Hartford Insurance Group Inc (HIG) 2013 Q3 法說會逐字稿

Good morning. My name is Melissa and I will be your conference operator for today. At this time I would like to welcome everyone to The Hartford third quarter financial results 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) I would now like to turn the call over to Ms. Sabra Purtill, head of investor relations. You may begin your conference.

Thank you. Good morning and welcome to The Hartford's third quarter 2013 financial results conference call. Our speakers today include Liam McGee, Chairman, President, and CEO; Doug Elliott, President of Commercial Markets; Andy Napoli, President of Consumer Markets; and Chris Swift, Chief Financial Officer. Other members of our executive management team are available for the Q&A section of this call, including Beth Bombara, President of Talcott resolution, and Jim Davey, President of Hartford Mutual Funds.

As described on page 2 of the slides, today's presentation includes forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and actual results could be materially different. We do not assume any obligation to update forward-looking statements and investors should consider the risks and uncertainties that could cause actual results to differ from any forward-looking statements. A detailed description of those risks and uncertainties can be found in our SEC filings, which are available in the investor relations section of our website.

Finally, please note our presentation includes several non-GAAP financial measures. Explanations and reconciliations of these measures to the comparable GAAP measure are included in our SEC filings as well as in the earnings release and financial supplement. I will now turn the call over to Liam.

Thank you, Sabra. Good morning, everyone, and thank you for joining us. The Hartford delivered very good third quarter results with core earnings up 17% to $505 million or $1.03 per diluted share. This performance reflects the significant progress we have made transforming The Hartford.

This quarter we saw strong execution in our go forward businesses and an acceleration of Talcott Resolution's runoff, further reducing the overall risk profile of the Company. With this performance year to date, we expect full-year 2013 results to exceed the outlook provided during our April investor day.

In P&C commercial, Doug and his team are executing on their strategies to improve margins. Written premiums rose 1% overall, with growth of 2% in both small commercial and middle market.

Strong pricing gains of 8% in standard commercial lines were consistent with the prior four quarters, and included increases of 9% in both middle-market workers compensation and property. For the quarter, the combined ratio was 93.3, excluding cats and prior year development, 4.2 points better than the prior year. Profitability in workers' compensation has improved dramatically over the past two years, as you can see in our middle-market results.

I am encouraged by our continued success in the middle-market in broadening product reach across workers' compensation, property, and general liability, which is providing new growth opportunities for us. Recent feedback from key distribution partners at the CIAB annual meeting confirmed our forward momentum in the P&C commercial marketplace.

We have meaningfully improved profitability in group benefits with core earnings margin rising to 3.9% this quarter, driven primarily by improved disability loss ratios and pricing actions. I am confident in the favorable underlying profit trends of the business and pleased to see two consecutive quarters of new sales growth.

Consumer markets also had a successful quarter, expanding underlying margins and growing written premium by 3% over the prior year. The combined ratio excluding cats and prior year development improved to 91.1, more than two points better than the prior year period.

Andy and his team have repriced this book of business and are positioned to balance growth and margin expansion going forward.

I am also pleased that in September we extended the AARP partnership by three years to January 1, 2023.

Mutual funds is trending in a positive direction with solid fund performance and sales growth of 35% for the quarter.

In Talcott Resolution, Beth and her team continue to reduce the size and the risk of the legacy annuity blocks. The Japan VA block is in a fundamentally different place today than a year ago. Over the past year, 18% of Japan VA contracts have surrendered.

In the third quarter, the annualized surrender rate remained elevated at 31%. This is a permanent and meaningful reduction in the risk of that block.

In the US the full VA surrender rate increased again in the third quarter to 20%, driven by rising markets and policyholder initiatives like the enhanced surrender value program. Over the past year, 14% of US VA policies have surrendered.

We continue to evaluate potential transaction that can permanently transfer these exposures and accelerate a release of capital. There is a growing interest in the marketplace for runoff blocks of annuity liabilities. We would pursue those transactions that are attractive in terms of sales price and the capital that would be released, compared to the underlying economic value of the business.

We are executing our capital management plan with $241 million of equity securities repurchased in the third quarter and $408 million through the third quarter since announcing the program in February. As additional capital becomes available over time, we will take accretive capital management actions to create value for shareholders.

The Hartford has undergone a significant transformation. The Company is more focused with a reduced overall risk profile. The go forward businesses' performance is improving, and we are well-positioned to generate higher returns for shareholders.

We are on track to have a successful 2013 with momentum carrying over into 2014. I am very thankful for the hard work and dedication of all my Hartford teammates.

Thank you and, with that, I will turn the call over to Doug, who will review commercial markets results.

Thank you, Liam. And good morning, everyone. Today I will cover our P&C commercial and group benefits results for the third quarter of 2013. I will also provide some insight on various initiatives.

I am pleased to share that our core margin gains continued during the third quarter. Our execution remains a steady and consistent with margin improvement being the focus across the board. Let's begin on slide 5.

