Hartford Insurance Group Inc (HIG) 2014 Q2 法說會逐字稿

Good morning. My name is Laurel and I will be your conference operator today. At this time, I would like to welcome everyone to The Hartford's second-quarter 2014 financial results conference call. (Operator Instructions). I will now turn the call over to Sabra Purtill, head of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to The Hartford's second-quarter financial results conference call. We released these results and also filed the investor financial supplement, 10-Q and financial results presentation, which includes our third-quarter 2014 outlook, yesterday afternoon. All of these documents are available on the Investor Relations section of our website.

Our speakers for today's call include Liam McGee, Chairman of The Hartford; Chris Swift, CEO; Doug Elliott, President; and Beth Bombara, CFO. Following their prepared remarks, we will have about 30 minutes for Q&A. I would note that other members of our executive leadership team are also available for questions during that section of the call.

As described on page 2 of the financial results presentation, today's call 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 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 also 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 supplement. I will now turn the call over to Liam.

Thank you, Sabra. Good morning, everyone. It's really good to be with you. In my life, I don't have much experience working less than full time, so the last few weeks have been welcome as I have been able to focus on my health. And I do appreciate the many expressions of support I received from so many of you and I am very pleased to report that I am feeling much better and stronger.

I have also had time to reflect on The Hartford's remarkable turnaround and transformation. The Hartford faced severe challenges when I arrived in 2009 and its future was unclear. Today, with a focus on growing profitable businesses, the Company's prospects are bright.

Now as you know, while we made many changes over the last five years, I believe three were critical to our success and will continue to deliver shareholder value. We brought clarity to the Company's strategic direction, focusing on businesses where we could compete and win. We have invested and will continue to invest in new capabilities for those businesses. The result has been sustained margin expansion with more expected. We significantly lowered the risk profile of the Company to a more reasonable level. Most importantly recently with the sale of Japan. This will reduce the volatility of The Hartford's results and will lower our cost of capital going forward.

Finally, we focused on generating and freeing up capital. We retained businesses that could create capital and sold other businesses that were capital-consumptive. We also reduced the size and risk of the Talcott Resolution liability, freeing more capital in the process. As a result, The Hartford now has a very strong balance sheet with the capital flexibility to take accretive actions to create shareholder value. These three steps -- reducing risk, narrowing the strategic focus and generating capital -- were key to the transformation and position us well for the future.

The CEO transition from me to Chris has gone smoothly. Over the last few years, I've spent a great deal of time on talent development and succession planning with the Board of Directors and this thoughtful preparation enabled the Board to act quickly and decisively when I decided to step aside as CEO. And I must emphasize that I couldn't be more confident in The Hartford's future with Chris Swift as CEO, Doug Elliot as President and Beth Bombara as Chief Financial Officer, as well as the entire executive leadership team. Personally, I have fully transitioned to my new role as Executive Chairman and I look forward to supporting this team.

Finally, I want to thank you, our investors and analysts. I have valued your support and insight, but if I could be candid some days more than others and in the early days of my tenure, your patience with this banker who, as I was reminded, was relatively new to the industry, I appreciate your support.

I particularly want to thank The Hartford's employees of whom this management team has asked a lot and they have consistently delivered with great pride and integrity. Without a doubt, the nearly 18,000 teammates are The Hartford's greatest strength. With that, I am proud to turn the call over to the Chief Executive Officer of The Hartford, Chris Swift. Chris?

Thank you, Liam, for your comments. On behalf of the Board, the management team and 18,000 Hartford teammates, I want to thank you for all that you've done for our Company. Your willingness to make tough decisions, along with your guidance, leadership and passion drove the successful transformation of The Hartford. You have positioned the Company for great success and the leadership team and I are committed to achieving our vision of an exceptional Hartford. Personally, I am deeply appreciative of our partnership over the last five years. Thank you, Liam.

I am honored to serve as CEO of this great company and I am excited about the path we are on. We continue to execute the Company's strategy, profitably growing the P&C, Group Benefits and Mutual Fund businesses, reducing the size and risk of the legacy annuity blocks and transforming The Hartford into a more effective and efficient organization. We have made tremendous progress. Profit margins are expanding in P&C, Group Benefits and Mutual Funds. All the businesses are growing the top line with the exception of Group Benefits where margins have recovered strongly and the top line has stabilized.

Although prior year A&E development and elevated storm activity impacted The Hartford's second-quarter results, the underlying trends in this quarter reflect the positive momentum in the businesses. In the P&C lines, written premiums grew 3% and the ex-CAT, ex-prior year combined ratio improved 0.9 points from the second quarter of 2013. Written premiums in Small Commercial were up 6% and the underlying combined ratio was 85.4, an improvement of 2.2 points compared to the second quarter of 2013. Core earnings in Group Benefits and Mutual Funds increased over the prior-year quarters.

I am confident we will continue to expand margins. Our pricing levels are higher than our loss cost trends in the P&C and Benefits businesses. In Middle Market, new property and general liability capabilities are driving profitable growth in selected markets, a dramatic improvement over the past two years. In Group Benefits, earnings have sharply rebounded and we expect the business to produce a sustainable after-tax core margin of around 5.5%. We are rolling out new voluntary offerings and I expect to see top-line growth beginning next year.

