Hartford Insurance Group Inc (HIG) 2014 Q1 法說會逐字稿

Good morning. My name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to The Hartford's first-quarter 2014 financial results conference call.

(Operator Instructions) Ms. Sabra Purtill, Head of Investor Relations, you may begin your conference.

Thank you, Lisa. Good morning, everyone, and welcome to The Hartford's first quarter 2014 conference call. Our speakers today include Liam McGee, Chairman, President, and CEO; Doug Elliot, President of Commercial Markets; Andy Napoli, President of Consumer Markets; and Chris Swift, CFO. Other members of our executive management team are also present and available for Q&A, including Beth Bombara, President of Talcott Resolution.

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 these statements. A detailed description of those risks and uncertainties can be found in our SEC filings, which are available on our website.

Our presentation today 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 supplements. Finally, please note that our 10-Q will be filed by the end of this week.

I will now turn the call over to Liam.

Thank you, Sabra. Good morning, everyone, and thanks for joining our call.

Just over two years ago we launched The Hartford's strategy to enhance shareholder value; profitably grow the P&C, Group Benefits, and Mutual Funds businesses; reduce the size and risk of Talcott Resolution; and increase the Company's operating effectiveness and efficiencies. Our focus on executing that strategy has been unrelenting and I am very proud of the substantial progress we've made in transforming The Hartford.

Building on a successful 2013, The Hartford's outstanding first-quarter results further demonstrate that our businesses are profitably growing through margin expansion and top-line growth. In addition, the Japan sale announced yesterday is an important milestone in the Company's transformation.

This is an excellent transaction for shareholders, generating an estimated $1.4 billion capital benefit and sharply reducing The Hartford's risk profile by permanently eliminating the Japan variable annuity risk. Our policyholders in Japan will also benefit from a financially strong, strategic Japanese buyer.

In evaluating the transaction, we examined the capital benefits compared to the economics of running the block off. We considered the permanent risk transfer and the likelihood of regulatory approval. After a comprehensive process, we concluded that the sale to ORIX was clearly the right decision for the Company.

The transaction will accelerate the return on capital from Japan so we can we deploy it for accretive activities more quickly. We will provide details about our plans for the capital benefits after the deal closes, which we expect to occur in July.

The transaction also accelerates the transformation of The Hartford, putting greater emphasis on our successful efforts to profitably grow the P&C, Group Benefits, and Mutual Funds businesses. This is an important transaction for The Hartford. With the return of capital from Japan and the permanent elimination of the VA risk there, The Hartford is much closer to achieving the strategic objectives we set out in 2012.

The Hartford had an outstanding first quarter. Core earnings increased 23% to $564 million, or $1.18 per diluted share. Core earnings in the P&C, Group Benefits, and Mutual Funds businesses also increased 23% year over year.

Disciplined underwriting and pricing continued to drive margin expansion in P&C and Group Benefits. Excluding a one-time expense benefit, CATs, and prior-year development, the total P&C combined ratio improved to 89.9 in the first quarter, a 1.9 point improvement over the prior-year quarter.

In Group Benefits we continued to grow margins, recording a 50% jump in core earnings and an increase in the core earnings margin to 5.1%. As Doug will discuss later, renewal written price increases were strong in P&C Standard Commercial at 7%. Pricing increases remained well ahead of loss cost trends, which will drive future margin expansion.

In addition to increasing profitability, we are beginning to generate improving top-line growth across the P&C line. New business premiums were up year over year in Middle Market and Consumer Markets and retentions are higher across the board, even as pricing remains strong. In Group Benefits, sales increased 7% over the first quarter of 2013 for the fourth consecutive quarter of year-over-year growth.

In Mutual Funds, growth in assets under management drove core earnings up 5%. We were pleased to see positive net flows in Mutual Funds in the first quarter, a sign of growing momentum in the business.

As Chris will elaborate, we continue to manage the balance sheet prudently with the aim of continued financial strength and flexibility, while returning capital to shareholders and paying down debt. During the quarter we repurchased $300 million of common stock and repaid $200 million of maturing debt. Across the Company we are driving improvements in operating effectiveness and efficiency, which you can begin to see in declining enterprise insurance and other operating expense levels. We are instilling a continuous improvement mindset to ensure that we operate more effectively and efficiently going forward.

The first four months of 2014 represent an important turning point for The Hartford. With the sale of Japan, The Hartford is transforming into an insurance underwriting company with a smaller, less volatile US runoff block in Talcott Resolution. The P&C, Group Benefits, and Mutual Funds team are delivering profitable growth.

Outstanding first-quarter results further demonstrate that the fundamental changes we have made to how the Company operates are working. We are creating a culture of execution at The Hartford and are well-equipped to compete effectively in our markets. We are focused on the work ahead as we continue to execute on The Hartford's strategy.

Thanks again for your interest in The Hartford. We look forward to sharing our continued progress with you. I will now turn the call over to Doug.

Thank you, Liam, and good morning, everyone. Commercial Markets is off to a strong start in 2014 and clearly building on the growing momentum established over the past several years. With an improving earnings profile, particularly in Middle Market, P&C, and Group Benefits, our attitude towards growth has turned more positive across all our businesses.

