved to 86%, up 3 points over last year and 1 point sequentially. Homeowners improved as well, 4 points from last year and 1 point sequentially. Auto new business was flat to last year, while homeowners was up 30% which was driven by the roll out of our Hartford Home advantage product most significantly in California where we have very favorable margins.

Now let's shift to Consumers full-year results. Our combined ratio improved about 4 points to 97.4%, driven by an almost 19 point improvement in homeowners which ended the year at 97.0%. A nice improvement, but still work to do to achieve its target. The combined ratio for auto deteriorated slightly from 2011, finishing at 97.6%. This was largely due to the higher trend of physical damage severity that has since made it into our pricing models. I would like to note that these results combined AARP direct and Agency. AARP auto is performing better, and finished near its combined ratio target, reflecting favorable loss experience inherent with this preferred customer segment.

Shifting to growth for the full-year, we continue to drive new business in our AARP agency channel. We grew written premium in AARP agency by $64 million or 89%, authorizing more than 6,400 agents to write the AARP product. As mentioned previously, a majority of AARP members prefer to shop for their insurance through a local agent. And with our AARP auto and home programs now in market across the country, we continue to be very excited about the upside potential of this channel. Top line trends for AARP direct have also improved dramatically from a year ago, benefiting from a 2 point lift in both auto and homeowners policy retention, all along with improvements in overall marketing effectiveness. We are growing top line in markets where we expect to be profitable, and AARP members across both channels now accounts for 78% of total written premiums, up from 72% three years ago.

Now let's move to our 2013 outlook. In 2013 we expect to return to total premium growth with an estimate of flat to plus 2%, driven by growth in both AARP agency and AARP direct. Growth in AARP agency will be driven by more deeply engaging our authorized AARP agents, as they capitalize on the value proposition offered by the Hartford and the AARP brand. Within AARP direct, we expect strong new business growth and further improvement in premium retention, as we continue to take mid single-digit written pricing increases in auto and high single-digit written pricing increases in homeowners. In both auto and homeowners, pricing is being taken to stay ahead of loss cost trends in such a way to achieve or maintain our combined ratio targets.

In terms of auto profitability, we expect an additional point of ex CAT current accident year improvement in 2013. We believe auto frequency will continue to be favorable, and that auto severity both in bodily injury and auto physical damage will be moderate. For homeowners, it is important to note that non-CAT weather frequency in 2012 was much better than the historical average. And we expect non-CAT weather loss cost to revert to a more typical levels in 2013. Thus, even though we are taking written rate increases in excess of loss cost trends, our outlook calls for slightly higher ex CAT loss ratio for homeowners in 2013. We expect written pricing increases for homeowners will be a bit higher in 2013, as our rate indications reflect higher CAT loads after several years of damaging tornado and hail events.

In addition to pricing, we have taken action to mitigate risk in homeowners, including instituting higher wind deductibles, and introducing roof value schedules that adjust the claim payout based on the age of the roof. All-in, we expect the combined ratio before catastrophes and prior-year development to fall within a range of 89.5% to 92.5%. In closing, we are very pleased with the results in consumer markets for 2012, and our ability to improve profitability while positioning the division for growth in targeted markets in 2013. And we began the year with positive momentum and focused execution. I will now turn the call back over to Liam.

Thanks, and thanks to Doug and Chris as well. As you heard from our comments, this was a good quarter for The Hartford, and a strong end to a transformational year. And we all feel very good about our progress in the ongoing businesses. So, operator, let's turn it now over to Q&A.

(Operator Instructions)

Your first question comes from the line of Tom Gallagher with Credit Suisse. Your line is open.

Good morning, Tom.

Good morning, Liam. My first question is just on the earnings guidance. I guess for Chris, can you just remind us how much of a backend loading we should expect to get from the expense savings here? Maybe if you can frame it in a way of, how are we going to start out 1Q, where are we going to be by 4Q, in terms of the bottom line benefit of cost saves? That is my first question.