The Talcott Resolution team has meaningfully reduced the size and risk of the annuity liabilities in the US and of course in Japan. For the US blocks, we will continue to use targeted initiatives to accelerate the annuity runoff. As we've said before, we will consider transactions as a potential tool, but I expect that we will create the most value for shareholders if we manage the runoff of the US block ourselves. With a more focused company, we must operate more effectively and efficiently while investing in new capabilities. We have done well in our cost neutrality efforts having eliminated the stranded costs from the life and retirement plans businesses and we will continue to manage expenses as Talcott shrinks. We also will continue to invest to increase our competitiveness in key markets and improve the quality of our customer experiences.

I am confident in The Hartford's strategy. I am also very confident in this management team. With the changes announced Tuesday, the team possesses an outstanding mix of experience and skills perfectly suited to The Hartford. Doug Elliot has demonstrated he is one of the best P&C operators in the business. As President, his new responsibilities now include all of P&C and Group Benefits, including claims, providing greater accountability and alignment across these businesses.

Beth Bombara has been an outstanding leader in both finance and operating roles at The Hartford, most recently at Talcott Resolution. Beth's financial skills and business expertise will be critical factors in this team's success. Bill Bloom is a great addition for The Hartford. He has deep technology and customer service operations experience, but equally important he knows the insurance business.

I am also excited to have Ray Sprague join my leadership team as leader of strategy and business development. Ray is a seasoned P&C industry veteran who has done a terrific job in building our industry-leading Small Commercial business. Ray will work closely with me and other senior leaders to accelerate the pace of growth across the enterprise. In addition, Ray will serve as acting head of Consumer Markets to replace Andy Napoli. We appreciate Andy's contributions to the Company over the past few years and we wish him great success in his next opportunity.

Finally, I am pleased that Brion Johnson will lead Talcott Resolution in addition to continuing as the Chief Investment Officer. Brion has annuity experience in his background and is the ideal leader for Talcott as it continues to reduce the size and risk of the US annuity liabilities.

Every member of the team understands the insurance business model, a trust-based business where confidence is earned one day at a time with customers and partners. When that confidence and trust accumulates over time, it develops into a powerful brand and a market leader. This team is determined to win and build an exceptional company.

On July 1, we announced the closing of the sale of the Japan annuity business. We went from signing to closing in 60 days, an outstanding accomplishment. Both parties worked diligently to get this done. I appreciate everyone's effort. The Japan sale is an important milestone. It accelerates the strategic transformation of The Hartford and significantly improves the Company's risk profile. The sale also enables us to increase the Company's capital management plan for 2014 and 2015 by $1.275 billion. Consistent with our prior program, the expansion will be balanced between equity and debt repurchase. In this case, about 60% equity and 40% debt. We plan to put most of that additional capital to work by the end of this year.

In addition, we have increased the common stock dividend by 20% to $0.18 per quarter based on the improving earnings power of the P&C, Group Benefits and Mutual Fund businesses. With the expansion of the capital plan, the total share repurchase and debt repayment for 2014 and 2015 is nearly $4 billion. Over time, the generation of excess capital from profitable growth in the businesses and the runoff of US annuity block and the use of that capital in accretive ways will be critical to driving ROE improvement and increasing book value per share.

In closing, I am thrilled to take on this new role. I am very confident in the future of this Company. The ingredients for success are here and I am proud of all that this team has accomplished and we are relentlessly executing on The Hartford's strategic plan with a focus on creating shareholder value. Now I will turn the call over to The Hartford's President, Doug Elliot. Doug?

Thank you, Chris and good morning, everyone. Before I review the financial results for Commercial and Consumer Markets, a few comments on our new team. I am excited about working more closely with our Consumer Markets group. We have an excellent team and a terrific brand in the Consumer space and I am looking forward to being their partner. I am also excited about Bill Bloom joining our team. Bill and I have worked together in the past. The leadership and expertise he brings to our organization will be invaluable for our journey ahead and an excellent fit with the strong technology and operations team that we already have in place.

Likewise, I am very pleased about Ray Sprague's broadened responsibilities across the enterprise. He is a proven leader with deep insurance experience that we will leverage to further expand our franchise. And lastly, we are very fortunate to have Stephanie Bush ready to step into the role as head of Small Commercial. Stephanie has a long and successful track record in P&C Commercial here at The Hartford and is ideally prepared to take this business to new levels of growth and performance.

Now let me get into our results. I will cover P&C Commercial first, move on to Consumer and conclude with Group Benefit. We had a very solid second quarter in P&C Commercial. Across our business units, we posted quality earnings and delivered strong top-line results even as the market shows signs of growing competitive pressure. Overall, I remain pleased with our execution and confident in our ability to navigate changing market conditions.