P&C commercial had a combined ratio for the quarter of 98.1. Our results included continued solid underwriting improvement year-over-year with our current accident quarter loss ratio, excluding catastrophes, at 63.4; 5.4 points lower than 2012. Year to date we posted a 63.1 loss ratio, 3.2 points lower than the same period last year, demonstrating the strong underlying improvement in our margins.

This quarter saw $48 million or 3.1 points of cat losses. Of that total, $19 million is attributable to current quarter events, with the balance due to increased estimates on late May wind and hail storms that affected Texas and other regions in the Southwest.

Across commercial lines we also strengthened our prior year reserves by $26 million. This change reflects releases in workers' compensation, general liability, and storm Sandy, offset by an $86 million addition to commercial auto.

A significant portion of our adverse development in auto occurred in our programs business, which I will describe more fully in a moment. We also added modestly to our auto reserves in small commercial and middle market to address the general rise in bodily injury severity trends we have seen across the marketplace.

Overall, our combined ratio for the quarter, excluding cats and prior year development, stands in very good shape at 93.3; 4.2 points lower than the third quarter of 2012. Year-to-date we have improved 2.9 points to 93.2 versus the same period in 2012. Let's move to slide 6.

Written premiums of $1.6 billion were up 1% in the quarter. Small commercial and middle market were both up 2%, with specialty down 4%, primarily related to profit improvement actions in our programs and captive businesses. Written pricing in standard commercial remained very solid for the quarter at 8%, generally consistent with prior quarters and well ahead of loss cost trends.

The components of overall pricing shifted slightly with small commercial auto up a point up to 7% from 6%, and workers' compensation and middle market declining to 9% from 10%. All in, I am pleased with our ability to maintain this base of consistent pricing gains, given that we still have more work ahead before we achieve our target returns.

Let me now share some specific thoughts about each of our three P&C commercial business segments, starting with our market-leading small commercial franchise on slide 7.

Written premiums of $740 million were up 2% in the quarter. Retention and pricing remained very steady and new business of $115 million was up 6% versus third quarter of 2012.

Our market momentum in small commercial has picked up over the last 4 to 5 months. We continue to see very positive returns from the rollout of our new quoting platform, ICON, for our business owners' policy. Feedback from our agent partners tell us that we have hit a homerun here.

Average quote time for a new policy is down to five minutes or less. Quote flow is up 10% in the quarter and our yield ratio is improving as well. We have embedded new support tools, increased our straight through processing flow, and delivered a world-class user experience to our agents.

We now have both workers' Compensation and our business owners' policy on this platform, and we will complete the full product suite next year when we roll out commercial auto.

To conclude on small commercial, our returns in this business continue to be excellent, with an all-in combined ratio for the quarter of 92.4, and 87.1 excluding cats and prior year development.

Moving to slide 8, our middle-market segment also had a strong performance with current accident quarter combined ratio, excluding cats, of 95.9. Margins continued to improve while we are deepening our market penetration and target segments.

Topline was up 2% in the quarter on the back of strong written pricing gains at 8%, well ahead of our loss cost trends. And new business premiums at $107 million were up 24% compared to 2012.

We are encouraged by improving retention in this business segment. Policy count retention moved up slightly and premium retentions are also improving to stronger historical levels. This is a result of a much healthier book of business in the middle market after aggressive re-underwriting actions these last two years.

Reviewing our trends, much of the heavy lifting is behind us, from an underwriting perspective. However, we have not backed off from our segmentation actions to correct pricing on underperforming accounts. But the good news is that we have fewer of them today. All in, another quarter of strong progress for middle market.

On slide 9, the performance of our specialty businesses remains mixed. Success in national accounts continues with written premium growth of 15% in the quarter. Rate levels remain consistent and we are pleased with our execution.

Turning to our programs business, we are disappointed at the further deterioration to our results. We recorded a $60 million addition to our auto liability reserve this quarter, largely in connection with five transportation programs. Over the past year, we have exited four of the five transportation programs, and we will discontinue writing new and renewal business on the final program, effective January 1, 2014.

Earned premium from these transportation programs will decline rapidly as expiring business moves to other insurance markets throughout 2014. We did not react quickly enough to the early signs of adverse trends in this book. Our profit actions have increased significantly in speed and intensity over the past six months.

I am confident that we are addressing the areas that have caused these adverse financial outcomes. More importantly, I am confident that we are building a data-driven, risk management culture that will act with greater speed and decisiveness moving ahead.

Let me now shift over to group benefits business, summarized on slide 10, which had an outstanding quarter. We have been very disciplined in our management actions and the results are clearly paying off.

Core earnings for the quarter were up 57% over prior year, achieving an after-tax margin of 3.9%. Year to date, core earnings are up 66% over 2012, driving an after-tax margin improvement of 1.7 points.

Our improved core earnings are largely attributable to a lower disability loss ratio which came in at 87.9% for the quarter, favorable to last year by 3.6 points. We have commented previously that our claim recoveries were improving across our long-term disability book and this trend continued in quarter three.