Sure, happy to, Tom. I think just to remind everyone, we had a $850 million total plan. And we think about $500 million is already out with the transactions, plus cuts we made at the end of 2012. We have $285 million to take out this year. I would say that it is more back-ended, because there is a little bit of an expense drag in the first couple of quarters primarily. So, it's hard to slope precisely, but I would weight more the expense saves, it will start to come out in the second half of the year.

So, Chris, that -- the $285 million, is that from now to the end of the year? That is going to be the bottom line pre-tax benefit that we would expect to see by the end of 4Q?

Tom, those are the gross saves that we need to achieve, that we set for ourselves, in essence to make up for the lost revenues. So I don't think of it is all dropping to the bottom line. Or very little dropping to the bottom line, in fact because those are -- those revenues and expenses have gone away. And that is the corporate overhead we need to cut, in essence to maintain our existing revenue streams. Now there is an incremental goal in there of about $180 million that will improve margins overall. But the vast majority was to cut our overhead expenses, in relation to revenues that are going away.

Yes, understood, Chris, I just wanted to make sure. Because I know you are going to lose the associated revenues in 1Q, but that you would expect to essentially get that back by the end of 2013. Is that the way we should be thinking about it?

Yes, Liam addressed this --

About 90% of the stranded costs, Tom, that were not transferred to the buyers will be out by the end of this calendar year. The other 10% will come out early in the first quarter.

Got it. And then --

And I want to be very clear on this, we have this down to the dollar, to the head. We know exactly where it is coming from. We have a very disciplined plan. Yes, this will occur.

I appreciate that. So the, just moving on to the net amount of risk improvement in Japan. And I just want to understand from your standpoint, what does this practically mean for you? Because obviously, when you see a reduction in net amount of risk of that magnitude, from 3Q to now, it has been cut more than half. You would sort of assume that an associated liability would be going down pretty meaningfully, and potential capital lift or capital getting freed up. But then you have the complexity of money being tied up in captives here. So, anyway, just I guess broad question, what does this mean for you in terms of the yen weakening, and the reduction in net amount of risk and the liability from a practical standpoint?

Well, clearly, at a high-level and I'm sure Chris and Beth may have their own perspectives, Tom. At a high-level the prima facia the economics of the book have improved very significantly. And as I commented, I think the general market consensus is that the yen as it relates to dollar and euro is likely worst-case to stay where it is, and perhaps even weaken further. So the economics are better. You are well aware that our hedging program is very dynamic. And so as the yen weakens, it enables us to take more risk if you will, which gives us a greater upside. And clearly, as I commented and Chris reiterated in his remarks, the improving economics should give us a greater ability to consider potential de-risking transactions, either to reduce the risk or permanently move the risk.

So, I think from all those perspectives, and ultimately as these things annuitize. And if they annuitize at these kind of values over the next four years, that is also attractive to us from an economic and cash flow perspective. So, I think we are quite encouraged by this. I think the magnitude of the reduction in the net amount of risk, I think does give shareholders a view of what is more normal yen/dollar, yen/euro, the economics are much more manageable for us.

Yes, I think you are right on it, Liam. And I think Tom, also, I think the April Investor Day, the real intent is to dive deeper with Beth and her team into exactly some of those questions, and how we see these blocks running off, policyholder behavior, sensitivities, more economic values. So, stay tuned, but we will try to be much more clear of why we think the net economics of these blocks are improving significantly as Liam said.

Got it. And then my last follow-up on that is, Chris, you had mentioned the annual cash spend on hedging has gone from $200 million to $250 million, to $75 million to $100 million. Is that mainly the currency hedge getting -- being able to hedge less or it's cheaper or is that not related to the currency?

Not related to the currency. The reference, I thought the words that I used were macro hedged. So it is the macro equity protection that with Bob Rupp and team, we just made much more economic, virtually for the same amount of coverage. So, we have cheapened up that program. And the risk management techniques of managing Japan is still our dynamic program, where we manage interest rates, currency, and equity dynamically.

And I believe you had said you were spending $200 million on a currency hedge or so annually, is that still about the same?

No, never talked in those terms, Tom.

Okay. Any guidance you can give us on what your spending on currency hedges for Japan?