For the quarter, we delivered core earnings of $213 million on an all-in combined ratio of 94.2. Compared to the second quarter of 2013, this is an increase of $15 million in core earnings and an improvement of 4.2 points on the combined ratio. Underwriting gains were up $66 million in the quarter versus last year, offset by a decrease in net investment income. Current action year CATs were relatively modest for the second quarter of 2014 and $9 million less than the quarter one year ago. The underlying combined ratio, excluding catastrophes and prior-year development, was 91.1 for the second quarter 2014, and improvement of 2 points versus prior year reflecting our strong execution across all business units.

Turning to the top line, our total written premium was up 2%. Excluding the decline in our Programs business of $28 million, which is a result of our re-underwriting actions, P&C Commercial grew 5% for the second quarter. We also continued to drive written pricing gains, achieving a 6% increase for Standard Commercial. We are watching our pricing trends very closely given growing competitive pressure and diligently executing our pricing segmentation methodologies. Importantly, pricing continued to outpace loss cost trends.

Let me now drill down on each of our P&C Commercial businesses. We had another excellent quarter in Small Commercial with an all-in combined ratio of 89.3. Last quarter, I noted to you that our top-line momentum was building. Those trends continued this quarter with policy retention improving to 84% and new business of $140 million for the quarter, up 12% over prior year. Equally impressive, our underlying combined ratio of 85.4 improved 2.2 points versus second quarter 2013. Our Small Commercial team is driving top line, written pricing gains and superior underwriting results. We could not be more pleased with our path forward.

Moving to Middle Market, I continue to be encouraged by our steady progress here, posting an underlying combined ratio of 95.1. Although this is essentially flat versus prior year, we are executing well on critical priorities. Renewal written pricing at 6% remained ahead of loss cost trends and our underlying combined ratio in Middle Market Workers compensation is down nearly 5 points for the quarter versus last year.

Offsetting these results was an increase in our property losses. We see nothing specific beyond these losses other than the normal volatility associated with the property line. Over the last several years, our team has done a great job of balancing our Workers compensation book with more writings in property and general liability. In fact, we are very excited to have just locked in a new property per risk reinsurance treaty that provides CAT capacity up to $500 million. This is a very important line of business in our strategy and we expect to thoughtfully continue our property expansion.

Commercial Auto has been a more challenging line across the industry, including us as well. Our Middle Market written pricing in this line is in the high single digits as we continue to address loss cost trends. Our retentions have remained quite strong despite the rate increases indicating to us that the overall market is also raising rates. Middle Market premium was up 3% in the quarter primarily driven by improved retention. New business of $112 million was down slightly from last year with a well-balanced product mix. Pricing and underwriting actions remain disciplined and the rate adequacy of our Middle Market book is significantly improved from prior years.

Turning to Specialty Commercial, national accounts delivered another strong quarter of written premium growth, up 7% versus last year. We continue to believe that available new business in the market is down slightly from 2013, but we are still seeing opportunities to write new accounts. Our retention rates continue to exceed 90%. The repositioning of our Programs business remains on track as is progress in our Financial Products business as well.

Shifting over to Consumer, we experienced elevated property losses in the second quarter, posting an all-in combined ratio of 106.3. Excluding CATs and prior-year development, the underlying combined ratio was 89.6, up 7/10 of a point from a year ago. Like others in the industry, weather adversely affected both auto and homeowners results on a CAT and ex-CAT basis. The largest CAT event in the quarter was a string of May hailstorms that crossed 11 states from Montana to South Carolina, accounting for nearly one-third of our CAT losses. Outside of CATs and weather, we experienced higher fire losses in the quarter versus last year, contributing 4 points to the underlying homeowners combined ratio. At this point, we don't see an unusual pattern developing with respect to fire losses other than the usual volatility associated with this peril.

Top-line momentum continued with 4% written premium growth driven in part by auto new business production, particularly strong in both agency channels. Premium retention was flat for auto and homeowners and a solid result given continued written pricing gains of 5 and 8 points respectively. Perhaps most noteworthy was our auto PIF growth of 1% in the quarter, a direct result of more precise pricing segmentation and service delivery improvements.

Our expense ratio decreased this quarter to 23.2. This is due to the timing of technology and marketing spend, which is weighted more to the back half of the year. We expect our full-year expense ratio to be comparable to the 23.8 we reported in the first quarter.

Now let's move to Group Benefits. This was another strong quarter for Group Benefits with core earnings of $52 million, up 41% from last year. Profit improvement this quarter is driven largely by the life and AD&D lines where we benefited from favorable life mortality. Disability trends were slightly elevated in the quarter yet remained favorable year to date through June. For the quarter, long-term disability incident trends continued to be favorable offset by lower recoveries versus a year ago resulting in a slightly higher disability loss ratio.

We continue to see favorable effects of our underwriting, pricing and claims management initiatives reflected in the achieved margin improvement across our employer, group life and disability block. The rate of improvement has been significant in recent years and we will remain disciplined with these operating levers.