In particular, actual recoveries for accident years 2011 and 2012 have emerged better than our previous expectations. This has caused us to update our reserve assumptions for claim recoveries in accident years 2012 and prior, which contributed to our loss ratio improvement in the quarter. This also gives us high confidence in our projection for accident year 2013 and confirms that we are making great progress on our pricing and claim initiatives.

Adding to the favorable outlook, we are encouraged by continued signs of declining incidence rates. As you recall, incidence rates have been stable for several years, but at historically elevated levels.

As our 2012 data has matured and now with a very early look at 2013, we have continued to see a modest but consistent decrease in incidence rates, approaching levels more in line with long-term patterns. Looking to both recovery and incident trends, we believe they establish a strong profit driver for us moving forward.

Shifting to the top line, this is the second consecutive quarter of year-over-year growth and new sales, posting $63 million this quarter, up 15% from 2012 as conditions in certain sectors of the new business marketplace have improved. We are also working aggressively on our January 2014 renewal block, which is particularly important for the national accounts segment. We are maintaining our disciplined approach to pricing and underwriting on our multi-year contracts.

Our execution on renewals and new sales in conjunction with favorable emerging trends in our book of business indicate that we are well along our journey to achieve target profitability levels.

Stepping back from the details, this was a solid quarter for commercial markets. Our performance was consistent, with a strong start in the first half of 2013, and we continue to see the positive results of underwriting and pricing decisions made over the last few years. Overall written and earned pricing is still outpacing our loss cost trends and driving margin improvement across our businesses.

We still have much work ahead, but I am excited about our progress. Let me now turn the call over to Andy Napoli.

Thanks, Doug. Good morning, everyone. Before we get into the details for the quarter, I would like to briefly discuss our broader strategy.

First, we couldn't be more pleased with the three-year extension of our contract with AARP. This long-standing partnership is the core of our business and has produced strong results over the last 30 years, and we expect that to continue. Our AARP program, historically a direct model, has gained significant traction in our agency channel, which came at a good time as we worked to reposition the non-AARP, or other agency portfolio.

That effort continues to pay off as we have achieved significant combined ratio improvement in that channel over the past couple of years. And we now view this channel as a more significant source of profitable growth as we move forward. More to follow as this strategy unfolds.

Now turning to our results for the third quarter on slide 12, we had another quarter of expanding margins while improving growth. In both auto and homeowners, earned pricing exceeded loss cost trends and we were able to accomplish this while maintaining premium retention.

Growth was driven primarily by strong new business production in our AARP direct and AARP agency channels, but especially noteworthy was 2% growth in other agency new business. The combination of new business and policy retention, particularly in auto, led to our third consecutive sequential quarter of in force policy growth.

Core earnings for the quarter were $68 million, which included a 2.2-point improvement in our ex-cat, ex-prior-year combined ratio. The quarter's core earnings were also impacted by a higher level of cat losses and a lower level of favorable prior-year development than in the third quarter of 2012.

Current accident year cat losses in the quarter were $18 million, primarily related to wind and hail events in Colorado and other Midwest states. The $18 million is above last year's levels, but as the third quarter is typically a seasonally high quarter for cats, this was well below expected levels.

During the quarter we also lowered operational costs while increasing our AARP direct marketing. Those actions, combined with premium growth, have kept our expense ratio flat. We are committed to driving down our expense ratio further through additional operational and process improvements.

Turning to slide 13 and focusing on auto profitability, our combined ratio, ex-cat and ex-prior-year, improved to 96.8; over 3 points better than last year.

Here is our perspective on loss trends. For auto liability, which combines bodily injury and property damage, both frequency and severity are up low single digits. This is relatively benign from our perspective.

Auto physical damage frequency increased, but primarily with smaller towing claims, so there was a favorable offset in severity. On a net basis, physical damage trend is up, but pricing continues to exceed loss costs.

In homeowners, our combined ratio, ex-cat and prior year, dropped just over a half-point to 77.6, reflecting strong earned pricing exceeding loss trends and continued favorable non-cat weather and non-weather frequency. Now let's transition to growth on slide 14.

Written premiums grew 3% for the quarter in total and individually for both auto and homeowners. Written premium has grown 2% year to date and we are positioned to maintain that level on a full year basis. Contributing to the growth were renewal written pricing increases of 5% and 8% in auto and homeowners, respectively, while maintaining policy retention in both product lines.

New business increased 19% to $100 million in auto and 9% to $35 million in homeowners. New business production was driven in part by a 42% increase in our AARP agency channel as well as increased spend and marketing productivity in the AARP direct channel.

Homeowners' growth has moderated following the initial launch of our new Home Advantage product and targeted rate increases in a number of states.

In closing, we are pleased with our results for the quarter and the year so far, and we are positioned to deliver similar results as we close out the year. We will closely monitor our loss trends and will take the necessary rate to achieve our combined ratio targets, while also continuing our growth momentum across all our channels. I will now turn the call over to Chris.

Thank you, Andy. Good morning, everyone. I have three main topics to cover this morning.

First, I will review the quarter's results. Second, I will cover the performance of the variable annuity books. And, third, I will provide a fourth quarter and updated full-year 2013 outlook.