Again, I think we can give you general views. But we would like to spend a little bit more time with you in April. So why don't we save that for April, and we could be more scenario-specific. And then you could see the effects of the hedging programs and the economics that emerge.

Okay, thanks.

And Tom, this is Liam. And just one final comment I would make, I think the ability to purchase effectively the same protection in our macro hedge, at half or less of our historic cost, I hope is an indication to investors of how far along our risk management has come in the last year.

Okay, thanks.

Your next question comes from the line of Jay Gelb with Barclays. Your line is open.

Good morning, Jay.

Good morning, Liam. I am very glad to hear your feeling better as I am sure everyone else is.

Thank you, Jay, very kind of you. I feel -- I actually feel great and very blessed.

Glad to hear it. With regard to the capital deployment, the proceeds from the sale of the units was around $2.2 billion. And it appears currently around $1.5 billion of that is being deployed into debt repurchases and share buy-backs. So I think what a lot of people are wondering is why hold back the $700 million?

Yes, well, you are correct, Jay. That first of all, we presented management and the Board's capital management plan and worked collaboratively with our regulators, and we are gratified that they approved the plan that we presented to them. I will just go back to the concept, which I think I have been very consistent about over the last three quarters, is first of all, we are going to do share repurchases, the $0.5 billion that we have outlined, which clearly we -- accreted for shareholders. Second of all, we will reduce holding company debt by $1 billion. A couple of additional perspectives I would make on that. First of all, as you will recall, The Hartford during the financial crisis significantly levered up, number one.

Second of all, the foregone earnings from the sold businesses require us to delever a little bit. And third, we do want -- we have said all along, that we want to be more of a P&C centric, a leading P&C oriented company, and we want to get our leverage down, as Chris and I have both said, into the low 20% range, and our debt service coverage up in that 5 to 6 range. Also accretive for shareholders, $55 million reduction in our interest cost as well. I have always been clear that it was likely that we were going to preserve capital in our life subsidiaries, which I think is even more important now with the improving markets that we just discussed with Tom. When transactions, whether it be customer offers, either the US or Japan, potential permanent transactions or other risk reduction transactions, maybe more available, and we want to be ready to act as soon as those things present themselves.

So I think this is a very thoughtful, balanced plan. It is very friendly to shareholders. And that third element of being able to either reduce or permanently eliminate VA liabilities is also very good for shareholders, I think you would agree. I think it is thoughtful, it is balanced, and we feel very good about it. And I remind you as I have said and I think Chris alluded to, our intention particularly with the historic capital generating ability of our go forward businesses, as well as what we expect will be some success reducing or permanently eliminating VA liabilities at these market values, our intention is to continue to have a consistent capital management approach returning excess capital as appropriate to our shareholders. But this is our plan now for '13 and '14, and we feel good about it.

Okay, thank you. On the variable annuity guarantee exposure, last night as I am sure you saw, Berkshire Hathaway announced a deal with Cigna to reinsure the remainder of those guaranteed minimum benefits. Would something like that have an attraction to The Hartford as well, knowing that already a good portion of it is -- of that exposure is reinsured?

Well, on a high level, and Beth may have some comments. I would say first of all, obviously, I cannot, and on conversations we may or may not be having for obvious reasons. But I can assure you particularly with the capital flexibility, and I think more normal market scenario we have today. Beth and her team are leaving no stone unturned, in terms of ways to move the risk off or reduce the risk, which very well could include transactions. Beth, anything you would like to add?

I think Liam has said it very well. We have said from the beginning that we are open to looking at transactions where they make sense. So, where our view of the underlying economics are there, and we can maximize the use of our resources and our capital to reduce our risk. So we continue to work with our advisors and we will continue to evaluate opportunities in that space. I think seeing transactions getting done. I am seeing different players that are interested in these exposures, I think it is all positive for us.

Okay. And just a quick one for Chris or Sabra, the corporate expense in 2013, that is going to I believe you said $40 million less. Is that $40 million less than the $315 million that was the full-year 2012 core corporate impact?

Yes.

Excellent, thank you.

Thanks, Jay.