Looking at the top line, fully insured ongoing premium declined 7% compared to prior year. As we have noted previously, the decrease is primarily attributed to our exit of an agreement with a third party targeting sales through financial institutions. Excluding the premium from this arrangement, our top line is down about 1% to prior year. Overall book persistency on our group life and disability business exceeded 90% through June, which is up over 10 points from 2013. We are very pleased with our renewal block and the overall persistency rebound versus 2012 and 2013.

Industry data indicates that new sales are trending down slightly. Our sense is that, in early 2014, large case customers have taken a tempered approach to moving their business, particularly as they sort through the dynamics of the Affordable Care Act and the trend toward more employee direct benefit options. We believe this may have been a factor in our own strong book persistency and contributed to our lower quarter-over-quarter fully insured ongoing sales of $45 million. We continue to actively quote business and we believe that we are competing effectively for new accounts, leveraging our outstanding service and claim capabilities.

In closing, this was a solid quarter for us across P&C and Group Benefits. While P&C Commercial competition continues to grow, I would still characterize the environment as rational. Our aggressive and disciplined actions in Standard Commercial over the last three years have us in strong position to compete moving forward. And we continue to make the people and technology investments that will be necessary to succeed in the years ahead. Now let me turn the call over to Beth Bombara.

Thank you, Doug. Last evening, we reported second-quarter core earnings of $144 million, or $0.31 per diluted share. Second-quarter results included $178 million after-tax or $0.38 per diluted share of unfavorable items. The largest item was $164 million after-tax of A&E unfavorable prior-year development consisting of $146 million for the annual asbestos reserve study and $18 million for environmental. Aside from these two annual studies, unfavorable prior-year development was not material, totaling $10 million before tax, of which $7 million was for accretion of discount on workers compensation reserves.

During the quarter, current year catastrophes totaled $127 million after-tax, slightly above our outlook. There were 13 named catastrophes with wind and hail being the highest cost perils this quarter. The net loss for the quarter was $467 million, or $1 per diluted share, compared with a net loss of $190 million, or $0.39 per diluted share in the second quarter of 2013. The largest contributor to the net loss for the quarter was the loss on discontinued operations due to the Japan annuity sale, which totaled $617 million after-tax. P&C, Group Benefits and Mutual Funds generated core earnings of $113 million, down from $197 million in the second quarter 2013 primarily due to the A&E prior-year development.

As you know, we complete the annual asbestos and environmental studies in the second quarter. Environmental reserve development totaled $27 million before tax in part due to increased cleanup costs on a few waterway sites. The $212 million before-tax increase in the asbestos reserve primarily arises from a small number of insureds. For those insureds, a higher-than-expected frequency and severity of mesothelioma claims drove the reserve increase. We continue to proactively pursue legislative and legal remedies to manage these claim costs, including transparency around the various asbestos bankruptcy trusts.

Mutual Funds core earnings rose 5% over the prior year due to higher fees resulting from increased assets under management. Performance remained solid with 76% of funds outperforming their peers over the last five years. We continue to see sales momentum up 5% in total and up 38% for equity funds while redemptions also declined. However, net flows were slightly negative due to our previously announced decision to liquidate target date funds, which had $709 million in assets under management. Excluding that liquidation, net flows were positive by about $300 million.

Talcott's core earnings for the quarter were $101 million, which was above our outlook, principally due to higher investment income, including limited partnerships. The risk of our USVA book continues to decline. With US equity markets up 5% in the quarter, 95% of the GMWB contracts are out-of-the-money. We continue to pursue various policyholder programs to reduce the size and risk of the Talcott books of business. In addition to the ISV program for US retail fixed annuities that was launched in the first quarter, during the second quarter, we rolled out a second enhanced surrender value program for certain of our lifetime benefit contracts. With the impact of these programs and surrender activity, fixed annuity accounts decreased by 7% and variable annuity contracts decreased by 3% during the quarter.

Turning to investment income, the general account is producing solid investment returns with modest impairments. We have a highly diversified portfolio with investments in a broad array of asset classes. Our overall credit risk profile is not materially different from a year ago. Yields have held up relatively well despite the low interest rate environment without increasing credit risk or portfolio duration. The decline in total investment income from the prior-year quarter was principally due to lower assets as a result of the runoff of Talcott and lower limited partnership income. Excluding limited partnership return, the annualized portfolio yield in the quarter was 4.1%, down approximately 10 basis points from a year ago.

Low interest rates and tight credit spreads remain a challenge. We will continue to evaluate opportunities to enhance returns by leveraging our investment capabilities without compromising portfolio quality. For instance, in the second quarter, we achieved a reinvestment rate of 3.8% aided by attractive opportunities in private placement securities and commercial mortgage loans where we could maintain credit quality and yield by capturing liquidity premiums.

The Hartford's book value per diluted share, excluding AOCI, at June 30, 2014 was $39.21, down slightly from year-end, but up 2% from June 30, 2013. The growth in book value per share over the last year was due to the positive impact of net income and share repurchases over the last 12 months, which are partially offset by shareholder dividends. During the second quarter, we repurchased 10.2 million common shares for $351 million at an average price of $34.53 per share.

