Hartford Financial Services Q3 Earnings Call Transcript

123jump.com Staff
26 Nov, 2010
New York City

The insurer quarterly revenues increased 28% to $6.67 billion. Net income generated in the quarter was $666 million or $1.34 per diluted share, compared to a net loss of $220 million or 79 cents per share in the prior-year quarter.

The Hartford Financial Services Group, Inc. ((HIG))
Q3 2010 Earnings Call Transcript
November 3, 2010 10:00 a.m. ET

Executives

Richard Costello – Senior Vice President, Investor Relations
Liam E. McGee – President and Chief Executive Officer
Christopher J. Swift – Executive Vice President and Chief Financial Officer
David N. Levenson – President, Wealth Management
Andrew J. Pinkes – Acting Head of Commercial Markets
Andy Napoli – President of Consumer Markets

Analysts

Darin Arita – Deutsche Bank
Christopher Giovanni – Goldman Sachs
Nigel Dally – Morgan Stanley
Eric Berg – Barclays Capital
Edward Spehar – Bank of America/Merrill Lynch
Larry Greenberg – Langen McAlenney
Andrew Kligerman – UBS
Thomas Gallagher – Credit Suisse
John Nadel – Sterne, Agee & Leach

Presentation

Operator

Good morning. My name is Camico and I will be your conference Operator today. At this time, I would like to welcome everyone to The Hartford Third Quarter 2010 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers'' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.

I would now like to turn the conference over to your host, Mr. Rick Costello. Sir, you may begin.

Richard Costello

Thank you, Camico. Good morning and thank you for joining us for The Hartford''s third quarter 2010 financial results conference call. The earnings release and financial supplement were issued yesterday. Our slide presentation for today''s call is available on the company''s website at www.thehartford.com.

Chief Executive Officer, Liam McGee and Chief Financial Officer, Chris Swift, will provide prepared remarks this morning, and we will finish with Q&A. Also participating on today''s call are Dave Levenson, President of Wealth Management; Andy Napoli, President of Consumer Markets; Andy Pinkes, acting Head of Commercial Markets; Greg McGreevey, Chief Investment Officer; and Alan Kreczko, General Counsel.

Turning to the presentation on slide two, please note that we will make certain statements during the call that should be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These include statements about The Hartford''s future results of operations.

We caution investors that these forward-looking statements are not guarantees of future performance and actual results may differ materially. Investors should consider the important risks and uncertainties that may cause actual results to differ, including those discussed in our press release issued yesterday, our 2010 quarterly reports on Form 10-Q, our 2009 annual report on Form 10-K, and other filings we make with the Securities and Exchange Commission. We assume no obligation to update this presentation, which speaks as of today''s date.

Today''s discussion of The Hartford''s financial performance includes financial measures that are not derived from generally accepted accounting principles or GAAP. Information regarding these non-GAAP and other financial measures, include reconciliations to the most directly comparable GAAP measures, is provided in the investor financial supplement for the third quarter of 2010 and in the press release we issued yesterday as well as on the company''s website, all of which can be found at www.thehartford.com.

Now, I will hand the call over to The Hartford''s Chairman, President and CEO, Liam McGee.

Liam E. McGee

Thank you, Rick. Good morning, everyone, and thank you for joining us today. Before we begin, I want to take a moment to remember JR Reilly of The Hartford''s Investor Relations team. As you probably heard, JR passed away unexpectedly a few weeks ago. I know many of you interacted with him on a regular basis. He was a valued and respected member of our team and a friend and his untimely passing was truly tragic. We miss him and his family remains in our thoughts and prayers.

In the third quarter, we delivered strong financial results based on solid execution, receiving a lift from rising equity markets and light catastrophe losses. I am confident that we are on the path to delivering more predictable and consistent performance as well as achieving the targets we set out in April.

Core earnings were up 8% from last year at $710 million or a $1.43 per diluted share. Net income was $666 million or $1.34 per diluted share. The investment portfolio improved significantly in the quarter. Chris will provide details but by almost any metric, the portfolio was substantially stronger than it was a year ago. While some of the improvement is due to lower interest rates and spread tightening, it also reflects the significant actions that Greg McGreevey and his team have taken to appropriately derisk the portfolio.

Investment improvements helped drive book value per share to $45.80 on September 30, up 21% year-over-year and 11% sequentially. Our statutory surplus position increased about $700 million.

During the quarter, we also put on additional equity and currency hedge protection to mitigate surplus volatility. We managed The Hartford''s surplus volatility with a combination of reinsurance and hedging programs and by holding appropriate amounts of surplus capital.

Over time, we will continue to reduce our exposure to changes in the capital markets in a prudent fashion, balancing economics and risk, just as we''ve done in derisking the investment portfolio. So in summary, the third quarter performance was very good and is a testament to The Hartford''s strong focus on execution.

We are making good progress implementing the strategy we outlined in April. We said then that this is a strategy of evolution, not revolution and that consistent, strong execution quarter after quarter and year after year is key to our success. We''ve completed the reorganization into a customer-focused structure and this quarter, as you know, began reporting financial results reflecting this new segmentation.

Leadership within the businesses is in place and the teams are moving ahead. Andy Pinkes is running the Commercial Markets business, where we have good momentum. Andy is a talented and strong leader with deep knowledge of the insurance industry and has been an integral part of the P&C leadership team for the last five years.

We are considering internal and external candidates for the Head of Commercial Markets and expect to name a permanent leader in early 2011. Commercial Markets delivered good results this quarter, despite some headwinds in Group Benefits. Written premiums in P&C commercial lines were up 4% over the prior year, led by growth in small commercial and specialty casualty. Policies in force in our standard commercial lines were also up 4%.