Let's begin on slide 5. For the first quarter 2014, P&C Commercial delivered $264 million of core earnings and a combined ratio of 91.2. Compared to the first quarter of 2013, this is an increase of $40 million in core earnings and a decrease of 2.8 points in the combined ratio.

Current accident year CATs for the first quarter of 2014 were approximately $60 million, significantly above the very light CAT quarter one year ago. Partially offsetting the increase in CAT losses was a one-time expense benefit resulting from changes in New York Worker's Compensation Board assessments.

The underlying combined ratio excluding CATs and prior-year development and was 87.7 for the first quarter 2014, a decrease of 5.4 points versus the prior year. Excluding the favorable effects of the New York assessment changes, the underlying combined ratio improved 2.2 points, reflecting our strong execution across all market segments.

CAT losses for our property-casualty businesses this quarter were more heavily skewed to Standard Commercial lines. This is largely a function of our extensive Small Commercial business and low temperatures across the Midwest and Northeast that resulted in a much higher frequency of burst water pipes than we normally see from winter storms.

Turning to the top line on slide 6, our total written premium was up 1%. However, underneath this overall modest change a very important story is unfolding for our P&C Commercial businesses. Adjusting for the $43 million written premium decline in our programs business, which is a result of re-underwriting actions, P&C Commercial grew over 4%, the strongest quarterly growth we've seen in several years.

Furthermore, we continued our relentless execution on written pricing gains, achieving a 7% increase in the quarter. Although down from 8% in quarter four, we are nonetheless pleased with the general strength of pricing achieved. Importantly, pricing continues to outpace loss cost trends.

New business momentum also continued and in particular I would note our Middle Market new business premium was up 14% in the quarter. With this as a backdrop, let me share a few additional thoughts on each of our four business segments starting with Small Commercial beginning on slide 7.

Performance in Small Commercial continues to be excellent with an all-in combined ratio of 85.7. Top-line momentum is building with policy retention improving to 83% and new business of $131 million for the quarter.

Quotes for our business owners' package policy Spectrum were up 12% in the quarter. Recall that we are introducing our commercial auto product on our new quote-to-issue platform in the coming months, completing our small product suite. This cutting-edge technology with our market-leading products and outstanding distribution partnerships has us poised for further PIF growth as we look out over the next several quarters.

Moving to Middle Market on slide 8 I continue to be pleased with our progress. Margin improvement has been our consistent focus over the last several years and our first-quarter underlying combined ratio of 90.1 paints a completely different picture than what we saw a few years back.

After adjusting for the benefit from changes in New York assessments, we are down 3.2 points from prior year. Renewal written pricing at 6% remained well ahead of loss cost trends and our account performance analytics continued to guide our pricing discipline. As I mentioned in our fourth-quarter call, the environment has become more competitive over the last six months, but I would continue to describe the overall market as rational.

Middle Market written premium was up 4% in the quarter, reflecting our improved go-to-market capabilities. Retention remains solid and new business of $111 million was up from $97 million in the first quarter of 2013. Our new business product balance is now consistently performing within our target range, with property, casualty, and auto representing two-thirds of our new written premium.

Most importantly, based on our aggressive pricing and underwriting actions over the past 30 months, the rate adequacy of our Middle Market book has improved significantly including workers' compensation.

Turning to Specialty Commercial on slide 9, national accounts continued its top-line momentum, up 24%. Specific circumstances related to several individual accounts helped drive this result. However, even adjusting for these, the underlying run rate is in the low double digits.

Our credit and underwriting standards remain rigorous. We estimate that available new business in the market was down slightly, but I was pleased with the new accounts we wrote in the quarter. As in prior quarters, with exceptional retention above 90%, our new accounts exceeded those either lost or non-renewed, a great organic result.

Financial Products also had a solid quarter with 4% growth. Pricing remains positive in most sectors with the outlier being large commercial excess layers, where we see pricing declines. I remain positive on our progress here and am pleased with another good 90 days.

Re-underwriting efforts in our Programs business remain a priority. We are making difficult, yet appropriate, financial trade-off decisions here and I am not concerned with the top-line decline. Our financial outlook for the go-forward programs supported by revised underwriting and claims controls has significantly improved over the past two years.

Now let's move to Group Benefits on slide 10, where our excellent momentum from 2013 continues. Core earnings in the quarter of $45 million were up 50% from last year. Favorable long-term disability incidence trends, continued strong recoveries, and improved pricing were all drivers in the quarter.

In the February year-end call I noted our strong persistency on January 2014 renewals. In fact, for the quarter persistency on accounts renewing in our employer group life and disability business came in at 80%, up approximately 18 points from 2013. This strong performance produced a book persistency of over 90%, which is 10 points improved from 2013.

Looking at the top line, fully insured ongoing premium declined 4% compared to prior year. The decrease is primarily attributed to a decision we made last year to exit an agreement with a third-party targeting sales through financial institutions. The impact on core earnings is immaterial, but we will continue to see premium decline throughout December 2014 when our exit is complete.

Excluding the premium from this arrangement, our top line is down about 1% to prior year.

Turning to new business, fully insured ongoing sales of $180 million were 7% ahead of first-quarter 2013. This is now the fourth consecutive quarter of increasing year-over-year sales.