Your next question comes from the line of John Nadel with Sterne, Agee. Your line is open.

Hi, John, good morning.

Hi, good morning. Let me echo Jay's comments, Liam, I am very happy to hear you are in good health.

Thank you.

A couple -- just one quick follow-up on Tom's question about the expense saves or cuts. I just wanted to clarify. So should we think about $285 million as the total expense save for all of 2013, or should we think about that as a run rate by the fourth quarter, so something like $70 million or so by the fourth quarter?

No, that -- think about that as the actual cuts that will happen in 2013. So that is a run rate reduction that will be achieved by the end of '13.

Got it, okay. (Multiple Speakers)

So John, our commitment was -- we have all been associated with selling businesses and getting the cost out. Our commitment was we are going to get all the costs out. And so, that is why we have been so clear about it. And again, I will reiterate, we are very disciplined about it in the company. This will be a cost neutral exercise at the end of the day.

Fully appreciate that. The guidance for 2013, what -- if you could put -- give us sort of a modest ROE range, what type of ROE are you expecting to achieve?

John, I think at a high-level we are going to give you some more details on ROE in April. I think '13 is a year where if we see ROE increase, it will be very modest. The real increase in ROE is going to occur in '14 -- in '14 and '15. We will show you that. You should expect pretty significant increases in ROE in '14 and '15. But with all the moving parts, the kick-in over time of the capital management actions, the loss of the earnings, and as Chris said, a bit of the lag in getting the cost out and we have increased our CAT load as well. And I think '13 is a year where if we see ROE increase, it will be modest.

Okay. And then just finally, given all of the shifts in capital on the life side in particular, reflecting the business unit divestitures, the dividend, et cetera, is it fair for us to assume that the vast majority of what is remaining pro forma at $6.6 billion or $6.7 billion of life statutory capital relates to the runoff US VA business? Or is there something else still remaining in there, the Group Benefits business or other?

Yes, John, I think you are right. We tried to talk about this last time. We think of sort of $6.6 billion of the new beginning normal for the life statutory surplus. Of that, approximately $1.5 billion would be -- I will call it allocated to group benefits, and there is a little bit allocated to the reinsurance recoverables from our transactions. So.

Right.

So, that is how we think about it. And we have obviously, the holding company liquidity, also.

Understood. Okay.

But from a statutory blue book side, that is how we think about.

Okay, very helpful. Thank you.

Thanks, John.

Your next question comes from the line of Mark Finkelstein with Evercore Partners. Your line is open.

Good morning, Mark.

Good morning. I got a few. I guess my first question -- kind of going back to Gallagher's question a little bit. And maybe the way I will frame it out is, back in -- what was in October of 2011? You gave some scenarios around the Japan block, and kind of benign scenario, as well as kind of an adverse scenario. The question I would ask is when you look at where things are today, the yen kind of JPY93, markets higher, et cetera, should we expect a meaningful improvement in that net cash flow in that benign scenario? In the Japan block?

It is a definition of meaningful. It is improved, and I would say particularly, if the trend continues it can be meaningful. But it is a definite improvement. And again something we could talk more about in April and we plan to. So, if you could let us update our complete models, and present them to you, I think they will be very helpful.

Okay. And then Chris, just how do we think about statutory capital generation in the life company going forward? Obviously, you had some expenses in annuities. Markets are a tailwind. You have got Group Benefits improvements. I mean, how should we think about free cash generation in the life business?

I am more and more positive on it, particularly at these market levels and conditions. You have always heard us talk about the low interest rates, and sort of the constraints that, that has, and some of the additional liabilities we put up at the end of the year. But I would say there is more tailwind, Mark, to have a modest expansion in statutory surplus, going forward in '13. Beyond that, a lot depends just on market conditions and policyholder behavior, but I am encouraged with the potential to increase and grow surplus in 2013.

I guess, just to follow-up on that. I mean just if things kind of trended from here the way you would ordinarily expect them, or how you would normally model them, would you expect the VA business to generate capital in '13?