Underwriting profitability in Commercial Property and Casualty improved over the prior year. Excluding cats and prior-year development, P&C Commercial posted a combined ratio of 92.2, about a four point better than the prior-period quarter. This reflects The Hartford''s commitment to underwriting discipline as well as benign loss cost trends.

I am very pleased with these results, particularly given the competitive nature of the commercial P&C market. Similar to many of our peers, we are working hard to retain existing profitable business. At the same time, we are pursuing new business where we feel good about the underwriting risks and we recognize this is a balance.

Our goal is to increase submission flow in the areas where we want to grow, especially where The Hartford has a unique product offering or underwriting expertise to offer its customers. With small businesses as an example, we continue to have a competitive advantage and are writing new, profitable business that we like.

We''ve also had success with our industry-specific programs and are expanding this effort. In areas such as technology and healthcare, we have already developed market-specific expertise and products that differentiate us from the competition.

Our new outpatient healthcare offering is performing very well, contributing to more than $60 million in new healthcare business year-to-date in the midsized customer segment. And most recently, we''ve launched a renewable energy practice.

Excellence in sales execution also makes a difference in this environment. Our sales regions are working to develop new opportunities, maximize existing relationships, manage individual sales performance and reduce the variability of process and output. In short, in this environment, we will not sacrifice profitability for growth.

In Group Benefits, we continued to experience elevated claims incidents and lower terminations in our disability lines during the third quarter. The GBD management team is very focused on taking corrective measures to improve the business results, including taking rate as appropriate. Along with members of the Commercial Markets team, I was at the CIAB conference in Colorado Springs last month, meeting with many of the company''s largest agents and brokers. Their response to The Hartford and the changes we are making was positive.

They are generally supportive of our new strategy, particularly around the combination of Group Benefits with our Commercial Property and Casualty business. This model is consistent with the growing trend of agencies to provide value-added solutions as opposed to a product-centric approach.

We launched our new sales approach in support of the combined P&C Commercial and GBD strategy in August. Since that time, we have quoted over 200 accounts and built a pipeline of nearly 200 additional qualified opportunities. And to date, in just those few months, we have written over $30 million of joint customer, that being Commercial P&C and Group Benefits business.

In Consumer Markets, in August, we named Andy Napoli to lead the business. Andy has broad industry operational experience as well as a background in personal lines and affinity relationships. He is making good progress to date in sharpening the businesses'' focus on the levers that will drive profitable growth, selling the AARP product to agents, deepening our relationship with AARP, focusing on specific customer segments and developing new affinity programs.

We have hired The Kessler Group, a firm with an excellent track record of developing the type of affinity relationships we are looking for. We are focused on this opportunity and are having conversations with potential new partners.

Under Dave Levenson''s leadership, Wealth Management is now organized to focus on four key areas, global annuities, mutual funds, retirement plans and life insurance. In U.S. annuities, Personal Retirement Manager, which we launched last fall, was designed to offer consumers a simpler, lower-cost annuity alternative. But in an environment of equity market volatility and low interest rates, customers have sought out richer equity guarantees. As a result, sales of the product have not met expectations.

As we said on the second quarter call, Dave and his team are evaluating the annuity strategy. While this work is still underway, I can say our goal is to develop a rationale suite of annuity products, including Personal Retirement Manager, to meet the demands of a range of distributors and customers, with acceptable risk and profitability parameters for The Hartford. The $5 billion target we have articulated is a proportional guide to how we are thinking about The Hartford''s desired level of market participation over the long-term. But we will not take unacceptable risk to achieve it.

In other Wealth Management businesses, we are making good headway. We reported a 13% year-over-year increase in retirement plan deposits. And Individual Life sales were up 14% over the prior year, with sales in the independent channel up 45%.

In mutual funds, we plan to launch global fixed income funds in 2011. This will complement our existing equity and domestic fixed income offerings and respond to customer trends. When we communicated our strategy in April, we talked about our intent to improve efficiency at The Hartford.

We are making good progress on that front. We have significant opportunities to simplify the company and its processes, making The Hartford easier to do business with and more efficient as a result. As an early example, we have combined service operations throughout the company into one enterprise operation structure.

We also announced in mid-October that Jim Eckerle joined us to lead an enterprisewide-effort to simplify our business processes and help us become a more efficient company. I have known Jim for many years and he is widely recognized in financial services for his success in project management, process improvement and enhancing efficiency.

Finally, I want to comment on the economic environment and its impact on The Hartford. As we have said for the last few quarters, we expect a slow and choppy economic recovery. While there are some signs of improvement, broad economic factors continue to impact our business, including tepid job growth and cautious spending by consumers and businesses alike.

Similarly, we also do not expect near-term relief from the current low interest rate environment. However, we do think rates will rise over time, particularly given expanding government balance sheets around the world.

We continue to target a long-term, 13% to 15% ROE when we put business on the books. But in this environment of low interest rates and intense competition, achieving these returns is challenging. That is why we are working so hard on many fronts. We are paying close attention to rate adequacy. In businesses such as Consumer Markets and Group Benefits, we are taking rate and we are letting business go when we need to.

We are focusing on market segments where we have sustainable, competitive advantages and we continue to drive for outstanding sales execution and better efficiency. I want to thank all my Hartford teammates for their outstanding performance this quarter. Their commitment to the company and to executing in the marketplace every day is unmatched. I appreciate all they are doing to move The Hartford forward.

So to summarize, we delivered strong results in the third quarter. We are making very good progress executing on our strategy and we are confident that we are on a path toward delivering on the 2012 targets we established. Our goal is to execute quarter after quarter and year after year, delivering consistent operating results and effectively managing the company''s risks.

Now, I’ll turn it over to Chris for a deeper dive on this quarter''s results. Chris?