For the 12 months ended June 30, 2014, our core earnings ROE was 7.8% compared with 6.1% at June 30, 2013. I would like to point out that core earnings ROEs for all periods presented have been recast to reflect Japan earnings as a discontinued operation, which has the effect of reducing our core earnings ROEs. Looking forward, we would expect our full-year 2015 core ROE to improve to the low 9% level after giving effect to the full execution of our capital management plan, as well as continued profitable growth in P&C, Group Benefits and Mutual Funds.

On July 1, we announced the closing of the sale of the Japan annuity business for cash proceeds of $963 million. As a result of the additional financial flexibility and risk reduction provided by this sale, our capital management plan for 2014 and 2015 has been increased by $1.275 billion to a total of almost $4 billion. And in addition, we increased our common dividend by 20%. The combination of the capital benefit from the sale, improved cash flow generation from Talcott and strong earnings power from P&C, Group Benefits and Mutual Funds enables us to execute this plan and will contribute to future ROE improvement.

The $1.275 billion increase is comprised of two pieces -- first, a $775 million increase in equity repurchases, including a $525 million accelerated share repurchase plan, or ASR, that was executed yesterday and will be completed by year-end. Second, we allocated $500 million for additional debt reduction, including associated premiums and transaction expenses, which also will be completed this year.

With the expansion of the share repurchase plan beyond the portion being used for the ASR, we expect that equity repurchases will be about $300 million a quarter. Actual repurchases will, of course, depend on market conditions and other factors that may impact market access and timing. In the third quarter through July 29, we have purchased approximately 3.9 million shares for $140 million. Yesterday, we also declared a quarterly dividend of $0.18 per common share, up 20% from the $0.15 that we began paying in mid-2013 and the third increase in three years.

Before turning to your questions, let me provide a brief summary of our third-quarter outlook. Our core earnings outlook for the third quarter of 2014 is $335 million to $355 million, or $0.74 to, $0.79 per diluted share, assuming 452 million shares outstanding. Talcott earnings are projected at $75 million to $85 million. This outlook assumes catastrophe losses of $87 million after-tax, which is equivalent to about 5.2 points on the combined ratio. This outlook is about a 15% increase in core earnings per share after adjusting in third quarter of 2013 for items that included a favorable $55 million corporate settlement, CATs below budget and prior-year development.

To wrap up, the second quarter was another quarter of significant progress. Despite challenging catastrophe and non-CAT weather conditions, underlying performance in P&C, Group Benefits and Mutual Funds continued to improve and Talcott made a significant leap forward in reducing the size and risk of its portfolio with the sale of Japan. We remain focused on achieving greater operating efficiency and effectiveness. And in combination with these accomplishments and our expanded capital management plan, we are on the right path to achieving book value growth and higher core earnings ROEs, which will continue to create shareholder value. I will now turn the call over to Sabra to begin the Q&A session.

Thank you, Beth. Laurel, could you please repeat the Q&A instructions? And in addition, I would just remind everyone that, in the interest of time, if you could limit yourself to one question and follow-up. Thank you.

(Operator Instructions). Jay Cohen, Bank of America.

A couple questions, maybe first a big-picture question for Chris. As you look out a couple of years, Chris, is there some ROE range that you think the Company can achieve if you are looking out to 2016 or 2017?

Jay, thank you for the question. I think Beth tried to describe what we see in the near term through 2015 with her announced capital management plans and where we see the momentum of the go-forward businesses. When you get into 2016 and 2017, we've previously and continue to believe we can expand ROE in those years as we continue to grow and manage capital accretively. But probably not at the rate of pace that we see now through the end of 2015. So we still believe we are in that 30 to 40, 50 basis point continual improvement through those years at this point in time. But, as you know, when you get further out, Jay, there's a lot of dynamics in the economics of the P&C cycle in the businesses, but we are still confident we are going to be able to expand beyond where we see 2015 currently.

Got it. That's helpful, Chris. Second question, maybe for Doug, in the Consumer Markets business, you highlight a certain elevated level of non-CAT weather and fire losses. I am wondering if you can discuss those losses relative to a normal quarter. How much above typical were those losses?

Jay, thanks, good morning. It's Doug. A couple of thoughts, then I'll -- you have our detail inside the subs. You know that our core accident year essentially quarter over quarter was up 2 points and that was due to non-CAT both weather and fire. I would also describe that 2 point change as roughly above normal as well. So I think I would use a couple of points is the answer on both counts.

A guess I was talking just about the Consumer business. Did I say Commercial? I meant Consumer if I said it wrong.

Did I say Commercial? I was talking Consumer.

Oh, okay. Fair enough. That's great, Doug. Thank you.

Vincent DeAugustino, KBW.

Good morning, everyone and I guess just to start just congrats to the team on your respective promotions and of course, also to Liam for what has been just a remarkable turnaround here.

To start, asbestos is something that we generally can sometimes look through and so I don't want to get too hung up on it, but we've seen a number of asbestos retro deals, particularly with Berkshire out in the industry and I'm just curious if this is something that you'd consider doing. And then along with that, how dilutive something like that might actually be relative to the downside on policy limits sort of as a worst-case scenario?