Let's begin on slide 16. Third quarter 2013 core earnings rose 17% to $505 million. Core earnings were $1.03 per diluted share, an increase of 14%.

Commercial markets, which Doug just covered, was a major contributor to the growth. P&C commercial and group benefits achieved higher margins, driving core earnings for those segments up 9% and 57%, respectively.

Andy covered consumer markets, which had a strong underlying quarter, but lower core earnings due to higher catastrophes and less favorable development.

Touching on the other segments, mutual funds core earnings decreased slightly from the third quarter of 2012, due to higher expenses for marketing and advertising. Fund performance remained solid, driving sales up 35% over the prior year. Although net flows remain negative, they improved 18% over last year and 78% over the second quarter.

Talcott core earnings were up 6% over prior year, higher than our July outlook, largely due to $22 million of pretax limited partnership income versus our outlook of zero to $5 million for the whole Company.

In the corporate segment, core losses improved $60 million over the prior period, principally due to total after-tax benefits of $55 million from an insurance recovery and items related to spin-off from The Hartford's former parent.

Including this quarter results, we achieved a trailing 12-month core earnings ROE of 8%, which is at the higher end of our 2013 outlook. Net income for the quarter was $293 million, a significant improvement from $13 million last year.

Two principal items reconcile core earnings to net income this quarter. First, net realized capital losses totaling $130 million after-tax and DAC, principally due to Japan VA hedge losses. And, second, an unlock charge of $67 million, mostly due to the annual assumption study, which we completed this quarter.

Turning to slide 17, you can see that core earnings included a total benefit of $87 million after-tax or $0.18 per diluted share for certain items. The two largest items were the $55 million benefit in corporate that I just mentioned, and $43 million in favorable cats compared to our outlook of $86 million after-tax.

Last year's quarter included $44 million in core earnings from individual life and retirement plans, which were sold in January of this year.

Turning to slide 18, at September 30, The Hartford's book value per diluted share was $38.87, up slightly from June. Book value per share reflects a decline in unrealized gains on our investment portfolio, due to higher interest rates, which is shown in the table at the bottom of this slide.

Excluding AOCI, book value per diluted share was $38.91, up slightly from June. Book value per share includes the accretion from share repurchases, which totaled $408 million through September. We expect to repurchase about $200 million or so each quarter going forward, subject to legal restrictions and market conditions.

Our principal focus at Talcott is to reduce the size and risk of that block. And, as Liam mentioned, we have made significant progress this year. In the IFS, we provided some additional disclosures about policy counts this quarter.

Slide 19 shows that since September 2012 Japan VA contracts in force are down about 18%, resulting in a permanent reduction in the size and risk of the block. Japan surrenders have been driven by the sharp improvement in contract moneyness due to combination of market factors, including higher equity market levels and a weaker yen. In addition, 73% of total contracts are beyond the surrender charge period.

The slide also shows GMDB and GMIB net amount at risk or NAR, over the past several quarters. GMIB NAR is down 92% over the past year to only $0.5 billion at September 30.

Moneyness is another way to measure the improvement in the book. At the end of the quarter, 53% of the GMIB contracts are out of the money, which means that the account value exceeds our GMIB guarantee. This compares favorably with 43% at June 30 and 2% at year-end 2012.

In August, the first tranches of Japan VA contracts became eligible for annuitization. To date, many contract holders are surrendering rather than annuitizing or deferring their annuitization, which is a positive for us in that we come off risk faster than expected.

While the eligible number of accounts is small in 2013, it ramps up substantially in 2014 which will allow us to develop a more informed view of this aspect of customer behavior next year. 2015 is the peak for potential annuitizations with about $5 billion of account value eligible to annuitize. Again, it is too soon to know if our current experience will continue, but initial signs have been favorable.

Moving to slide 20, favorable markets and in force management initiatives are driving similar trends in our US VA block. As Liam mentioned, the annualized full VA surrender rate increased to about 20%, including about 6 points from in force management initiatives, including the ESV program.

During the quarter, we finished the ESV program launch, extending the offer in four more states. As of quarter end, 91% of GMWB contracts are out of the money and 84% of total contracts are beyond the surrender charge period. GMWB NAR has declined 67% since September 30, 2012, while total US VA contracts in force have decreased by 14%.

Based on the policyholder behavior across the VA blocks, we are confident that Talcott will be positioned to return capital to the holding company in late 2014 or early 2015.

Our capital resources are summarized on slide 21. At September 30, they totaled $17.7 billion, down $400 million from June. The decrease was in holding company resources, while total insurance company capital was up slightly after the impact of a quarterly P&C dividend to the holding company.

Life surplus was flat this quarter as operating income from non-VA books, including the group benefits business, offset the modest negative impact of VAs. Life capital margin remained strong with an estimated RBC ratio of 460% in The Hartford Life and Accident Group, allowing us to complete the group benefits legal entity separation project without utilizing holding company resources. We remain on schedule to complete that project by the end of the first quarter 2014.