Christopher J. Swift

Thank you, Liam. Good morning, everyone. Let''s begin on slide four. The Hartford generated very strong third quarter results, with net income of $666 million or $1.34 per diluted share. Core earnings were $710 million or $1.43 per diluted share. These results were driven by the five following items. First, solid performance in most of our operating businesses; second, the DAC unlock benefit; third, favorable prior year development in our property and casualty businesses; fourth, positive returns on our alternative investments and fifth, favorable cats.

All-in book value at the end of September stood at $45.80, up 11% from the end of June and 21% over prior year. Diluted book value per share, excluding AOCI, grew 2% during the quarter to $41.72.

Now, let''s move to slide five to discuss two new financial metrics that we are using internally to track progress against our strategic plan. They are adjusted core earnings and the expense efficiency ratio. Adjusted core earnings excludes significant one-time items as well as volatile items like prior year reserve development and DAC unlocks. Making these adjustments will provide a clearer picture of the underlying profitability trends of our business. It will also serve as a baseline from which we will measure core earnings growth in future years.

We''ve also quantified the efficiency ratio. As you will recall, at our April Investor Day, we set a goal of reducing our efficiency ratio 200 basis points by the end of 2012.

Now, let''s discuss the numbers. Adjusted core earnings for the third quarter were $485 million or $0.98 per diluted share. This excludes two items. First, the DAC unlock and second, Property and Casualty prior year reserve development.

The DAC unlock benefit''s core earnings was $166 million. The majority of this benefit was driven by global equity market appreciation. About $15 million of this benefit reflected our annual review of assumptions used in calculating DAC and other similar balance sheet items.

The most significant assumption changes were a decrease in withdrawal levels in the U.S. and an increase in future annuitization levels in Japan. We also continued to benefit from positive reserve development in the third quarter, both in our P&C Commercial lines and Consumer Markets.

In total, net prior-year reserve releases were $99 million after-tax. We continue to reserve appropriately and our reserves remain strong. Some of the positive reserve development was offset by an increase to environmental reserves. The after-tax impact was about $40 million.

Slide five also includes a reconciliation of adjusted core earnings for the third quarter as well as year to date. Adjusted core earnings ROE over the last four quarters is 8.9%. This measure reflects adjusted core earnings and also excludes a $440 million write-off relating to the repayment of CPP in the first quarter.

We''ve also quantified our efficiency ratio and included details about the calculation of the ratio in the appendix. The numerator is the expense number and represents all controllable expenses. The denominator includes all revenues other than trading securities and realized capital gains and losses.

Year-to-date, the ratio has improved more than 100 basis points. This reflects the significant expense actions the company took over the course of 2009. We are also benefiting from expense discipline and higher revenues in 2010.

Looking ahead to 2011, we expect the efficiency ratio to increase modestly. This will be driven by investments we are making to execute on our overall strategy, including growth and efficiency initiatives. This should leave us well-positioned to deliver the full 200 basis point run rate improvement by the end of 2012.

Much of the future expense saves will come from process improvements across the organization. Our intent is to make our systems work better for customers and employees and to become a simpler and more efficient organization. We will continue to report on this efficiency ratio, along with progress and actions in this area, in the quarters ahead.

Now, let''s move to a discussion of third quarter business results, beginning with Commercial Markets on slide six. The P&C Commercial lines performed very well in the third quarter, with year-over-year improvements in written premium and underwriting profitability. P&C Commercial reported a 92.2% current accident year combined ratio, excluding cats, almost one point better than the third quarter of 2009.

These continued solid underwriting results were driven by our rigorous underwriting and pricing process, coupled with favorable severity from lower inflationary pressures, like wage and material costs. On the top line, written premiums turned positive, with 4% growth over prior year. Some of this reflects an easy comparison against last year''s third quarter, when large auto premium adjustments reduced premiums.

On the other hand, some of the written premium growth reflects sustainable trends. Renewal pricing remains positive, plus 1% in standard commercial lines, a good result in this competitive marketplace. In addition, there was a slight improvement in exposure base during the quarter, suggesting that the decline in exposures has flattened out.

In Group Benefits, sales continue to be soft due to the weak economic environment and the competitive marketplace. Margins remain pressured by disability experience. We continued to experience elevated claims incidence and lower terminations in our disability lines in the third quarter.

We have closely reviewed our disability claims experience and the increased frequency continues to be widespread and not specific to any industry or plan size. We are responding appropriately to these higher loss costs.

For 2011, we are increasing disability rates, taking into account the elevated claims experience, as well as the lower interest rate environment. As always, we determine rates on a case-by-case basis. We are committed to maintaining our underwriting discipline. We expect to remain competitive in these key markets.

In summary, it was a good quarter for Commercial Market segments. The P&C Commercial lines reported written premium and combined ratio improvements. In Group Benefits, we are making progress on necessary actions to address pressures on profitability.

Now, let''s turn to slide seven for a discussion of our Consumer Market results. In Consumer Markets, we are implementing our strategy to increase profitability and position ourselves to drive growth. We continue to take meaningful rate increases. Renewal written price increases for auto and home were 8% and 11%, respectively, in the third quarter.

Written premium declined 3% from prior year. This was driven by two factors, pricing and underwriting actions and our decision to shift our focus to a preferred market segment. Premium retention is relatively flat as pricing increases offset an expected reduction in policy retention.

Profitability in the third quarter was lifted by light cat activity. Excluding cats, the current accident year combined ratio was 93.3% more than 1% better than prior year. Going forward, we are looking to increase our AARP penetration and to sharpen our agency focus. We expect new business premium to begin to grow again in 2011 in response to targeted marketing and new product launches.

