Hartford Financial Services Group Inc. (HIG)
December 08, 2011 9:00 am ET
David N. Levenson - President of Wealth Management Group
Andy Napoli - Executive Vice President and President of Consumer Markets
Sabra Purtill - Head of Investor Relations and Senior Vice President
Douglas G. Elliot - President of Commercial Markets
Liam E. McGee - Chairman, Chief Executive Officer, President and Member of Finance, Investment & Risk Management Committee
Christopher John Swift - Chief Financial Officer and Executive Vice President
Andrew Kligerman - UBS Investment Bank, Research Division
Jay Gelb - Barclays Capital, Research Division
Thomas G. Gallagher - Crédit Suisse AG, Research Division
A. Mark Finkelstein - Evercore Partners Inc., Research Division
Randy Binner - FBR Capital Markets & Co., Research Division
Edward A. Spehar - BofA Merrill Lynch, Research Division
Robert Glasspiegel - Langen McAlenney
Christopher Giovanni - Goldman Sachs Group Inc., Research Division
Eric N. Berg - RBC Capital Markets, LLC, Research Division
Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division
John M. Nadel - Sterne Agee & Leach Inc., Research Division
Jay A. Cohen - BofA Merrill Lynch, Research Division
Previous Statements by HIG
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Finally, today we will use a few non-GAAP financial measures. Reconciliations to the GAAP are in the appendix. I'll now turn the presentation over to Liam.
Liam E. McGee
Good morning, everyone. Oh, come on. Good morning, everyone. It's great. I know you've been going to many of these and we and I really appreciate you being with us this morning. This morning, as Sabra said, I'll provide an update on The Hartford's transformation and the company's overall strategy and priorities. I will also discuss the performance of the company from an individual business return perspective, and how that is driving actions to increase shareholder value. In addition, I will show you the company's separated into operating and runoff business segments, and the results and implications for management and shareholders. Let me start off by saying that we believe that our stock price does not reflect the strength and value of The Hartford. So we're determined to give you greater transparency into our company. And so in October, we reviewed with you the balance sheet and the significant improvement and risk management in our company. Our intent today is that you leave with a good understanding of The Hartford's competitive advantages, business strategies and priorities going forward.
And a clear sense that this management team is working with urgency to deliver increased value to shareholders. In April 2010, we held an Investor Day, where we outlined a go-forward strategy for The Hartford. At that time, we talked about the comprehensive business review we conducted and the company's 3 distinct competitive advantages. First, a large customer base. We provide services to more than 1 million business customers and more than 18 million individual consumers. Second, multichannel distribution, with more than 175,000 Life and Wealth agents and more than 15 P&C and Benefit brokers and agents, plus of course, the internet and direct channels. Third, unique product breadth, The Hartford's products cover over 85% of total financial service profits, excluding commercial bank, deposits and loan business. Now to better leverage these strengths and create execution focus, we organized the company, as you know, around 3 customer segments. Commercial Markets, which includes Small Commercial, Middle Market, specially P&C businesses, and our Group Benefits business. All our protection products targeted at companies are in this business. And this customer focus has led to success in leveraging our P&C and Group Benefits platforms, as you'll learn from Doug, to deepen customer relationships. Consumer Markets, which includes auto and homeowners insurance sold through agency and direct channels, such as AARP and other affinity groups. By concentrating on Personal Lines, we have improved profitability, created a sharper focus on our target customer segments and developed new affinity and direct relationships. And Wealth Management, which includes retirement plans, Individual Life, Mutual Funds and Annuities. At The Hartford, we have the products and services to help aging Americans accumulate wealth for their retirement. Now as you'll hear from the 3 business leaders, this organizational model has enabled us to balance our traditional product and channel focus with a customer view that is causing greater innovation, prioritization of business investments and process improvements and efficiencies. In addition, the 3 businesses are working together to maximize enterprise capabilities in ways that simply do not occur previously. We see this, as you'll learn, with commercial P&C Group Benefits teeming on sales opportunities, and Retirement Plans and Individual Life businesses leveraging P&C agency relationships as a growing sales channel. We are also simplifying and improving core processes across the company, which as Chris will share with you is resulting in significant cost efficiencies.