Vincent, thank you for the comments and the words and the question. I think we are very aware of the third-party solutions that are out there and available in the marketplace. I think that said, where we are today is we haven't found anything that we think is economical for us at this point and believe really managing these liabilities off ourselves is the optimum strategy. I think also you need to consider that these are really complex claim matters and again, we feel best-suited with the expertise that we've built over a long period of time with John Kinney and his outstanding claims team. It's really in our best interest to manage our own claims also during this period of time. So you put the economics, you put our claim handling and expertise available and that is where our current thinking is.

Okay, good. And then just for a quick follow-up, on the product development side, and with a lot of the defensive work here being complete to many of Liam's earlier points, I get the sense there has been an incremental step-up sort of if we can call it your offense strategy here in 2014. I was hoping to maybe get a preview of any of the new products or distribution opportunities that you might have here on the radar with the new leadership structure. And thank you.

Vincent, I will just give you a perspective and I know Doug will want to share his views. So I think you were specifically referring to Ray Sprague joining my leadership team as the head of Strategy and Business Development. And he has got a broad mandate and the broad mandate is obviously to accelerate our growth and our capabilities. And Doug and I, when we talk, we talk in terms of product, we talk in terms of distribution, we talk in terms of geographic presence. So Ray has got a great track record of being very innovative, creative in the Small Commercial area. So Doug and I want to leverage that capability across the broader platform. Doug, what color would you --?

Maybe a few more ideas, Vince, on top of Chris that I would share with you. In the second quarter, we did announce a new partnership with AARP in the Small Commercial space so that will be a growing opportunity we will look after and work at. Secondly, as we've commented previously, we have a number of initiatives in our Group Benefits space. We rolled out a critical illness product in the second quarter and still working on other products as we move through 2014 into 2015. And lastly, I know we've shared quite a bit of this with you, our journey to round out our Middle Market workers comp book continues. We feel very good about progress in the property and general liability area. But as noted now, new upside structure relative to reinsurance capacity and property I think allows us to continue to expand. So a lot of work in the product development area across all these businesses.

Thanks for all the answers, guys. Best of luck.

Erik Bass, Citigroup.

Hi, thank you. It's a question for Doug. In Commercial lines, as you highlighted, you continue to get rate above your loss cost trend. Just based on what you are seeing in both the industry pricing trend, as well as Hartford-specific dynamics, how much longer do you think that this can continue? Maybe what are you doing that is enabling you to outperform the industry?

Good morning, Erik. Maybe a few thoughts for you. The first thing I would say is, as we look out 90 plus days, we don't see something dramatic occurring that will have a dramatic shift or impact on the trend line. So I could be wrong, but as I think out and I look at what we are trying to accomplish third quarter and beyond, our behavior is going to be very consistent and that is our attempt.

Secondly, I would remind you and others that, as we think about margin improvement and we are constantly thinking about that, there are other levers that we are constantly working. So we are working underwriting, nonrenewal/renewal strategies. We have a number of initiatives in our claims area. And so we are working a number of areas, not just pricing against loss trend. And we feel good about what we have accomplished to date. I know that I have referenced our work in the auto area. It is not aligned where we are pleased with the overall performance today. It is getting additional attention. I talked to you about our rate gains in the second quarter. Those gains will continue. That is our intent into quarters three and four and beyond. So a lot of work going on and I am bullish that what we've accomplished so far will be the beginning of a really good path forward.

All right. Thanks for the thoughts there. Can I ask quickly on Group Benefits? Where do you think the margins can get to over time and is it achievable to get back to kind of the 7% range where you were in 2007, 2008?

Erik, it's Chris. In my prepared remarks, we talked in terms of 5.5% on a sustainable basis. So I would temper your expectations a little bit on 7%.

Got it. And what does that translate into in ROE?

I would say again with the statutory capital and the GAAP capital that we hold against that business, we think we could operate in the low double digits and try to grow it from there.

Great, thank you very much.

Jay Gelb, Barclays.

Thank you. Chris, with regard to the -- or Beth -- with regard to the ROE outlook, I'm thinking that since the life business has a greater portion of the common equity of The Hartford ex-AOCI than P&C, but P&C delivers the lion's share of the earnings that it might make sense to explore every avenue to continue to shrink that runoff life business, including the US variable annuity. I know you mentioned you appear to prefer to keep that in-house, but perhaps you could expand your thoughts on that.

Jay, it's Chris. Let me just take the strategy point and then Beth will talk about the ROE implications and the allocation of capital. I think if you think about it, where we are at right now, now that we have sold Japan, we are really left just with a US platform. You have always heard us talk about that we think that risk is -- we understand it very well. It has been managed historically very well. We know how to hedge it. We make about $300 million a year on that VA line of business. Our hedge costs are low obviously at these market levels, including our macro program so that you really are positioning Talcott as a steady capital provider to the holding company in the years to come. And then we'd like to use that capital again to redeploy into higher accretive purposes. So that is sort of the simple model, but I always did say we are always aware of I will call it options out there as a potential tool, but what we see right now for the next couple years at least is what we like. So Beth, would you care to comment?