In Agency, we are steadily increasing our focus on the 40-plus age group. More than 80% of Agency new business flow in the quarter came from this demographic. We will report this metric going forward and you should expect it to steadily climb.

We plan to have our Universal auto product in 39 states by the end of the first quarter of 2011. This will further improve our ability to increase penetration across all of our targeted segments.

In summary, the fundamentals in this business are headed in the right direction. We are taking rate and underwriting actions where appropriate. Our combined ratio is improving and we are focusing our efforts on target markets.

Now, let''s turn to the Wealth Management results on slide eight. Excluding the effects of DAC unlocks, profitability in Wealth Management continued to improve, with core earnings up 10% over prior-year. Margin expansion is being driven by equity market appreciation and positive net flows outside of annuities.

Core earnings, ex the DAC unlock, for the combined annuity segments was $146 million in the third quarter, an 8% increase over prior-year. Rising account values have more than offset net outflows to generate earnings growth.

In our Life Insurance business, third quarter results were again strong. Ex the DAC unlocks, core earnings were $57 million. Mortality was a bit unfavorable in the quarter, but with an expected level of volatility. Individual Life sales were up 14% over prior year.

We are making excellent progress with our Monarch program, our initiative to increase our penetration with some of the largest independent life producers in the country. We believe momentum here is building, with a record sales month in September and we are excited about growth in the fourth quarter and into 2011.

In mutual funds, deposits totaled $3.1 billion. Retail mutual fund deposits were off 19% from prior year. The decline in deposits is consistent with generally weak industry flows into equity funds. In contrast, industry flows into fixed income funds remains at historic highs.

We are working to grow AUM in this environment with a more robust fixed income product offering in 2011. Also, we announced two weeks ago the planned sale of our Canadian mutual fund business, which is expected to close in the fourth quarter. This is a non-core operation with under $2 billion of AUM.

As we''ve said, we will regularly review our portfolio of businesses to ensure we are focused on the right mix to drive our strategy. Our Retirement Plans business posted solid third quarter core earnings, excluding the DAC unlock, were $10 million, up 25% over prior year. Deposits were $2 billion, up 13% over prior-year.

To summarize third quarter results in Wealth Management, we saw good flows in non-annuity businesses, margin improvement driven by account value growth and strong sales and profitability in Life Insurance.

Now, let''s turn to slide nine for discussion of capital and risk management. We''ve received a lot of valuable feedback from investors since the second quarter call, indicating they want more clarity about changes in our statutory surplus. We''ve heard you and we thank you for your input.

As a result, we are providing expanded information this quarter. We continue to believe we have sufficient capital for any reasonable stress scenario. Slide nine presents a roll-forward of third-quarter changes in stat surplus at our Property-Casualty and U.S. Life entities. In aggregate, surplus improved about $700 million in the third quarter to $15.2 billion.

Working across the slide, VA-related surplus impacts totaled $400 million. I will discuss that in more detail on the next slide. Our Property and Casualty operations generated $300 million of surplus in the quarter. Credit-related impacts provided a benefit. Impairments were more than offset by price improvements in several mark-to-market fixed-income portfolios. Dividends from the P&C companies were about $200 million, consistent with our stated plans.

In our Life statutory entities, excluding the impact of the VA business, surplus declined about $100 million. This was caused by reserve increases related to our fixed annuities due to the low interest rate environment.

Now, let''s move to slide 10 to examine the VA surplus impacts in greater detail. VA-related statutory income, excluding changes in reserves and hedge assets, was about $300 million in the quarter. The two largest drivers of VA-related surplus movements are typically changes in statutory liabilities and hedge assets.

In the third quarter, these two essentially neutralized one another. With rising equity markets, statutory VA liabilities declined about $700 million. Conversely, our hedge assets declined in value about $800 million.

There are two key drivers for this result. First, while the U.S. equity market recovered much of its second-quarter decline, the yen continued to strengthen against the dollar. Second, we increased hedging levels for both global equity protection and yen-dollar protection. That extra equity protection lowered surplus in the quarter due to rising equity markets.

Looking ahead to future quarters, you generally should not expect the changes in hedge assets to so closely offset the change in liabilities. As we''ve said, our first risk management priority is to manage tail risk. So although we have taken steps to mitigate surplus volatility, you should still expect to see point-to-point volatility in the future.

Bottom line, we feel good about our capital position. We articulated a prudent capital philosophy in March. Our goal was to be prepared for any reasonable stress scenario. Since that time, the fixed income market has steadily recovered but other capital market variables have been more volatile.

The significant recovery in bond prices combined with our derisking efforts, have meaningfully reduced the Hartford''s credit risk. In connection with our March capital raise, we annualized our investment portfolio under a severe stress scenario that included a double-dip recession and additional declines in commercial and residential real estate prices. In total, we anticipated about $2.8 billion of credit-related impacts over 2010 and 2011.

Now, when we annualize our portfolio as of the end of September under the same scenario, the impact has declined to about $1.4 billion over 2010 and 2011. On the other hand, the yen and interest rates remain at stressed levels, which partially offset the improvements in credit.

As we''ve said, we continue to feel very confident in our capital position. However, given continued market and economic uncertainty, it is premature to change our capital management philosophy.

Now, let''s turn to slide 11 for a discussion of interest rates. A number of you have asked us about the low interest rate environment. As you know, lower reinvestment rates will reduce net investment income. We can offset this by lowering crediting rates on our spread-based liability but this is only a partial offset because many of those liabilities are at their contractual minimums already.

We typically use the forward interest rate curve in our planning process. As a result, our plans incorporate today''s views of future rate levels. However, if interest rates were to stay at their current levels through the end of 2012, we estimate that the incremental core earnings impact would be about $30 million in 2011 and $100 million in 2012.