The decrease in holding company resources reflects a $320 million debt maturity and $241 million of share repurchases. Going forward, we expect holding company resources to decline, due to the equity repurchase program and a March 2014 debt maturity, but to remain in line with our liquidity target of approximately 2 times annual interest expense and dividend payments.

Before turning to your questions, let me provide a brief summary of our fourth-quarter outlook, which is on slide 22. Our current outlook for the fourth quarter core earnings is a range of $420 million to $445 million or $0.87 to $0.92 per diluted share. This outlook assumes catastrophe losses of $42 million after-tax and Talcott core earnings of $165 million to $175 million, including approximately $7 million in after-tax costs for the ESV program.

This outlook also assumes limited partnership income of about $60 million before tax, which equates to a 9% yield. We are estimating an average share count of about 485 million shares based on $200 million of share [and warrant] repurchases.

Also expected is a realized gain of approximately $15 million after-tax from the sale of the AARP member contract center for health insurance products to a division of United Healthcare. This center, which generates about $15 million of core earnings per year, is included in the consumer market segment. This deal is consistent with our strategy to sharpen our focus on P&C, group benefits, and mutual funds. The transaction is expected to close before the end of the year.

If you add this fourth quarter outlook to our year to date results, which are summarized on this slide, 2013 core earnings would be about $1.7 billion. This is well ahead of our April outlook of $1.45 billion to $1.55 billion.

Our actual results will depend on a lot of factors, including no major cats in the fourth quarter. However, we are very pleased with our 2013 results and appreciate the significant effort by all of our teammates to achieve these results. We look forward to delivering both growth and progress on our strategic goals in 2014.

We are in the midst of the planning process and we will share our 2014 outlook with you on our February call. To ramp up, let me summarize a few themes from the quarter and the year.

Our go forward businesses are producing strong results with topline growth in P&C, and improving margins in P&C and group benefits. Talcott has made significant progress in reducing the size and risk of the legacy annuity liabilities, with favorable contract holder behavior resulting in higher surrender rates.

And capital resources remain strong. And with favorable trends at Talcott, we are confident in our ability to return capital from Talcott in late 2014 or early 2015.

Now I will turn the call over to Sabra, so we can begin the Q&A session. Sabra?

Thank you, Chris. We have a little less than 30 minutes for Q&A. Please be considerate of others and limit yourself to one question and a follow-up. Melissa, could you please give the Q&A instructions?

(Operator Instructions). Tom Gallagher, Credit Suisse.

I just wanted to ask a few questions on Talcott. The first question is, does running off the VA block on your own still make the most economic sense here? It is another way of asking, is the bid-ask spread still too wide, in your view, to pursue risk transfer deals?

Well, Tom, this is Liam. Our strategy on Talcott remains unchanged. It is to reduce the size and risk of the VA book.

And, as you heard in both my remarks and Chris's remarks, Beth and her team have been very proactive against that strategy, as evidenced by the increase lapse rates, the significant reduction in the policy count in the last 12 months, whether that is through the enhanced surrender value or policyholder education.

We are also consistent in saying that potential transactions that can permanently transfer these exposures and accelerate release of capital are things that we will continue to evaluate. And we would pursue those transactions that are attractive in terms of sales price and the capital that would be released compared to the underlying economic value of the business.

I am not going to speculate on any theoretical transactions, Tom, so I think that is going to be the extent of my remarks on that topic.

Okay. And, Liam, suffice to say, though, given how fast the lapse rates are moving and also, to Chris's comment about the now policyholders that could elect to defer or to annuitize who are actually surrendering, I am assuming the view of fair market value continues to go higher, in your view, based on those trends.

Again, I am not going to speculate on how the market might value it. What I would say is that, obviously, we have a lot of flexibility because of some of the things you noted, and that Chris and I have mentioned as well. And we will look at all options, including to continue the great proactive work that Beth and her team have done thus far and including evaluating potential transactions.

But we would only pursue those that are attractive in terms of sales price and the capital that would be released as compared to the underlying economic value of the book.

Understood, Liam. And then, just a follow-up for Chris on what is the best way that we should be thinking about Talcott? You are looking between US and Japan, lapse rates are running at 20% to 30%.

And so if you look forward a year, or more at a higher level assuming 5% or 6% or so market appreciation, that would imply, all else equal, the year-over-year profit decline would be roughly 15% to 20%. And I know that is not the way you're thinking about it economically, but that would be the way it is presented in your P&L, unless I am missing something else that might be major there.

And so, A, is that the right way to think about it? Or are there some other offsets? And, B, would you all be better off giving net income guidance on this business, or guidance that somehow better expresses the way you're thinking about the economics?

Tom, it is Chris; a couple points. I think you are seeing the trends right, and Beth might be able to comment upon what she sees for fourth quarter lapses, but they are elevated, particularly in Japan and the US. So we will talk more about it in February when we give guidance, but I do think your point of view on a substantial decline in Talcott's core earnings, is right on.

So I think you are wise to look hard at those forward views, given the elevated lapses in Japan and the recent elevation we have seen in the US. Beth, would you care to comment upon fourth quarter lapses and what you have seen?