Yes. Yes, I would say -- I am not hesitating, I am just trying to quantify it from a range. I mean, it is in the range of a $200 million that could -- we could generate from the VA book over time. And then let me remind you that the Group benefit operations are also in there. But we do have some interest sensitive liabilities that will still feel some pressure from interest rates. So I am trying to be balanced on the positives, but still the existing pressure on certain blocks of business.

Okay. And then just one quick final question is, I saw the cut in the macro hedge costs, more than in half. Are there any -- are there any changes in how we should think about the below the line kind of structural loss in the dynamic hedge, which I think historically has been around15 bps, or is that about the same going forward?

On the dynamic program, is that your question, or the macro?

No, you told us the macro. I am thinking more about the dynamic.

Right. Then the dynamic for both pieces, Japan and I will call it the US are -- I would say -- generally have remained consistent, and we have talked generally about in total about 40 bps for both programs.

Right, but the macros -- I assume the macro is much lower than the 25 that you have historically talked about? Is that wrong?

The macro, what you said was $75 million to $100 million in annual spend. And I think you can do the translation, which --

Right.

That is if it is coming down, but the dynamic program for the US VA block and the Japan block still is around 40 bps.

Okay, I understand now. Okay, thank you.

Thank you.

Thank you, Mark

Your next question comes from the line of Brian Meredith with UBS. Your line is open.

Good morning, everybody. Just a couple quick questions here. First, with respect to the capital management, one quick question for Chris. You have got like $520 million I guess of debt coming due over the next two years. How do you plan on dealing with the remaining $480 million? Do you have any call provisions in any of your debts, or will you have to go into the marketplace and buy it?

Thank you, Brian. I would rather not be too specific. It really involves a time to process. So we are going to be active here in the near-term. But we are looking at trying to reduce that debt, but is ultimately is NPV positive compared to any premium that we might pay.

Okay. So in the $1 billion -- is a $1 billion of par reductions, right? So it could cost you little bit more than $1 billion to actually reduce it?

Yes, so the $520 million is a component of the $1 billion, and then the rest would come to reducing the amount that we would tender for.

Great. And then the next question -- I am just curious, I know you [you kind of talked about] this, but how did you come up with the $500 million of share buy-back by year-end '14, particularly given the additional liquidity, you have got the holding company and the capital generation you will have over the next two years which will be pretty substantial.

I think I will just go back to what I said. We, really working management, working with our Board, believe this is the most prudent balanced approach. All three elements of it are very accretive for shareholders. And for the reasons that I noted, both the amount of leverage that the Company added during the crisis, the earnings lost from the sold businesses, and our desire to get a balance sheet that is consistent with our go forward strategy of being a P&C centric company. As I think Chris has noted, the $1 billion was the right number. We thought $0.5 billion was the appropriate number for buy-backs. And I think as Chris has said, we will be pretty methodical about that.

And then lastly, I think for reasons that should be even more apparent now, preserving incremental capital in the life subsidiaries to potentially do the most accretive thing. And to either reduce or eliminate VA, and particularly Japan VA risk, we thought was a good balance. And as I said earlier, I feel very good about the plan. And then I would reiterate, for the reasons I said earlier, Chris and I, intend to have a consistent capital management approach of returning excess capital as appropriate to shareholders going forward, as once this plan is complete.

Okay, great. And then just a quick question with respect to the specialty business. I wondering if you could tell us a little bit about what needs to be done to really improve the profitability there? Is it a pricing issue, is it a risk selection issue, and how quickly do we think we can get those underlying combineds down into a, call it mid-90%s area where they probably need to be?

Yes, good question, Brian. And let me just give you some context. I think this will help all of you think through this. Inside our specialty businesses, we really have four businesses. We have got our national account business, which largely is an excess casualty excess workers comp line. In the program captive area, we have some dollar one programs, but we also have a pretty significant excess casualty program in there as well. And then obviously we have our D&O, our financial products business. When you look at the four businesses, two of those businesses have target combined ratios for high levels excess of 100%, right? So we have a mixed component of businesses in there. Our national account casualty business for returns in the teens has target combined ratios in excess of 107% to 110%.