Finally, a sustained low interest rate environment over a two-year period should not have a significant impact on DAC or goodwill, which are generally not sensitive to rates in the near-term. So bottom line, the interest-rate environment is a manageable headwind for The Hartford from an earnings perspective. At the same time, it is a critical factor in our thinking about pricing and returns on new business going forward.

Now, let''s turn to slide 12 for a brief review of our investment results. Declining interest rates and some spread tightening drove significant improvements in the investment portfolio in the quarter. We flipped to a net unrealized gain position at the end of September as the value of our fixed-income holdings increased. Impairments and mortgage loan valuation allowances continue to trend downwards. Total impairments, including OTTI and mortgage loan valuation allowances, were $122 million.

The primary source of these impairments was weaker collateral performance on a handful of structured commercial real estate securities. Also included in the $122 million number are $44 million of impairments related to securities we intend to sell given the recent improvements in valuation.

Net investment income, excluding trading securities, was $1.1 billion, 3% higher than prior year. Improved partnerships'' returns more than offset the effect of lower reinvestment on our fixed income portfolio.

Now, let''s turn to slide 13 for our updated 2010 guidance. As we announced last evening, we are increasing our full-year core earnings guidance to between $2.60 to $2.70 per share. This range incorporates actual third quarter results as well as the impact of unseasonably high catastrophe losses in Consumer Markets and P&C Commercial in October. This was driven by severe storm activity in the Southwest United States.

We had planned to guide to fourth quarter core earnings of a little over $0.90 per diluted share. But in light of October''s estimated cat losses, we''ve lowered our outlook by about $0.09 a share. Therefore, we expect a little over $0.80 per share in the fourth quarter, at the midpoint of our guidance range.

Looking ahead, we will share our 2011 outlooks with you early next year. This ends my prepared remarks, which were a little longer than usual. We wanted to provide additional details and insights on capital and interest rates. I hope you found it helpful.

With that, I will turn the call over to Rick as we move into the Q&A session.

Richard Costello

Thank you, Chris. Before we begin the Q&A session, I would ask callers to limit themselves to two questions, because this will allow us to get to as many callers as possible. Camico, Please open the call for questions.

Question-and-Answer Session

Operator

Again I would like to remind everyone, if you would like to ask a question, please press star then the number one on your telephone keypad now. And we’ll pause for just a moment to compile the Q&A roster. And your first question is from Darin Arita at Deutsche Bank.

Darin Arita – Deutsche Bank

Hi. Good morning.

Richard Costello

Good morning, Darin.

Darin Arita – Deutsche Bank

I had a question on, first, slide 11, on the effect of low interest rates and was wondering how much is that coming from lower investment income in the Property and Casualty insurance businesses?

Christopher J. Swift

Darin, it’s Chris. Hi. I did not split it out by Property-Casualty, Life. We did it more -- the analysis in total. I mean, we could get that information to you. But I don''t have it split out right now between Property-Casualty and Life.

Darin Arita – Deutsche Bank

I guess is it fair to assume that you are assuming pressure from that business but you''re not assuming any corresponding price changes to offset the low rate environment?

Christopher J. Swift

Again, it is from an in-force perspective, so it is sort of running off the in-force book. As you heard, we are trying to take pricing actions in most lines where appropriate. So I would bifurcate the analysis here. This is in-force future pricing. We are trying to take rate where appropriate.

Darin Arita – Deutsche Bank

Got it. Then just turning to the Group Benefits and P&C commercial joint sales, Liam, I appreciate the data that you were giving out at the start of the call. I was curious, what are the size of accounts that Hartford is targeting here for the joint sales and where do you think this can get to?

Liam E. McGee

Well, initially, Darin -- Hi, thanks for the question -- initially, most of the cross sales tends to be at the higher end of the market. But as we go forward, we are very focused on the middle market. We think that is the highest potential for us and we are beginning to see interest there from agencies who have come to the same conclusion.

Darin Arita – Deutsche Bank

And the sales, where do you think that can get to? That''s $30 million now.

Liam E. McGee

I''m not sure we are prepared to quantify it yet. I would say that we are very encouraged. The teams are working together very well. As I noted, agencies see the wisdom of it. They are working with us, not only to sort through how we deliver to them but how they deliver to their customers and we are very excited about it.

I think the first stage is what we are talking about, is the joint sales between our two sales forces. But we understand the next stage or iteration will be more about product innovation as well.

Darin Arita – Deutsche Bank

Thank you.

Liam E. McGee

Thanks a lot, Darin.

Operator

Your next question is from Chris Giovanni with Goldman Sachs.

Christopher J. Swift

Hi, Chris.

Christopher Giovanni – Goldman Sachs

Hi. A question for Chris. Do you think you could provide a bit more detail around the hedges you put on in terms of the global equity markets and the yen in terms of maybe potential around pricing as well as the timing of those hedges?

Christopher J. Swift

Sure. I think what I would point out is we''ve been building our FX positions during the second and third quarter working with risk management. Those positions were put on at different, obviously, yen levels, dollar levels. But I think we built a substantial base of protection on currency.

We''ve spent approximately $170 million run rate accumulative year-to-date on the program. The program expires -- most of it expires early 2011. We do anticipate putting on protection in 2011. We are working through the exact strategy and the dynamics of that. We try to balance, as we''ve always said, risk, capital, earnings and do the right thing from a long-term shareholder perspective. So, hopefully, that is enough detail to give you a feel for it.

Christopher Giovanni – Goldman Sachs

Okay. Then I guess different from some of the past calls where you''ve provided RBC estimates, I haven''t seen that this quarter. Do you have an update in terms of where that stands and where you expect it to end the year?