These financial results reflect our improved financial profile and market competitiveness, and critical to our strategy, this improved financial performance has also been recognized by AM Best, Standard & Poor's, and Fitch, all of which have recently reviewed the Group Benefits writing company and upgraded our ratings. We've been working aggressively to transition all Group Benefits business to Hartford Life and Accident and these upgrades are an important step as we work to grow this business.

In closing, this was a very good quarter for us with strong top-line and bottom-line performance. I would highlight that we continue to invest inside each of our businesses for 2014 and beyond. Technology is at the core of this agenda but underwriting, product development, and data analytics are equally critical.

Our markets are continuing to evolve and these operating initiatives will strengthen our value proposition with customers and distributors. Coupled with the improving financial performance we delivered over recent quarters, we are optimistic about our strategic position as we move forward. Now let me turn the call over to Andy Napoli.

Thanks, Doug, and good morning. Consumer Markets delivered strong first-quarter results that continue the positive momentum created in 2013. During the quarter, Consumer generated written premium growth of 6% year over year, sequential policy growth in both auto and home, while simultaneously improving underlying margins.

Let's start with margins. Overall, despite the winter activity that drove elevated non-cash frequency across all lines, we produced 1.2 points of underlying margin improvement. In homeowners, winter storms and the unseasonably cold weather that hit the eastern half of the country unfavorably impacted our non-CAT home loss ratio by 4 points. During the quarter we experienced large increases in non-CAT weather claim frequency, particularly from frozen pipes.

In auto, the weather also contributed to increased physical damage frequency. On the other hand, auto liability frequency and severity trends remained modestly positive. Finally, our expense ratio improved over 1 point compared to last year due to direct marketing efficiencies coupled with the benefit of increased scale.

Now let's move to the top line. Written premium growth for the quarter was driven equally by new business production and improving retention. Auto new business grew 20% with reduction coming from all channels.

Agent ease of doing business is critically important to us and we spent a large part of 2013 working on new business throughput in this channel. Our team thoughtfully reviewed agent feedback and implemented numerous workflow improvements resulting in a 7% increase in quotes, a 32% increase in issues over last year. These improvements helped drive auto new business production in AARP agency and other agency, which grew 46% and 31%, respectively.

Now let's shift to AARP Direct's top line, where new business grew 10%. This growth was largely enabled by a 29% increase in response as we continue to optimize our direct marketing by driving leads for more cost-effective online sources. During the quarter, 78% of our responses came from online shoppers, up 7 points from a year ago.

Our AARP direct marketing has improved significantly over the past couple of years, while leveraging better analytics and quicker test-and-learn capabilities to more efficiently target shoppers who will respond to our Hartford AARP offering. Strong premium retention is also driving growth. Targeted renewal pricing and increased policy retention contributed to a 1 point increase in auto premium retention including a 2 point improvement in agency auto. Home premium retention is also up 1 point.

Overall, we are very pleased with our growth and we are mindful of balancing that growth with a strong underwriting focus, managing both on a very dynamic basis from state to state to optimize our total return.

Focusing on Auto, we are very happy with AARP growth in states like Florida, Illinois, and Arizona and agency growth in Texas, Connecticut, and Pennsylvania. We also have some states we are actively managing, like California, where we are taking both rate and non-rate actions to combat loss cost pressure and to decelerate growth a bit. In New York, where the rate we have taken combined with non-rate actions, for example restricting new business flow through filters and comparative raters, our actions are working and new business growth has slowed.

Consistent with our results this quarter, where the auto current accident year loss ratio was essentially flat with prior year, we are confident the actions we've taken and will take during the remainder of 2014 will continue to keep earned pricing ahead of loss costs.

In closing, we are proud of our first-quarter results, continuing the momentum from 2013, improving margins, expanding top-line growth, and growing policies in force. As we look ahead to the remainder of 2014, we will actively monitor our growth, we will take rate to stay ahead of loss trends, and implement other non-rate actions where appropriate. We are confident in our ability to achieve our 2014 objectives and that our core strategy remains strong and on track.

I will now turn the call over to Chris.

Thank you, Andy. This morning I will cover several topics. First, I will review first-quarter 2014 results. Second, I will cover the HLIKK transaction and its financial impact. Third, provide updates on our legal entity realignment work, and finally I will cover our second-quarter 2014 outlook.

Let's begin on slide 14. Last evening we reported first-quarter 2014 core earnings of $564 million, or $1.18 per share, up 23% from the first quarter of 2013. First-quarter results included about $58 million after-tax or $0.12 per diluted share of favorable items.

These items included $26 million in after-tax favorable prior-year development, mostly from prior-year catastrophes, and $32 million after-tax for a reduction in assessments for the New York State Worker's Compensation Board. Current year catastrophes were in line with our outlook of $57 million after-tax. In addition to these items, limited partnerships returns were 13% annualized or about $0.07 per diluted share higher than our 6% yield we are using for outlooking purposes.

Turning to slide 15, consolidated net income for the quarter was $495 million, or $1.03 per diluted share, compared with a net loss of $241 million, or $0.58 per diluted share, in the first quarter of 2013. Hedging losses and credit impairments were modest, reflecting relatively stable capital markets and a favorable credit environment this quarter. Combined, our P&C, Group Benefits, and Mutual Funds businesses generated core earnings of $452 million, up 23% from the first quarter of 2013.