Yes, thank you, Chris. I will echo a lot of Chris' comments on that. As we sit here today and look at not only just the GAAP earnings generation that comes from the Talcott businesses, but with the elimination of Japan and the reduced volatility from our statutory results, we really do see ourselves on a path of being able to rely more consistently on taking dividends out of the life entities and all that obviously over time will play into the ROE equation. And it is a balancing act between increasing that ROE maybe initially and long term what we think the economics are of this business and provides us with greater I think capital flexibility for the long term. But as Chris said, we are always mindful if there are other opportunities to accelerate that, but that is kind of the equation that we go back-and-forth in our minds with.

That's helpful, thanks. And then for the low 9% return on equity outlook for 2015, does that assume continued underlying margin expansion in the property casualty business?

Yes, that includes our thoughts going into 2015 of the margin expansion that we see in our businesses, as well as the full execution of the current capital management plan that we have.

Thank you.

Randy Binner, FBR.

Hey, thank you. Congratulations, everyone and I want to go back to -- with that, I want to go back to asbestos, I'm afraid. I know that there have been issues across the industry, but it is still -- it's a lot of money to lose, to post there, still for what's supposed to be a decaying liability. And I guess I want to get a better sense if you can provide us with what is going on. I get that it is peripheral defendants, it's probably mostly mesothelioma claims, but are you losing at trial? Are you settling more? Are you just spending more on claims and defense costs? I'd like to kind of understand better what is going on with a hope to kind of get a sense subjectively at least of when we think this might trail off.

Randy, it's Chris. Beth is prepared to give you more insights, but just from my chair in observing this over a little bit of time, you are not going to like this, but there is really nothing new here. I mean this is still a handful of our accounts. There is nothing new that is sort of bubbling up, but when you have I will call it sort of elevated frequency in our accounts and you extend that out over a longer period of time what our model predicts, you can have a relatively large movement in our loss reserves. But Beth will give you a little bit more of the details of what is going on, but the key point here is there is nothing new that we are managing or that we are getting exposed to. It is more of the same.

Yes, Chris, I would agree with that and again, as we said, if you think about the charge that we took, the $212 million pretax, think about roughly two-thirds of that coming from the experience that we are seeing with a small number and you said all the right words, peripheral insureds, where we are seeing an increase in meso claims and we would have expected to see a decrease. And given the severity that comes with meso claims, and we extrapolate that out through our models, we get the increase that we recorded this quarter.

The medical science continues to point to the fact that we should start to see a decrease in these claims and depending on what activity affects our insureds and the type of coverage that we provided to those specific insureds that see these increases, this is the result that we see. But as Chris said, it is not really anything new; it is just how that activity is affecting our insureds and how it runs through our models where we extrapolate over many, many years.

That's helpful. So I mean these are legitimate meso claims; this is not -- the expansion of liability is more to the peripheral of the defendants, but the actual claim is legit. And so you are just having to post more to settle more basically?

Yes, exactly. This is not like what we saw years and years ago where it was people who were claiming that they were affected, but they had no manifestation of an actual disease.

Okay. That's helpful color. Thank you very much.

John Nadel, Sterne Agee.

Good morning, everybody and to Liam, I want to wish you all the best. I really enjoyed our interactions over the last few years. Congratulations to everybody.

A couple of quick questions on the quarter. Doug, you mentioned I believe in your prepared remarks an expectation for the Consumer Market's expense ratio for the remainder of this year. I was wondering if you could give us any help on your expectations on the Commercial side for the expense ratio as well.

John, let me frame that. There aren't any variations that I think affect your model. Chris, I can't think of anything relative to run rate that are either front-loaded, back-loaded or have some seasonality to it. So John, I think what you've seen is a good indication of where we are and I think you can move forward from there.

Okay. Very helpful. Then on the new enhanced surrender program, can you just give us a little bit of color on what you are expecting there? How much account value or number of contracts you are targeting? Should we think about the cost benefit analysis there as being pretty similar to the most recent surrender program on the VA side?

Yes, sure. This is Beth; I will take that. So again, there are two programs. There is -- we refer to it as the ISV, which is focused on a fixed annuity block and it is about $4 billion to $5 billion of account value that we are making this offer to. And our expectation on that is that we would see about a 15% take rate. On the ESV program, it is similar to the program that we did last year with some modifications and again, it is targeted at our variable annuity book and a specific tranche of about $6 billion of account value. And we are assuming there that we will probably see about a 15% take rate as well. That is down from what we saw with our first program, but we think given the fact that this program, the offers are a little bit less than before and we have also been out to this group of policyholders with our first offer that we expect the rate to be a little bit less. And when we put the combination of those programs together at those take rates, we'd expect to see about $150 million-ish of capital benefit when we look at sort of our stressed scenario capital.

And that $150 million is both of them put together?

Both of them put together, yes.