Christopher J. Swift

If the question is from RBC from our main life company, HLA, I would say that it is well north of 4.25 on an estimated basis at this point in time.

Christopher Giovanni – Goldman Sachs

Okay. Thanks so much.

Operator

Your next question comes from Nigel Dally of Morgan Stanley.

Nigel Dally – Morgan Stanley

Great. Thank you. Good morning. First question, with the surplus volatility and hedging, can you discuss where you stand with regards to hedging interest rates on your global annuity book? Is that an area that is fully hedged or is it one of the areas where additional work is still needed to reduce the volatility going forward?

Second, with group disability, obviously still seeing weakness but I understand you''re pushing through some relatively large price increases. So can you provide an update on the renewal process? Are clients accepting the price increases, or should we expect some estimated lapses as we look to 2011? Thanks.

Christopher J. Swift

Nigel, it''s Chris. I''ll try to take the first one going forward. I think your question was on interest rates and surplus volatility. I would say, again, if you look at our WB program, we do have some interest rate protection, I would say about at the 50% level. When you translate that into the statutory world VACARVM, you don''t have that significant volatility.

So from an interest rate side, there isn''t that much volatility on the VACARVM. It does consume a little capital in this lower interest-rate environment, so that when you just model different benefits and things along those lines more from a valuation side, but not a hedging side. So hopefully, that''s clear. Andy?

Andrew J. Pinkes

Nigel, Andy Pinkes. In terms of the competition and the rates that we are talking about taking, really, we believe that the higher incident rates that we are seeing and the lower termination rates are really a marketplace phenomenon as well as the challenge that low interest rates are providing generally.

So we are responding to those appropriately, we believe. We are going to take price. We believe that the market is going to do the same as well. We will see it in 2011. But we expect to remain competitive and we will proceed forward. And as we''ve said, we are seeing others seeing the same challenges and certainly interest rates are out there for them as well.

Nigel Dally – Morgan Stanley

I guess my question was more about the renewal process. You are largely through that process now, so it would have been your action of clients. Is everyone sort of trying to push forward price, so you are actually still keeping the clients or is there some pushback from clients as to the price increases that you are trying to push forth?

Andrew J. Pinkes

I think like most of this, there is mix, but I think we are seeing both. And so we are going to take these one at a time as we underwrite these and we are going to make the right judgment for us about what business is priced appropriately and what business we should walk away from.

Nigel Dally – Morgan Stanley

Okay. Thanks.

Operator

Your next question is from Eric Berg at Barclays Capital.

Richard Costello

Good morning, Eric.

Eric Berg – Barclays Capital

Good morning. Thanks very much. You indicated that in the annuity area, your Personal Retirement Manager continues not to meet your expectations. Can you describe what your domestic annuity strategy is going to be therefore? Since this one hasn''t worked and since the existing guarantee-based products prior to this are essentially winding down, where do we go from here on the annuity business? That''s my one question. Thank you.

Liam E. McGee

Thanks, Eric. I''ll make a comment and then Dave may want to make some comments on his own perspectives. Eric, I would just go back to what I said in my remarks, which is we are candid and realistic about the performance of the PRM, for the factors that you and I have both described.

Second of all, Dave and his team are hard at work on our go-forward annuity strategy, and we anticipate that being a mix of products that will be suitable for various distributors and customers. As we said in April, the $5 billion was always a proportional guide as compared to the $15 billion plus that we did at our peak. We don''t see ourselves playing at that level. And finally, as I said, we will not chase that target and seed either profitability or take undue risk. Dave, anything else you would like to add?

David N. Levenson

Eric, thanks for the question. I guess what I would add is just we are not going to be a single product provider on a go-forward basis. So as we look at PRM, it did not work well in this macroeconomic environment. In a different environment, we think it may work quite well. But we do have to complement that with other products and that is really what is in the lab right now.

Eric Berg – Barclays Capital

Okay. That''s helpful additional information. Thank you.

Liam E. McGee

Thanks, Eric.

Operator

Your next question is from Ed Spehar at Bank of America.

Richard Costello

Good morning, Ed.

Edward Spehar – Bank of America/Merrill Lynch

Thank you. Good morning. I guess the first question I had was on the DAC unlock. And I think there was a comment made that the assumption changes were only about $15 million benefit, and that they were concentrated in a decrease in withdrawal rates assumed in the U.S. and an increase in annuitization in Japan. I guess if that is correct, we''re at a point now where it is a good thing if we have higher annuitization rates in Japan and the business is more persistent in the U.S. Is that correct?

Christopher J. Swift

Your specific points, I would say annuitizations in Japan are not a good thing. That keeps the rest that means people are in essence using the guarantee. So again, when we updated our assumptions, obviously, we plan for that because they''re just more in the money. So just call it behavioral assumptions we had to update. That did, sort of on an all-in basis, not only affecting core, but that was about a $52 million charge in DAC for that. That did also consume some statutory capital from a VACARVM side when we made that change.

Generally in the U.S., we had been, I''ll call it, assuming a -- I''ll call it a higher utilization rate and higher lapses, which we took down, which provided a benefit because less in the money, I''ll call it balanced more from a risk side, we''re able to earn more fee income over the longer period of time. That is why that turned out to be approximately a $58 million benefit all-in on that assumption change.

Edward Spehar – Bank of America/Merrill Lynch

Okay. That''s helpful detail. And then I guess the one follow-up on interest rates is what type of a negative impact do you see if you had a period of -- a multiyear period, beyond the next couple of years of rates where they are today with regard to the variable annuity guarantees or is that not a big deal?

Christopher J. Swift

I would say, yes, multiyear is a big deal. We worry about interest rates; that''s probably one of the key economic factors. I could tell you I haven''t modeled it out in any detailed fashion at this point, but it''s something we could talk about in the future.