Doug and Andy covered their businesses, so I will cover the rest. Mutual Funds core earnings rose 5% over prior year due to higher fees resulting from increased assets under management. Fund performance remained solid and we were ranked as a top 10 mutual fund family in the Barron's/Lipper survey for the second year in a row. With strong sales and improving redemptions, net flows were positive for the first time since 2011.

Looking ahead to the second quarter, we anticipate a slight increase in redemptions due to the liquidation of our series of target date funds. These funds have approximately $700 million in assets under management. This reflects our decision to focus resources in areas where we can grow market share.

Talcott's core earnings were $175 million, basically in line with our outlook after adjusting for limited partnership returns. US VA surrender activity remained relatively consistent, with policy counts declining 3% sequentially and an annualized surrender rate of 12.3% in the first quarter. This is slightly lower than the last few quarters, primarily because of the ESV program.

We continue to explore policyholder initiatives for our annuity blocks. In mid-March we launched a program that will ultimately be offered to about 84,000 contract holders with $5.5 billion of US fixed annuity count values.

The Corporate segment had core losses of $63 million compared with core losses of $73 million in the first quarter of 2013. The difference was principally due to a reduction in interest expense of about $12 million before tax due to debt repayments in 2013. During the quarter, we repaid $200 million of maturing debt, consistent with the capital management plan we announced in February of this year.

Turning to slide 16. At March 31, 2014, The Hartford's book value per diluted share excluding AOCI was $40.17, up 2% from year-end 2013 and up 3% from March 31 of 2013. The growth in book value per share reflects first-quarter net income and the accretive impact of share repurchases during the quarter, which was modestly offset by dividends paid to shareholders.

During the quarter we repurchased 8.8 million common shares for $300 million at an average price of $34.03 per share or about 85% of book value excluding AOCI. Our core earnings ROE for the 12 months ended March 31, 2014, was 9.6%, which is above our expected run rate for full year 2014 of 8.7% to 9.2%. This increase was due to favorable limited partnership income and catastrophe losses over the past year.

Yesterday we announced the agreement to sell HLIKK, our Japanese annuity subsidiary for $895 million or $860 million net of expenses and taxes. This is a good transaction at a good price that will eliminate our exposure to the Japan VA business.

The transaction, which is subject to regulatory approvals, is expected to close in July and has a pro forma estimated capital benefit of $1.4 billion. The benefit is comprised of net proceeds from the sale of HLIKK and an estimated net statutory capital benefit of $540 million in the US resulting from the recapture of the Japan annuity risk to HLIKK. On a March 31, 2014, pro forma basis, the transaction would result in an after-tax GAAP net loss of approximately $675 million and a US life insurance company net statutory surplus loss of approximately $275 million.

The deal is subject to a purchase price adjustment. The Company's hedging program is designed to largely offset the effect of the purchase price adjustment on the expected capital benefit and we intend to continue the hedging program until closing.

As a result of this transaction, effective in the second quarter the Japan business will be classified as discontinued operations and will not be included in core earnings. Core earnings for Japan were $64 million this quarter and were outlooked at $215 million for the full year. Going forward, Japan results will also include the results of hedging and changes in the purchase price adjustment and will be included in net income through discontinued operations until closing, which is expected in July of 2014.

The estimated GAAP loss on the sale will be booked in the second quarter. After closing, The Hartford will have greater financial flexibility and a significantly reduced risk profile. We are evaluating how we will deploy the capital benefit from this transaction including incremental capital management opportunities and we will update you on our plans after the transaction closes.

Consistent with prior programs, we will evaluate both equity and debt options under any program. As Liam discussed, this sale is a major milestone for the Hartford, accelerating our transformation to a more focused insurance underwriting company and significantly reducing the Company's risk profile. In addition, it will reduce future net income volatility as GAAP accounting did not fair value most of the Japan liabilities.

Turning to slide 18, we have also made progress on our corporate structure realignment. During that quarter, we completed a Group Benefits legal entity separation project. Today, Hartford Life and Accident, or HLA, largely represents just the Group Benefits business.

As part of this separation this quarter, HLA subsidiaries upstreamed an $800 million dividend to HLA in March. This capitalized the Group Benefits company at an RBC of approximately 400% as of March 31, 2014.

After the realignment, HLA's former subsidiaries, Hartford Life Insurance Company and Hartford Life and Annuity, became subsidiaries of the life holding company. As Doug mentioned, after we completed the realignment, three rating agencies upgraded HLA, our market-facing Group Benefits company.

Our second project involves White River Re. In the second quarter of 2014, we plan to dissolve White River, our Vermont annuity captive, and Hartford Life and Annuity recaptured the risk previously ceded to White River. This transaction has no impact on net holding company resources or our consolidated US life statutory surplus.

In addition, this transaction simplifies our regulatory and reporting structure and improves our ability to manage Talcott's resources. Including the impact of HLA and White River realignments, pro forma March 31, 2014, RBC for Hartford Life Insurance Company and subsidiaries would be approximately 430%.