Yes. Sure. So as we look at the activity that we have seen in October, we continue to be very pleased with the level of surrenders that we are seeing in the US. We are slightly under the 20% that we saw for all of Q3. And in Japan we are running maybe around 25% or so.

So again, I think as markets just stay where they are or continue to rise, we would expect our surrender rates to continue to be very elevated. And, as Chris pointed out, that does have the impact of reducing earnings going forward. But, more importantly, it reduces the risk, which is what we are focused on.

Okay. Thanks.

Jay Cohen, Bank of America Merrill Lynch.

Hey good morning, a couple of questions. I guess, probably for Doug. Two lines of business I would like to ask about on the commercial side. First is Workers' Compensation.

I am seeing some industry data that suggests that claims frequency, after spiking in 2010, came down in 2011 and 2012. And I want to get a sense of what you are seeing in that line.

And then, secondly, in the commercial auto business, in the program business, where the biggest reserve addition was taken, can you talk about the tail on that business, how long it is?

Sure, Jay. This is Doug. Let me talk about workers' comp to start with. We are seeing very positive signs in our comp book over the last couple of years, particularly around frequency. And, obviously, we spend time looking at it across our markets, but certainly in our small commercial and middle-market businesses, our frequencies in the last four to six quarters have been flat to down.

So I think consistent with some of the signals you are seeing in the marketplace, but we think both our underwriting actions and some of the things we have done over the last couple of years have clearly driven our change. So, good news on the frequency front in workers' comp.

In terms of the automobile transportation programs, we do have our arms around it. This is more an exit strategy that it is a fix strategy at the moment. I share with you by 1/1/14 we will be out of the five programs that have caused really much of our financial adverse positioning here.

There is, clearly, a BI severity dynamic in the marketplace, not just in the programs area, but across commercial auto in general. And we are underwriting and pricing our way through that.

The tail, when I think about commercial auto, clearly it is not a workers' comp tail, but it is also not a property tail. So I think of it in that three- to four-year period of time and we are aggressively looking at 2009, 2010, 2011, and 2012 as we speak.

So I feel like we took actions to deal with the increased severity over that period of time, and this book will run out over the period of the next 12 months.

Brian Meredith, UBS.

Two questions. One, I guess, for Doug. Doug, I am just curious. In the commercial lines underlying to loss ratios, obviously very substantial improvement year-over-year. How much would you attribute that to just kind of lower than trend loss costs?

Brian, very difficult to articulate. I do believe that, in our positive trends, more than rate is coming through. We have an aggressive analytics program where we quintile our book of business and we look at retentions and price changes across classes, industries, and geographies.

And so probably much of the change is rate driven. But I think an appreciable component of our three-plus points of improvement year-over-year is driven by what I would say underwriting quality change in the book.

Okay. So more just the changes in terms of conditions you are doing, not so much just it has been a lucky kind of weather situation, non-cat weather.

Yes. Certainly on the property side. I mean, we have strengthened our ability to underwrite our product in the marketplace relative to property over the last three years. And so deductible changes, policy form, et cetera, all contribute on the property side.

I was kind of giving you more a global, across all lines, a view of just increased attention to our risk product in the marketplace. And I think the analytics behind some of our choices have clearly driven some of that positive change in our loss ratio.

Great. And then, for Chris, I am wondering if you could give us a sense of what you think the market consistent value is for the Japanese and the US runoff book right now? Is it appreciably higher than it was at investor day?

I think, directionally, I can comment upon that, Brian. We will periodically update numbers when appropriate, but generally I would say for Japan, it is less negative. And, for the US, it is greater positive. So that is where we stand right now at the third quarter, and we are contemplating updating that at least once a year. And give us a little time and we will put it out there at the appropriate time.

Is there any way we can kind of -- is it 20% higher in the US, 10%?

It is meaningful. I would say in that range, yes.

Erik Bass, Citigroup.

I was hoping you could talk a little bit more about just your expectations for capital return from Talcott. And I guess, specifically, the factors that affect the timing of paying dividends.

Well, Chris will, I'm sure, want to give more detail. I would reiterate what he and I have said, is that we are confident that Talcott is positioned to return capital to the holding company in late 2014 or early 2015. I would remind you, Erik, that there is a lot of work in process, whether it is closing the UK sale, the completion of the group benefits realignment, et cetera.

So there is still some work afoot. And with that, Chris, if you want to add anymore perspectives to Eric's question.

I think you are right to mention the moving parts, Liam. So I always just start by saying what is different today, Erik.

I mean, for 2014 for both group benefits and mutual funds, I mean, we're going to have cash flows coming to the ultimate parent company, holding company that we didn't have in prior years. So there is probably about $150 million in new cash flows that are coming out of those, I'll call it, former Talcott entities.

With relation, then, to Talcott, the remain co, we always think about in terms of the Japanese balance sheet and the US balance sheet. I think, for Japan, one of the things just to keep in mind is, there is a little bit of a constraint on dividends, meaning you have to have positive retained earnings. We just barely turned positive at the end of the third quarter 2013 here.