So when you look at combined ratio, you cannot just think of specialty as where is my D&O book running? So I will give that to you as an [out] drop. Number two, our national accounts book had a terrific 2012. We are very satisfied with our returns. We feel good about that book. And as I mentioned, we have work right now underway inside our program, and excess program, captive group as well. And last but not least, our D&O book needs work, just as others in the industry would describe as well. So we are attempting to achieve rate. Our rate inclined so far for 2012 fourth quarter in the mid- single digits. But we are not satisfied yet with our combined ratio performance in our professional practice.

Great, thank you.

Your next question comes from the line of Jay Cohen with Bank of America Merrill Lynch. Your line is open.

Hi, Jay.

Yes, hi. A couple of questions, first on the workers comp, obviously you had a little bit of adverse development, not that much, but it is still kind of an ongoing drag. And I am wondering if you could talk about what is happening from a claims standpoint? You had talked about frequency popping up, I guess about a year-and-a-half ago, what are you seeing these days?

Jay, this is Doug. You are right. We have worked hard at our workers comp book, both actions in the marketplace and books and records relative to reserving. I would say this, in terms of frequency severity. Our frequency has really settled down very well in our middle-market, based on the actions and drivers that we have taken over the last five or six quarters. We have seen a little bit of continued frequency in small commercial. I think we have got our focus around a few key programs that is driving it, and a little bit on the geography side. But we have started to take steps to address it, and that is where that margin pressure has come from in small, albeit very, very solid returns still in that small arena. So I feel like -- comparing where we were 12 months ago to where we are today, I feel so much better about our comp progress. More work ahead, but significant strides in the last 12 months.

Got it. And then on the -- just the buy-back portion of the capital plan. I could see over time why you would want to be consistent in your buy-back activities, if it is based on earnings. But in this case, it seems to me you have got capital free and clear. It is at the holding company. You don't need it. Why wait two years to return a relatively modest amount of capital to shareholders, when doing it quicker would be even more accretive? If in fact, it is free and clear?

Jay, it's Chris. Thank you for your perspective. I think as Liam said, we do feel good with the overall plan on debt and equity, the priorities, and sort of -- the amounts that we are starting with. The consistency portion is important to us. I think to your specific point, I think you just need to keep in context that we are still managing large risk positions in our runoff block. And so -- (Multiple Speakers)

But you have capital in the runoff business to handle that?

Yes. But we are still managing to the stress scenarios that would indicate that we still need to move capital and liquidity around the organization, if those stress scenarios emerge. So I understand your perspective, and when you see it. But when you stress the organization in the way we have shared with the regulators and the rating agencies, the plan that we adapted is still the prudent one for 2013, and as we head into 2014.

Okay. And then if I could just ask one last question -- I don't want to overstep my bounds here. But you have seen two other transactions where runoff businesses have been eliminated or sold to another party. What makes your runoff business different than Sun Life or Cigna's that makes it more of a challenge for you to complete a similar transaction?

Well, Jay, I think that is a big leap to assume that is the case. Just because we haven't done one, doesn't mean it is more or less challenging than those that have been done, number one. We are certainly well aware of the unique characteristics of the -- certainly, the Sun Life transaction has been done for a while, and what we have learned of the Cigna transaction. And again, I don't think it is appropriate for us to talk about the nature of discussions that we may be having. So, what I can say is, what I think Chris and I and Beth have said pretty repeatedly, is that you can assume that we are talking to the parties we should be talking to, with the advisors we should be talking to. And if there is a transaction that makes sense for us and for shareholders, that we will do it.

So there is nothing specific about your business that really prevents you from engaging in such transaction?

I think there are nuances and idiosyncrasies to every book. But in the general sense, no.

Jay, I would add a little color that, Liam is right. I mean, we are -- Beth and the team are very proactive. But as we have talked about it, the book really has three components, Japan VA, the US VA, and a big fixed block of annuities. Those characteristics are different. So there isn't going to be one holistic transaction that just sort of says, yes, here it is. I think structurally, we have some short-term limitations, given that we write the group benefits business in life legal entities. And if you look at the deal, besides the Cigna deal that you referenced, those involved legal entities, where acquirers wanted legal entities and structures to absorb. We cannot do a legal entity deal right now until we deal with the group benefit business, and where it is being written. So there are some short-term constraints. But over the long-term, you ought to think in terms of what we are thinking along those three blocks, in trying to have buyers that have appetite for Japanese exposures, US VA exposures, and fixed annuities exposures here in the US.