Before turning to your questions, let me provide a brief summary of our second-quarter outlook, which is on slide 19. Bottom line, adjusting for certain items, we forecast a core earnings increase of 8% in the second quarter of 2014 as compared to the second quarter of 2013. In total, our core earnings outlook for the second quarter 2014 is $295 million to $320 million, or $0.63 to $0.68 per diluted share, assuming 469 million shares outstanding.

This outlook does not include Japan annuity core earnings of approximately $55 million, or $0.12 per diluted share, which will be reported in discontinued operations. Talcott's earnings excluding Japan are outlooked at $80 million to $85 million for the quarter and include about $15 million after-tax for expenses associated with policyholder initiatives on the US annuity book. This outlook assumes catastrophe losses of $120 million after tax, which is about equal to our actual experience in the second quarter of 2013.

The second quarter is generally our highest CAT quarter and May and June are two of our most recent CAT months, particularly for tornadoes and thunderstorms that are still to come. We extend our sympathies to all those affected by Sunday's tornadoes and yesterday's storms in the Midwest and Mid-South.

As usual, the outlook does not include any estimates for prior-year development except for the accretion of discount on workers' comp. We complete our annual ground-up asbestos environmental reserve studies in the second quarter.

To wrap up, let me just reiterate that we are off to an outstanding start in 2014 with strong financial results from our P&C, Group Benefits, and Mutual Fund businesses, and a transaction milestone with the Japan announcement. Our capital position is very strong, with a $600 million improvement in statutory surplus this quarter reflecting positive statutory earnings in both life and P&C.

I will now turn the call over to Sabra to begin the Q&A session.

Thank you, Chris. We have about 30 minutes for Q&A. Please be considerate of others and limit yourself to one question and a follow-up. You are, of course, welcome to re-queue for additional questions.

Lisa, could you please give the instructions for Q&A?

(Operator Instructions) Mark Finkelstein, Evercore.

Good morning. I guess my first question is on the transaction and kind of the earnings outlook that you talked about. I guess how much did stranded costs get or shared service costs get reallocated and is it too early to start talking about an expense plan in terms of kind of dealing with those?

I will let Chris and/or Beth take the details of that question, but, Mark, I think as we have demonstrated with our sales of the life and retirement plans businesses as well as our broker-dealer, we are always determined to eliminate costs that are associated with businesses we sold. I think our success to date in those businesses are supportive of that context.

With that, I will have Chris and Beth give you the details that you asked for.

Thank you, Liam. I think your point is -- you are right on.

I think, Mark, if you put it in the context that HLIKK was really a standalone business unit in Japan, we allocated a small amount of holding company expenses to Japan. When I mean small, think in terms of $20 million, $25 million after-tax -- excuse me, pretax. We will put that part of our efficiency objectives that we will get out as quickly as we can, but it's relatively small.

Okay. Then, Chris, just what happens to the hedging costs? I know that 70 basis points likely goes away, but is there an opportunity to take down the macro hedge as well? And if so, how much should that save the strain in the below the line?

Mark, from a hedging side I would just reiterate we are going to continue to hedge for now until closing. That is important as we try to lock in our capital benefit.

I think as you go forward in the US block we still spend that 30 to 40 basis points of hedging cost. The macro program costs us approximately $75 million, so I do think we will have the opportunity with Bob Rupp's leadership to recalibrate our US hedging programs. That's on the list and we will update you as we modify it going forward.

Okay. Then just finally, Andy, is the expense ratio improvement in consumer sustainable?

Mark, this is Andy. Yes, we believe that we should sustain the 1.4 point improvement throughout the year.

Okay, thank you.

John Nadel, Sterne Agee.

Good morning, Liam. Congratulations on the transaction and the good quarter. I have a question.

I know you don't want to address sort of the deployment of the capital until the deal actually closes, but I guess my question is this: how should we think about those proceeds and the capital freed up from the sale? By that I mean is it fair for us to look upon those proceeds as completely unencumbered and available to the holding company, either directly as it relates to the sale price or over time as it relates to getting the dividends out of the life co?

John, it's Chris. How about if I frame it that the $1.4 billion capital benefit is obviously the gross impact of that combination? I think when you think about it what we announced, our capital management plan for 2014 and 2015, we would say as our thinking this transaction overlaid with that plan. We would say that there's an incremental $1 billion of capital that will be available to supplement that plan.

And as you know, we are going to work on it with -- we are going to work on closing the transaction first and then simultaneously that will work on our plans. Again, consistent with our past actions, I think we demonstrated the ability to be balanced, to achieve our deleveraging goals while returning excess capital to shareholders.

That's fair. I just wanted sort of an affirmation, if you will, that the net proceeds here over what you had already assumed in your $2 billion outlook was indeed unencumbered. And I guess it's fair for us to assume that, right, given the 400% RBC as a group company and the 430% at Talcott on a pro forma basis, correct?

Yes, the way we think about it is, the capital that's in the US entity, we will work with our regulators to do an extraordinary dividend to get it out. The cash that is going to come from the sale of the legal entity in Japan will go directly to the holding company, but all that totals an incremental $1 billion compared to our announced plan.

If I can just sneak one more in; I kind of hate asking about the Corporate segment on the conference call, but as you look at that $63 million operating -- core operating loss in corporate this quarter can you give us some help on where we should expect that to trend, given the debt reductions as well as your expectations for incremental expense saves from here.