Edward Spehar – Bank of America/Merrill Lynch

Chris, just the idea that you have hedged half of the WB on interest rates, does it suggest that that is not a -- I mean, when we say it is a bigger issue, is it just -- is it a really big issue or is it something that you obviously haven''t been that worried about, considering how much you''ve protected yourself?

Christopher J. Swift

I think we are just mixing and matching apples and oranges here. One, the WB program is obviously done for hedging purposes, 157 valuation purpose and then you''ve got to look at the economics in the long-term. And I would say yes, it is an important factor that we would look at and consider.

Edward Spehar – Bank of America/Merrill Lynch

Okay. Thanks.

Operator

Your next question is from Larry Greenberg at Langen McAlenney.

Larry Greenberg – Langen McAlenney

I''m wondering if you can give us a little bit more color on the reserve releases in Property-Casualty. Past quarters, Specialty seemed to be the biggest contributor to the releases and wondering if you could maybe give us a little bit of a breakdown between what we used to know of as the old segments. And then on the Consumer side, was that just the normal reserving process or was there anything more substantial that went into the look at reserves this quarter?

Andrew J. Pinkes

Thanks, Larry. It’s Andy Pinkes. So on the Property Casualty Commercial side, the first thing I would say is they have really been fairly broad-based across our markets. Small commercial and middle market have seen -- in sort of the old segmentation have seen a fair amount. But again, I would say pretty broad-based. They include workers'' comp, really general liability, auto. We have seen favorable severity in there and particularly, I would say in our long-tail lines. And that is really where we''ve seen it.

We do break it out in some detail, actually, in the IFS. There is actually a bunch of detail in there that shows it by segment, I believe.

Larry Greenberg – Langen McAlenney

Okay. Great. And the Consumer question? Consumer reserve releases?

Richard Costello

On the Consumer releases, that is primarily going to be out of the auto liability side.

Larry Greenberg – Langen McAlenney

Okay. But it was just the normal process for looking at the reserves this quarter? I mean, the number was more favorable than it has been running.

Richard Costello

No process change. You are just seeing the emergence of severity coming out of that book.

Larry Greenberg – Langen McAlenney

Great. And then I was just wondering if you could discuss on the Consumer side the emphasis on preferred and are the agents just not giving or showing you the business you are not interested when it comes up for renewal, or are you just pricing yourself out of the market there? Just how is that process working?

Andy Napoli

Larry, this is Andy Napoli. I guess I''ll start with homeowners. Well in this current year and going forward into 2011, we believe our pricing will increase in response to rising loss costs, both cat and non-cat, and will be consistent with what is happening in the market.

On the auto side, our plus eight is high, but not unexpected, given the profitability actions we are taking in our Agency channel. As far as what is happening at the Agency level, we have introduced pretty strict underwriting guidelines that are driving that mix shift that Liam referenced and Chris, in their remarks. We are pushing our new business mix -- 40 plus is what we call it -- accounts for 80% of that new business flow. As that continues to propagate itself within the renewal book, I think we will be in a much better place going forward.

Larry Greenberg – Langen McAlenney

Thank you.

Operator

Your next question is from Andrew Kligerman with UBS.

Andrew Kligerman – UBS

Great.

Richard Costello

Good morning, Andrew.

Andrew Kligerman – UBS


With regard to the Group Benefits business…

Richard Costello

Andrew, you''re breaking up a bit.

Andrew Kligerman – UBS

I''m sorry. Can you hear me better now?

Richard Costello

Now we can. Thank you.

Andrew Kligerman – UBS

Great. With regard to the Group Benefits business, the 77% ratio there, I know you''ve got three-year products that take a while to reprice. But when do you think you could get back to a more normal 70% level, 72%, that you were at a few years ago? The second question is around the variable annuity comments that you made earlier. Liam, it sounds like you want to get back to that $5 billion target. Do you have some living benefit products that you might launch pretty soon that could get you back into the game that might bring you in the near-term toward a $5 billion annualized rate? And just lastly, real quickly, what do you estimate to be your excess or redeployable capital number at this stage of the game?

Liam E. McGee

Andy Pinkes will take the first question, Andrew.

Andrew J. Pinkes

Hi, Andrew. In terms of the time, I would say, as you reference, a large portion of our book has three-year rate guarantees. And so we are going into the market with price, based on our reaction to higher incidence and lower terminations and interest rate. And so it is going to take some time, probably a number of years, to work completely through. But we are still working very diligently on the higher incidence and lower terminations piece. So we are taking actions there with regard to price. But we are also keenly focused from a claim perspective on making sure that our execution is absolutely good as it can be. And so we will continue to be very focused there, obviously with the goal of improving that ratio.

Andrew Kligerman – UBS

So it sounds like you could gradually get it down over the next few years then but it should directionally come down from where it is now. Does that sound right?

Andrew J. Pinkes

That''s our goal, for sure. This trend, if it is a trend at all, is new and so we are watching it and so we are going to continue to watch it.

Liam E. McGee

Andrew, to your question, I have Dave Levenson comment or answer your question, your specific question. But again, I would just reiterate what I said. Both in April and today, the $5 billion was a proportional sense. It was a third of our peak, the $15 billion, when we were market leader. That kind of gives you a sense of the appetite we have. But I''ll reemphasize that we will not chase that $5 billion with inappropriate risk or unacceptable profitability. Now Dave, I know, can share more about his specific thoughts.

David N. Levenson

As you know, it is very hard to pinpoint a number, whether it''s $5 billion or $4 billion or $6 billion. So what I would say to you is, again, we are trying to build a rational portfolio of products, kind of an all-weather portfolio, if you will. We do have a couple of ideas, as I said, in the lab that do meet our risk appetite, we think, it is early. And also, we are not going to do anything, as Liam said, that is a subpar from a profitability perspective.