So our current thinking is we will inform the regulators. We don't have to seek their approval when we are in positive retained earnings. But, we will bring them a 2014, early 2015 plan for capital expansion out of Japan, make sure they understand it and begin to execute it in the second half of 2014.

And then, with regard to the US, similar constraints. After we spin off group benefits into its own legal entity, we are in extraordinary dividend land because, again, we have negative retained deficits at HLIC and ILA. So we will, at the appropriate time, work with the regulators to extract capital. But that would have to be in the form of extraordinary dividend. Does that help?

Yes. That is helpful. Thanks. And then, I guess just over time, how quickly should we think about capital and reserves being freed as policies lapse? So maybe not thinking specifically in 2014, but just on kind of an ongoing basis, what is the lag between lapses and then when those reserves or capital could potentially become available for dividends?

We will cover a little bit more of our outlook of earnings and capital in February. But I would say that, I think, generally, you have to keep in mind, I'll call it -- we always talk about the units of risk, right? We are still managing units of risk and we run our stress scenarios that we are always going to manage to.

So, lapses by definition we will always have a lag factor compared to units of risk in a stress scenario. And we will describe that the best way we can in February.

John Nadel, Sterne, Agee.

Good morning Liam, a couple of questions. One, just on the -- I am thinking about, especially in relation to Tom's question, about the pace of runoff, maybe pace of account value decline in the runoff VA blocks, and thinking about that sort of 15% to 20% type of pace of decline in Talcott earnings as a result.

And I am sort of connecting that to the fourth quarter outlook for Talcott, which suggests something on an annualized basis anyway, that is a much faster pace of runoff when we adjust for some of the one-timers. I'm just wondering if there is anything you can help us understand there as it relates to the fourth quarter outlook versus the third quarter, which looks like it was more in the $200 million, $205 million range if we take out the ESV costs and maybe some strong results in the other line.

John, it is Chris. I think you have got to think in terms of just going into the fourth quarter that the third quarter had, I'll call it, a couple one-timers in it, particularly for, I'll call it, investment income partnerships. But, generally, as lapses occur we are going to have less fee income.

We are projecting just less net investment income in total in Talcott from regular spread products and any other income. And we did have a couple of one-time benefits for taxes and other, I'll call it, miscellaneous income benefits that just aren't expected to recur.

So I really do believe the range that we gave, which, at the midpoint $170 million, $175 million, is really what you need to think in terms of just a basic core run rate going forward. And really adjust for lapses from that rate.

Okay. And maybe we will follow up a little bit off-line. And then, just one other question, you have updated us in the past on your progress on expense initiatives relative to your targets. There is nothing here in the third quarter presentation, but can you just update us at this point, how much of your expense saves is in your third quarter results and how much more should we expect as we move through 2014?

Thanks for asking the question. I think we feel very good about all our expense initiatives related to stranded costs related to our sales that we completed earlier this year. So we are right on track. They are beginning to earn in.

And I think in February, when we get together and talk more about our run rate for 2014 and even a little bit 2015, I think we'll give you a better sense of the additional expense initiatives that we are planning above and beyond just getting the stranded corporate costs out from a deal perspective. But there is new rounds of initiatives that we are planning that really will take us forward for the next three years with goals to become a more efficient organization.

Okay. If I could sneak just one more in thinking about the Japanese VA business, I think, if I recall correctly, you guys hold contingency reserves in the Japanese sub. I think that number was somewhere around $700 million. Has that changed?

Well, first of all, is that right? And, secondly, has that changed meaningfully as a result of this faster pace of surrender activity? Have you started to build into the actuarial assumptions this higher pace of surrenders?

I will give you two data points, just for clarity. You are right. It is a little light of $700 million on a US dollar basis. It has been trending down just a little bit as the book runs off. So you're right.

And the way we think about capital that supports the Japan, I'll call it, block of business are two pieces, right? The $1.2 billion of capital in the legal entity that we just closed.

Yes. Yes.

And then, there is still, going back to what we disclosed in our investor day for Talcott, about $600 million of US statutory capital that is backing that reinsurance business into the US. So those are the couple key metrics that I just shared with you, John.

Jay Gelb, Barclays.

For the Japan business, how would that $1.8 billion of total Stat capital compare to a US GAAP capital?

Jay, it is Chris. I would say it would be that US capital would be slightly higher, in the range of $2.4 billion. Again, in total, in aggregate, supporting all the, call it, Japanese risk. No matter if they are in the island of Japan or if they are in the US. But, in aggregate, we would say approximately $2.4 billion of GAAP capital.

Okay. And, on that same metric, what would you allocate the US variable annuity business capital position?

I don't have that right front of me, Jay. So I guess I would want to be more thoughtful. But, again, I think if you go back to investor day, I think if you look at some of our disclosures, adjust for group benefits, now adjust for Japan, you're really left, then, with, I'll call it runoff Talcott.

But I would rather be more thoughtful and just give you that number when we talk about earnings and guidance for 2014.