John, I'm looking at the supplements. I always think in terms of -- at the Corporate segment there's about $60 million to $70 million of pretax operating expenses up there in addition to the interest expense. Yes, for the year. I'm sorry, that's for the year so that will continue to be there.

That's just a catchall for some unallocated expenses to the line. So think about it as $50 million to $60 million on an annualized basis pretax, what is in there, going forward.

Okay, so most of the expense saves that we should see from here then are truly in the operating units.

Clearly, that's where all the action is.

Terrific, thank you.

Vincent DeAugustino, KBW.

Good morning, just to start off with Doug real quick. I'm just curious if you're seeing any shifts in quote submissions that might indicate that your clients and agents are becoming more complacent with, call it, mid-single-digit rate increases since we're also seeing a concurrent modest rise in retentions as well.

Vince, I would describe the operating environment last 60 days as relatively consistent, so I don't see any major changes out there. Excited about progress we made in the quarter. Sales achieved across our businesses, as I noted. Really positive signs for the franchise, but I still see a very rational environment that is allowing us to compete effectively.

Good. Andy, you already provided some information on the non-CAT, non-weather, but I guess the question would go to both Doug and you. Clearly, the winter weather was a drag on the CAT line, and I'm just curious if you had any thoughts on weather outside of the catastrophe line. There might be some benefit across a variety of lines like auto and workers' comp, or some of these frigid temperatures may have weighed on whether it be discretionary driving or construction activity.

I'm just looking at some other things in the economy and we see it in retail sales, home starts, tons of things that are impacted here. And I'm just wondering if there's some also non-CAT, non-weather accident frequency benefits here in the quarter that's benefiting the (inaudible) loss ratio that we should be maybe thinking about normalizing out or -- just breaking that down would be helpful. Thank you.

Vince, this is Andy. I will address for consumer and then hand it off to Doug. So let me talk about homeowners first. So we did see an abnormally large increase or spike in freezing pipe claims, so we've got to deal with that. And so when will that repeat itself towards the end of this next year, into next year.

The long-term 3 or 4-year trend for non-CAT weather has been slightly negative, and so I view that as the year plays out that that trend should continue despite what happened in the quarter with the frozen pipe claims.

What is more interesting, at least to me, is what's happening in auto. So we observed a sharp increase in collision frequency that we attribute largely to ice and snow throughout the Northeast and Midwest. What is interesting about it is we did not see a corresponding increase in auto liability frequency. But that said, that's something that we are paying really close attention to as we come out of the cold weather period to see if the collision frequency drops off and auto liability frequency remains modest. Does that help?

It does, thank you.

Vince, let me add a few points to that. One is, you know, we had some pressure on our non-CAT weather inside commercial markets in the first quarter; not big, big numbers but clearly states that were borderline ISO defined CAT areas, etc., so a couple of points of pressure there inside our property line.

Secondly, we feel we also had some frequency in the auto line just because of weather, so we had commercial drivers out on the roads for extra hours, etc., that we know as we look at geographies had some pressure in the quarter.

The last piece I will throw to you may be a contrarian thought to you. In comp, we think we saw a little bit in the frequency area, just based on weather. So whether it be employees on the job sites with more challenging temperatures, ice, etc.

We actually looked at our first-quarter frequency numbers in comp and think we saw a little bit of a lift in areas that had those adverse temperatures.

Okay, so to your point on being contrarian, we should maybe actually think about this at least being sustainable, if not potentially getting some improvement throughout the rest of the year, based on all the rate and non-rate actions as well?

That's fair.

All right, perfect. Thanks, guys. Take care.

Jay Cohen, Bank of America Merrill Lynch.

Thank you. Good morning, Liam. Two questions. You had mentioned in the US VA book an offer that you were putting out to contract holders. If you can give more detail on that.

Then on the property-casualty side, I guess really on the Commercial side, this was the first quarter that I can recall where there was no adverse reserve development in any major line of business. And I'm wondering if you are seeing in some of these liability lines better claims trends, or is it simply that, hey, we've gotten the reserves where they need to be at this point?

Okay, Jay. We will have Beth take your first question on US annuity offers, customer offers.

Great, thank you. So in March, as Chris outlined in his remarks, we did start an offer related to our fixed annuity block. This offer is going to cover about $5.5 billion of account value.

These fixed annuities, think of them as offering minimum interest rate guarantees of around 3%. And so with this offer we are offering policyholders an enhancement, an increase to their surrender value if they would surrender their contract.

Beth, what is the expectation as far as what that should produce as far as a surrender value -- surrender rate?

It's early to tell right now. As I said, we just started the first launch in March and for the first wave currently we are experiencing about an 8% take rate. So we model that we thought in total we would get somewhere in the 10% to 15% surrender rate.

Great, thank you.

Jay, it's Chris (multiple speakers)

Jay Cohen And then on the development?

Yes, on the adverse development, I will add my comments and Doug might have a view. I think you are kind to notice. We've worked hard getting the balance sheet right and we believe it is right.