Got it. And then just one final quick question. So I think you ended the quarter with about $1.3 billion of cash and short-term securities at the parent. Can you just sort of roll us forward because here in a few days or maybe the month of July a lot of things happened? You brought in the cash proceeds from the Japan annuity sale, you have done a decent amount of buybacks, including the ASR. So on a pro forma basis at the end of July, would it be correct to just sort of take those couple of things into account and roll it forward or is there anything else more significant?

That would be the most significant item. The only other item that we did, and it is really a timing item more than anything else, is we did accelerate some of the dividends that we'd normally take out of the P&C legal entity. So if you read our Q, you will see that in there and that was about $500 million or so. And that really was just an acceleration of what we normally would have done over the third, fourth and first quarter of the remaining of this year and into next year. It is not an indication that overall we plan to be taking more out of the P&C company going forward.

That's really helpful. I didn't make it to the Q last night, so thank you.

Tom Gallagher, Credit Suisse.

Good morning. Just wanted to focus on what you've announced for the capital plan, the update in the capital plan. And now that Japan is behind you, should we expect that there is going to be another phase of capital to return for 2015 related to risk buffer and US Talcott? And if so, when do you think we'd get an update on that or finally is that something that we should be thinking about more for 2016 and not 2015?

Tom, it's Chris. Beth will provide some commentary too. So I think you might know this, we just announced what we want to do for the rest of 2015, so we are going to start getting after that. I think the accelerated plan demonstrates our commitment to really deploy our excess capital in what we think is the most accretive ways. And we are always going to continue to look at the balance sheet, all the combinations of factors in our operating companies, our holding companies and always challenge ourselves to being as efficient as possible with our capital. So Beth, would you provide any additional color?

I think, Chris, that summarizes it very well. Again, when you look at the plan that we've announced, a significant amount of both equity repurchases and debt repayments that we will be doing the remainder of 2014 and going into 2015. And I think we've demonstrated that, as we look at our overall capital position and look to manage our Talcott entities at appropriate levels, that to the extent that we were to make any changes to that in the future, we obviously would share that with you, but I would not be expecting some sort of big change coming in the short term as it relates to our capital management plans.

So I think more importantly if I just could add what we really are focused on is looking at what the statutory capital generation is in the Talcott entities and getting ourselves in a place where we can rely on a predictable stream of cash flows coming out of those entities over time.

And Beth, just to follow up on that, does the plan that you just announced contemplate utilizing US Talcott dividends?

So our current plan does anticipate, kind of consistent with where we've talked about before, $250 million, $300 million of dividends. So that is contemplated in the current plan and to some extent a portion of that was contemplated in the previous plan.

You said $250 million to $300 million?

Yes.

Okay. And just the last question, the $500 million additional debt reduction, can you just bring us up to speed in terms of how far out does it get you and how should we be thinking about what maturities that takes care of? I believe that actually gets you through more than 2016 maturities, if I am doing the math correctly and it would get you out until 2017 or am I not thinking about that correctly? Is there -- are you more thinking about doing early retirement of some of these maturities?

So a couple things. First of all, with the plan that we had announced earlier this year, as you may recall, we had indicated that we were targeting two of the maturities that we have in 2015, which is about $456 million and so those will come through the normal course. The $500 million that we have allocated for debt repayment for the remainder of this year, we don't have another maturity that would happen in the third or fourth quarter of 2014. So we will be looking at either calling a tranche of debt or a tender, but that would be an acceleration. We don't have a maturity that lines up with that.

Okay, thanks.

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

Brian Meredith, UBS.

Good morning. Thanks. Two quick questions here. First one, Doug, you mentioned some elevated property losses in the Middle Market commercial lines space. What would that add to the underlying combined ratio in the quarter kind of relative to what was normalized?

So we share the underlying and the Middle Market overall combined ratio side. I'd point you there in our supplement. I would characterize the losses as primarily fire. A couple of larger losses in our property book and we also had one in our inland marine book. So somewhat outsized, but not -- we don't take enormous retentions. Our retentions are normally under $10 million and so they did cause a little bit of blip in our Middle category.

Can you quantify what the kind of -- was it 1 point,2 points on the underlying?

There is so much seasonality. I will give you a sense. Our core, as I think about second quarter non-weather losses over the last three or four years, were higher than the norm by a couple of points overall. So it is certainly not 10 points in that book. It is 2 to 3 points. There have been quarters that have had that kind of activity, but relative to 2013 we are a little outsized.

Great. And the next question for you, Doug, just curious now that you are going to be running the Consumer business, any changes that you anticipate making and specifically focused on your other agency business that continues to kind of contract here?

So this is two days in. No changes planned. We have a terrific franchise with AARP and obviously you know that I have been deep in the agency space on the Commercial side for the last 25 years. So excited about what we will be doing there and what we are doing there currently today. Just a lot of work in front of me and looking forward with Ray to working with this team. So more to come as we go forward.

Great, thank you.

Thank you, Brian. We'd like to thank all of you for joining us today and for your interest in The Hartford. If anyone has any follow-up questions, please feel free to contract either Sean or myself by phone or email. Thank you and have a good afternoon.

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