That is real helpful, Chris. Thank you.

Your next question comes from the line of Eric Bass with Citigroup. Your line is open.

Hello, Eric.

Good morning. So first question, could you just talk a little bit about how much capital you expect the core ongoing business, kind of ex the runoff, to generate in 2013?

Eric, I would estimate that the core P&C business would generate about $900 million of statutory surplus. I would estimate that the group benefits business would generate approximately $100 million to $125 million. And then what we did with our life Mutual Funds operation, moved it up to the life holding company, I would say that the cash-based earnings that we could have access to there are about $75 million.

Okay, thanks. That is very helpful. And then just one follow-up for Chris, on the point you were just making on kind of the moving of the group benefits business. If you could talk a little bit about maybe what that process is? And then any other actions you are taking within kind of the US life subs to isolate and consolidate the variable annuity blocks, and maybe a timeline for potentially completing this?

I think what I would just like to share, Eric, is that the group benefits business is strategically important to us. It is written in two life legal entities currently. And we are figuring out what is the right structure going forward. So, there isn't anything sort of an "ah-ha" here. This is just what legal entity are we going to use to write Group Benefits, and we are going to align it to Doug and his management team going forward. It is just as simple as that.

Okay. And then on the annuity side, the Japan block is stand-alone, but I think the other, the US piece is in -- is it three different entities currently?

Yes, we have three different US legal entities that write that. And we are looking at obviously, a lot of different strategies for how to manage legal entities and books of business over the long-term. But once -- if we make any changes, we will let you know. But we are always looking at how to be more efficient with our operating structures, our hedging programs and the long-term risk management.

Okay, great. Thank you.

Tiffany, this is Sabra, I think we have time for one more question.

Our last question comes from the line of Bob Glasspiegel with Langen McAlenney. Your line is open.

Then let me add my pleasure at your favorable forecast that you are giving, Liam, personally.

Thank you, Bob.

On the migration to becoming a property casualty Company when you grow up, and you talked about the -- getting your debt in line with PC peers. I am curious on where the investment portfolio stands on that migration? And just looking at your BBBs are 26%, your BIGs are 5%. You have got 3% CDOs. Travelers which is probably at one end of the spectrum is at 9% BBBs, 3% junk, and no CDOs. You obviously need to get your ROE higher, so there is [tension] on that point. So, are you closer to using an AIG game plan of cranking up risk here on the margin? Or do you want to move more towards Travelers over time, and how long would that take?

Yes, Bob, it is Chris, I would say we are trying to have a prudent portfolio. We probably favor a Travelers model long-term. There are some holdover and transitional issues as we migrate out of some of our life books and assets that were retained or transferred back to us, that the buying parties did not want to have. So I think that will all balance that out over the next couple of years here. But I think, Brian Johnson and his team at HIMCO have the appropriate mindset to run a P&C oriented group going forward. I would say again, with that group benefits business there are longer duration liabilities that we need to continue to manage there, similar to the workers comp lines. So the component could be just slightly different, but I would think more along the Travelers model long-term.

So let's say a couple of years from now, what do you think BBBs would be versus 26% today? Down a couple points or down 5 to 10?

Bob, I am just trying to get through this month and next month. So I am not really focused in on '14 yet, or where it is at. But, we will see if maybe at Investor Day we could address that. But I don't have a vision right now for you.

Fair answer. Thank you.

Thank you. Thank you all for joining us today, and I know it has been a longer call than unusual. We appreciate all your attention. If you have any follow-up calls, please reach out to the Investor Relations Department. And again I would like to add my invitation to you all to join us on April 11 in Hartford for an Investor Day focused on Talcott Resolution. Thank you all and have a great day.

This concludes today's conference call. You may now disconnect.