I would also tell you that I think we have better collaboration amongst the financial reserving actuaries and the business actuaries, Doug and myself, so that our current-year picks, at least over the last two years, I think we are more confident about those picks. There's more real-time data that goes into our planning process and quarterly process. So, Doug, I think we feel that the process that we go through is just tighter, more real-time, and better data to give some comfort on those picks.

Jay, I would totally agree with Chris's comments. Just feel very good about the process; we jump on issues early. Just solid about where we are.

Great. Thanks, guys.

Erik Bass, Citigroup.

Good morning. I guess now that the legal entity restructuring is complete, can you just provide an update on the statutory capital levels for the different blocks remaining within Talcott?

Eric, what I would say -- if you look at our printed results in the supplement for US Life statutory surplus of $7 billion, $1.4 billion of that is HLA so the remainder, $5.6 billion, then would be the two life legal entities that support Talcott. That $5.6 billion then is before the approximate $275 million loss.

So you could think of it on a pro forma basis for that loss we have $5.3 billion of surplus supporting Talcott run off and that we have approximately $600 million of that surplus. That capital is allocated to VA Japan risk that over time will get an extraordinary dividend and extract and return to the holding company. I think in total you ought to think about what we have for Talcott run-off is about $4.7 billion of surplus on a pro forma basis and our Group Benefits company has $1.4 billion of surplus.

Okay, thanks. That's helpful. Can you talk a little bit about the different options you have for additional deleveraging going forward? I believe you've already committed to retiring the maturities in 2014 and 2015, so would you be looking to potentially tender for additional debt? Or do you have any securities that become callable?

I would say, Eric, that our thinking is very early and preliminary so I wouldn't want to comment beyond that. We do need to continue to delever. Our goals are geared towards the go-forward businesses and sort of where we need to be to support those businesses going forward. And that does continue to require some deleveraging.

How we do that, just give us a little bit more time and we will come back to you.

Okay, thank you for the comments.

Brian Meredith, UBS.

Just a couple of quick ones here. The first one, could I get in the P&C insurance business what the new money yield is versus the current book yield in the investment portfolio? Do you have that?

For the P&C business, I don't have it. I think in total that most of the cash flows relate to the new P&C business, Brian. We put new money to work at about 3.9% and what was rolling off was about 4%.

Okay, so not much deterioration in that here going forward. Okay, great.

Then, Andy, just quickly you gave us what the non-CAT weather was for the homeowners. Do you have that number just for the whole consumer unit and how does that compare to last year's first quarter?

Yes, so all-in, personal lines 2.7 points of non-CAT weather, auto and home combined relative to last year.

Relative to last year so that's the increase relative to last year?

That the increase relative to last year, yes.

Perfect, that's helpful. Then last one, Doug. I'm just curious; Doug, could you talk about progress being made in the Group Benefits business with respect to voluntary products for the public exchanges that you guys have been working on or just exchanges?

Absolutely, good progress to report. We now are out in the market with our critical illness product, feel good about that. Are working on that product with several customers as we speak and I expect as we move toward the latter half of 2014 we will be also in the market with accident for our 1/1/15 launch as well. So excited that revamped our flex disability, out with critical illness, and accident to come shortly.

Great, thank you.

Jimmy Bhullar, JPMorgan.

Operator, if you can go to the next question and then Jimmy can re-queue if he needs to.

Christopher Giovanni, Goldman Sachs.

Morning, Liam. Thanks so much for taking the questions. I guess one of the big surprises to us was kind of the pace of buybacks, particularly so far in April. So wanted to see if you could talk some about how tactical and aggressive you look to be with the current authorization, recognizing you are almost a third of the way through this $2 billion program that doesn't expire until the end of 2015.

I will let Chris give some perspective and then I may add some as well. Chris, go ahead.

We are pleased that we were able to do two tranches. I think we have said before that we've been operating under a 10b5-1 plan that we put in place for the first and second quarter late 2013, so we were very opportunistic. Our agent was very opportunistic.

But our current philosophy really hasn't changed as it relates to the program over the next six quarters. We want to be stable, consistent, generally ratable, but we do have opportunities to be opportunistic here in the second quarter and remaining the next two months.

Generally, we are pleased with what we have done to date and we are going to continue to execute ratably over the next six quarters.

Okay. Then for Doug, just a question kind of on the broader market. You continue to show significant improvement across really all your Commercial businesses as you stay disciplined on the underwriting. The rate of price change seems to be pretty consistent with what we've seen from your peers, but wanted to see if you could comment on any maybe incremental changes in terms of carriers looking to get either more aggressive around pricing or terms and conditions.

Chris, I'm not sure I would add any to what I shared in my opening comments. Again, reasonably balanced marketplace. From our own perspective very much improved profile of our businesses, small and middle. And we have talked about Group Benefits as well.

Like the product balance in the marketplace. We're still being driven by our product analytics. 2015 is a long way out, but feel very good about the start to 2014 and we will jump into the second quarter as we ended the first.

Thanks so much.

Tom Gallagher, Credit Suisse.

Good morning, Liam. Just had more of an overall company enterprise risk management question first and then a specific question on statutory. So, Chris, I know you mentioned $1 billion of capital is what has been earmarked from this transaction to be freed up.