Okay. On a statutory basis of the $6.9 billion US life capital position, can you give a rough breakdown of what that consists of currently?

Yes, and I think I know where you're going. So, of the US statutory capital, how we think about it is, ex-Japan, ex-, I'll call it, UK operation, HLL, and ex-recapitalization of group benefits, what Talcott will be left with is about $4.5 billion of statutory surplus.

So when we get through the group benefits separation, when we sell and close on HLL in the fourth quarter, which is still on track, and you exclude sort of the Japan statutory capital that is allocated in the US to it, you're left with $4.5 billion backing, I'll call it, the US runoff liabilities, which, again, are variable annuities and fixed payout annuities.

Christopher Giovanni, Goldman Sachs.

Liam, a follow-up for you in terms of, you mentioned kind of a growing interest in the market for runoff annuity blocks. I am curious if you could dissect a bit in terms of those that are showing interest, so maybe the mix of kind of [P-back] players, reinsurers or traditional insurers. And then, how many of these guys are really just looking for kind of a lopsided deal versus maybe a more credible bidder and counterparty?

Chris, I think you can understand for a variety of reasons it is not appropriate for me to talk about. If such transactions or conversations involve The Hartford characterizing counterparties, describing motivations, I just don't think would be appropriate.

Okay. And then, I guess for Chris. Just an update in terms of the legal entity separation, you had mentioned kind of strip out the group benefits piece. Any timeline for when you expect to have that done?

Yes, Chris, we feel very good about it. We have gotten the legal entity approved in New York. We have got to get some product filings approved. We have got to finish a couple little operational activities with admin systems, but I would say mid to late first quarter we will have that all done.

Thanks. Melissa, I think we have time for one more question, please.

Mark Finkelstein, Evercore.

Maybe a first question for Doug. Doug, in the specialty programs that you have set for termination -- already terminated, what is the total value of the premium looking a year from now, that will be on the books won't anymore?

The total value of all five of those transportation programs that we are exiting is approximately $50 million annually. So think of that out -- and several of those decisions have been made over the prior quarter. So the last program to cease writing new and renewal, 1/1/14.

Okay. And the $50 million is still essentially in there, so that full value will go away over the next four to six quarters or whatever?

Correct.

Okay. Perfect. And then, I guess a final question for Chris. Chris, could you talk about J-GAAP earnings a little bit? I feel like maybe we have actually kind of crossed over into positive surplus in Japan, maybe a little quicker. I don't know if that is right or wrong, if you can comment on that.

And then, secondly, what are J-GAAP or what have J-GAAP earnings been over the last [two] quarters?

I think between Beth and I, we -- well, I will try to give you a frame. But, we are, as I said, at September 30, about $10 million of positive retained earnings. Some of that is, again, just more fee income, more spread income off the general account products. Some of it is the, I'll call it, contingency reserves that are, I'll call it, running off.

So as we look forward, that is why we want to finish 2014, get through March, which is their fiscal year, get those accounts all closed up, see exactly where we are. We will have a better, then, forward view of the next 12 months, which is the next fiscal year for earnings. And then take a comprehensive 12-month capital extraction plan to the regulator, inform them what we are going to do, and then begin to execute it in the latter half of 2014.

But, Beth, from a run rate side on GAAP -- J-GAAP earnings, any color you could provide?

Yes. Just if you go back to June just as a starting point, we had negative retained earnings of about $60 million. So that is kind of the quarterly earnings that we see, to get to positive $10 million. So you're looking at $60 million to $70 million a quarter.

Okay. Have you turned positive a little quicker than your original plan was?

I would say, generally, right on schedule; maybe a smidge sooner, Mark, but generally right on plan. I mean, if you think about it, I would really consider it breakeven right now. So we broke even.

We will then have two additional quarters of, I'll call it, activity to take to the FSA. We will look then at the next forward activity. So you really could see and get a sense that we are already looking six quarters ahead for what that balance sheet looks like and then how much capital we could take out.

Okay. And then, actually, one last question, if I could sneak it in. Can you just talk about incidence trends in group and how they compared sequentially with the second quarter, which was obviously very strong?

Mark, this is Doug. I would say that sequentially the incidence trends in the third quarter compare very consistent with second quarter, right? So we are finally seeing some improvement relative to those patterns, and third quarter sat right on top of second quarter.

Hey, Mark, just the only other point, just as Doug and I look at that business, I mean, just to remind you. I mean, fourth quarter is our seasonally highest and best quarter in group benefits. So again, there will be, I'll call it, seasonality and incident and termination improvements that will ultimately come through when we report fourth-quarter earnings.

And, Mark, the other point I would make is that, as you know, because of the waiting periods, the retention components of these programs -- the back half of the year is important for us to stay on top. We are just beginning to take a peek at the 2013 year, given how these contracts are set up.

Thank you. Thank you all for joining us today. We appreciate your interest in The Hartford. Sean and I are available after the call for any follow-up questions you might have.

And I would also note that Liam McGee is scheduled to present at the Goldman Sachs conference on December 10, so we look forward to seeing you there as well. Thank you, and have a great day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.