Andrew Kligerman – UBS

Dave, so you think you could come out with products that will compete effectively with Lincoln and Prudential and Met and can be viewed in the same light?

David N. Levenson

With respect to the competitors that you mentioned, there are some things that they do that are attracting flows for them that for us may not make sense. And all I would say is it is just a little too early for us to comment a little bit further on that.
Christopher J. Swift

Andrew, it’s Chris. On call it your excess capital position, I would state that, similar to what we said here in our opening comments, there is really no change in our capital management philosophy. Hopefully, you understood the points on improving credit offset by some modest yen and interest rate declines.

So from where we were in our April capital-raise numbers, I would say we are modestly ahead of those numbers. But there is generally no philosophy change at this point in time.

Liam E. McGee

Still a lot of economic uncertainty and market volatility, Andrew, that I think reinforces the position that Chris and I have articulated today.

Operator

Your next question is from Thomas Gallagher with Credit Suisse.

Thomas Gallagher – Credit Suisse

Good morning. First question was just a follow-up on the hedges you bought this quarter. What does that bring your 2011 sort of run rate hedge expenses to? I think prior to 3Q, the number was $260 million. Where does that stand today? That is my first question.

Christopher J. Swift

Tom, it’s Chris. Thanks for the question. I think what we had been talking about for the macro program was maybe about a $65 million run rate cost before that. You overlay the incremental FX positions we''ve been building during the second and third quarter -- I put that at another $60 million run rate. And again, as we said, the FX positions are short-term in nature and expire first part of 2011. So all-in, you could say right now, on a run rate basis, about $125 million a quarter.

Thinking about ‘11, again, still trying to design the plan balancing and everything, but I would not be uncomfortable with sort of a $100 million per quarter all-in run rate cost for our macro hedging program -- in the short term -- right -- balancing what we might do in the long-term.

Thomas Gallagher – Credit Suisse

Okay. So that''s a decent run rate to think about moving ahead. The next question I had, Chris, is just when you all did your DAC review, are you factoring the hedge costs in? When you look at EGPs and evaluate future gross profits, are you assuming that the hedge cost is going to be continuing or is that not factored in?

Christopher J. Swift

I would say yes, we factored in a lot of things. If you are specifically referring to maybe our Japan derisking activities, those EGPs do not have -- I''ll call it a defined hedging program associated with them at this point in time.

Thomas Gallagher – Credit Suisse

And then last follow-up on that. So if there -- I guess this is a question both on the U.S. and Japan. If you were to overlay kind of a forward-looking assumption that you are going to continue to hedge this, would that affect the way you look at reserves and DAC on these businesses? And I guess in particular in Japan, it sounds like it was a fairly modest charge. Are you pretty confident that the reserves in DAC are right-sized now or is there still some uncertainty there?

Christopher J. Swift

Like we''ve been saying, Tom, the macro programs and the FX programs are short-term in nature. So by definition, if we would extend anything for a longer period of time, we would consider baking that into our EGPs, depending on how we define the program. U.S. may be less sensitive, Japan may be a little bit more so. But I would remind you, Japan, we have about $1.7 billion of DAC. If I look out over the next five years, about 65% of that will just be amortized off with our current methodologies and K factors. So it is not a long-duration asset there in Japan, that DAC asset.

Thomas Gallagher – Credit Suisse

Got it. Thank you.

Operator

We have time for one more question and that is from John Nadel of Sterne, Agee.

John Nadel – Sterne, Agee & Leach

Thank you. On the waterfall slide on page -- on slide number nine in your deck, that walks us through the $700 million change in capital -- in stat capital, just two quick questions. One, the $200 million positive impact of credit-related impacts, I just was hoping you could give us a little bit more detail there. And I guess I was under the impression that mark-to-market is not reflected on a statutory basis. So I assume -- is this equity positions or a trading account that is driving that?

And then the second question, also on the same slide, the $100 million reduction for Life third quarter statutory earnings. I think, Chris, you mentioned that was largely related to the fixed annuity business. Could you give us a sense for what the assumption impacts were there or how to think about that? Is that a -- does that reset those reserves to current interest-rate environment or is there more to take if we remain low?

Christopher J. Swift

Great. Thank you for the questions. I would say on the credit-related impact, it is primarily related to -- we call it our CRC or market-value-adjusted annuity program, where…

John Nadel – Sterne, Agee & Leach

I got it.

Christopher J. Swift

So there is I''ll call it credit benefit there as spreads come in.

John Nadel – Sterne, Agee & Leach

Got it. It is on the (inaudible) product, okay.

Christopher J. Swift

Then on the statutory earnings, the negative, I would point out during the quarter the headwinds that we faced were -- and you alluded to one, we did record -- call it an increase in reserves in the annuity line of about $300 million due to the low interest rate environment. Coupled then with some assumption changes that we put in for others, and that maybe cost us another $200 million. So with that, we still then were able to obviously grow statutory surplus during the quarter.

So as we fast-forward to year-end and doing our year-end cash flow testing, C3 Phase 1 final judgments, actually we feel pretty good that there is not going to be any other headwinds or charges that we face at year-end related to those particular items.

John Nadel – Sterne, Agee & Leach

Okay. Thank you very much.

Operator

There are no further questions at this time. Do you have any closing remarks?

Richard Costello

This is Rick Costello. I know we didn''t get to all the questions, but we do want to be respectful of the 11 o''clock call that has already started. We will be available all day for follow-up question. Thank you so much for your participation on The Hartford''s third-quarter earnings call and we look forward to seeing you soon.

Operator

Thank you. This concludes today''s teleconference. You may now disconnect.