But also, just listening to Liam's comments to open the call about the significant risk reduction, I have to imagine that from an enterprise risk management standpoint capital buffers would be significantly reduced as a result of this transaction or the need for capital buffers. So is there any contemplation in terms of how we should consider that and ultimately how those capital buffers that exist today may come back to the shareholders?

Tom, it's Chris. I think one point of clarification. What we are saying about the $1 billion that is the incremental to the capital management plan we announced for 2014 and 2015, so that is the incremental amount of capital that we will put to work.

I think as far as your question regarding capital buffers, capital levels going forward is valid. We are thinking really second half of 2014 into 2015 of now that the legal entity separation work is done, and I think you know why that was so important, to put that out -- put us in a position to run Talcott's two remaining legal entities off over a longer period of time with the right targeted runoff capital levels.

We do have the ability to recalibrate that with Bob Rupp's help from the risk side, but our guiding principles will always be for Talcott to be self-sufficient in a stress scenario. So with that backdrop, yes, I do think there is some tolerances that we will look at more closely and change going forward.

Okay, that's helpful. Then just specific question on how we should think about, not necessarily dividendable earnings generated from Talcott US going forward, but I am more interested in capital generation. And I realize there's restrictions to getting money out today because of negative earned surplus.

But I assume the outlook on statutory earnings, all things equal now that you've folded in White River or that you are in the process of folding it in, probably looks a little more clean and clear. Can you update on what kind of earnings stream on a stat basis you think that entity can produce over the next couple of years?

Tom, I think about it just sort of total capital generation no matter if it goes through the P&L or directly to equity. We still think in terms of Talcott has about $300 million to $400 million of annual capital generation. I think we got off to a good start, particularly in 2014 because a lot of that was front ended.

But even beyond that I think it's reasonable to project a steady dividend return from Talcott. That will be our philosophy and it will be tied to excess capital and generating statutory surplus as these blocks run off.

Okay, that's helpful. Thanks.

Jay Gelb, Barclays.

Thanks and good morning. As we work through all the shifts in the balance sheet and earnings from the Japan VA sale, I just wanted to get a sense of whether you feel that 10% core operating ROE by 2016 would still be reasonable.

Jay, it's Chris. How to frame that? I think the way we think about it is that the dilutive impact on core earnings of Japan I think the go-forward businesses, their growth, with our incremental accretive capital management plans, can offset that dilution and gives us a good shot at achieving a 10% ROE in 2016.

That's what I thought, thanks. Then, for Andy, the personal lines growth is the fastest in many quarters and you're now generating attractive margins from a combined ratio standpoint. I just wanted to see if there's anything else going on there sort of underneath the surface that you feel is driving those better results.

Jay, it's Andy. Thanks for the question. We feel great about our growth and it's absolutely a reflection of the momentum we created in 2013 across all the channels. I talked about agency channel ease of doing business, so I won't spend any time on that, but don't underestimate the power that that can have in that channel for agents and CSRs to place more and more business with us.

We've grown our AARP agency appointments almost 12%. We now have 7,200 agent locations out there that are taking advantage of that terrific program. We have also begun rolling out a new class plan for auto that has the effect of expanding our underwriting sweet spot, so to speak.

We have traditionally had a strong focus on more mature older AARP members and that very methodical and disciplined expansion of that sweet spot is starting to hit the market. So we've got a lot of things sort of hitting at the same time in the agent channel that are contributing to the growth. And then just better execution and marketing in our AARP direct channel and class plan implementation there that also serves to open up our underwriting aperture.

Thank you.

Lisa, we have time for one more question, please.

Randy Binner, FBR.

Okay, great, thanks. Good morning, Liam, thank you. Kind of a little more of the forest rather than all the trees kind of question and it goes back to the Japan VA divestiture here.

If I kind of put together the expense saves and the looser capital buffers and the potential for debt paydown and buyback, is that going to -- just from an EPS perspective, not necessarily from an ROE perspective, are all of those initiatives -- can we expect all of those initiatives going forward in our model to kind of make up most of that lost EPS, that $0.40 or so a year that we lose from the VA earnings in Japan?

Should we think of all those initiatives as being able to kind of backfill that in our models going forward, or do we kind of lose those EPS the way we see them to be for the second quarter here?

Randy, two points. One, I think implicit in that question the way we think about it is that net income is going to become more and more important to us as we focus in on growing book value per share and ROE. So net income, as you know, over the last couple of years has been de minimis or negative sometimes just given the amount of hedging, so I would also have that as a first thought.

The second derivative is your core earnings comment. What I was trying to say before is that, yes, I believe that the growth in our go-forward businesses -- our efficiency and saves, expense saves, the incremental accretive capital management actions -- I think we can offset Talcott's and Japan's core earnings decline starting in 2016.

Okay, that's very helpful. But when you say starting in 2016, I'm sorry, wouldn't it start kicking in before that?

Yes, but the crossover point that's what I'm just saying is that the dilution, the $0.40 that you're talking about, the dilution in earnings. Again, I think we could make that up over the next couple years.

Okay, as we work it through over the next 18 months kind of? Okay. Understood, thank you very much.

Thank you and thank you, everyone, for joining us today. We certainly appreciate your interest in the Hartford. Sean and I are available after the call for any follow-up questions you might have. Thanks and goodbye.

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