Finally, our distribution partners who are experiencing top line pressures of their own are increasingly receptive to selling broader ranges of products to their customers, and The Hartford is uniquely equipped and prepared to help them. We also laid out simple management principles that continue to guide everything we do. First, maximize shareholder value. Our goal, over time, is to generate an ROE in excess of our cost of capital. Second, focus on customers and partners and build on our brand. The Hartford brand will represent innovative solutions for consumers and businesses that build financial confidence and peace of mind. Third, drive superior business execution. We will be recognized as an efficient company with leading risk management. Now as you'll hear from the team, The Hartford has made good progress on a number of fronts. And while there is still much more work to do to fully complete our turnaround, I feel good about what we've accomplished, particularly in this environment. In April 2010, we also recognized that the company had tremendous strengths, but there were significant challenges to be addressed. Particularly, the financial and risk management foundation of the company. The Hartford is stronger today than it was 2 years ago, clearly. Much of this was discussed in great detail at our Investor Meeting in October, and so we're not going to repeat that today. But I do want to reiterate that The Hartford's balance sheet is strong. And while challenges exist, our risks are significantly reduced and manageable. The Hartford's risk management capabilities are meaningfully enhanced. Bob Rupp, who you just met, our new Chief Risk Officer, is a highly respected risk and markets executive, and he will lead our continued progress to be a recognized risk management leader.
The Hartford has the strength and the diversity of businesses to maintain sufficient capital levels consistent with current ratings even under significant economic and market stress. And finally, management is running the company with a disciplined focus on generating value for shareholders. Now today, we'll spend most of our time discussing our initiatives for continuing to improve the operating performance as well as the profitability of the organization, which will drive our goal of creating shareholder value by improving The Hartford's return on equity over time. As you know, we're operating in a slow growth economy in the U.S. with significant uncertainty in the outlook for Europe. We expect interest rates to remain at or near historic lows in 2012 and perhaps into 2013. In addition, we've seen higher than normal catastrophes and noncap weather. These factors collectively have offset much of the improvement that we've achieved throughout the company. Were managing The Hartford with a realistic view of the 2012 operating environment. We have a great sense of urgency to improve performance and shareholder value and I can tell you, we are accelerating our already fast paced change. We're aggressively managing the levers we control while prudently deploying capital to create shareholder value in our businesses, and also return capital to shareholders through dividends and share repurchases. This means focusing on growth where we can generate appropriate returns, prioritizing profitability over volume. And as Chris will demonstrate, driving greater efficiencies to ensure that the company's expense base is appropriately sized for this environment.
In Capital Management, we've returned more than $300 million to shareholders in the last 2 years through common and preferred dividends, and intend to return $500 million through the share repurchase program, which we expect to complete by early second quarter 2012. With the completion of this Investor Day, we expect to begin repurchase activity in the near term. Today I'll give you a deeper look at the individual businesses and share our perspective on their current returns and growth appetite. Now as you can see on Slide 6, The Hartford has a diverse portfolio of businesses. As you can also see, earnings are about equally split between businesses and consumers. The chart on Slide 7, which we affectionately call the bubble chart, gives a relative positioning of the individual businesses by returns, a relative positioning, our growth objectives and the amount of capital attributed to each. Looking at the businesses in this construct gives you a better perspective on how we're managing the company as a portfolio of individual businesses. We are measuring and evaluating each business objectively, looking at several factors, including capital requirements, returns, risk profile, potential customer and expense synergies, scale and of course, growth potential. The circles reflect results for both inforce and new business.
So for example, the return expectations for new U.S. variable annuity sales are much higher than the aggregate returns for the whole annuity business, given the large inforce book. For those businesses on the upper right, we're focused on profitable growth because they already generate attractive returns. For those in the middle, our primary focus is on improving profitability. We will allocate incremental capital to those businesses generating acceptable returns. This portfolio of businesses is being managed ready for sharp focus on reducing risks and on the aggregate sensitivity on equity markets, interest rates, unemployment and other macroeconomic factors. Our goal is to increase the value of each of these businesses. We will continuously evaluate the portfolio and strategy, and we'll be pragmatic as to how value is realized.
Starting on Slide 8, I'll take you through a quick assessment of each of the businesses and of course, you'll hear more detail from each of the business presidents. In Commercial Markets, our strategy is to grow the top line and maintain margin in Small Commercial and Specialty. Small Commercial has attractive returns, and we are well positioned as a market leader with an innovative new delivery platform. But this is an extremely fragmented market.
We have only, as a leader, about a 4% market share, giving us plenty of opportunities for profitable growth. Overall, we see Specialty as a growth opportunity. There are, however, specific subsegments such as public company D&O where lower returns are causing us to focus on improving profitability not growth. In Group Benefits and Middle Market, our primary focus is on pricing and margin improvement given the current cyclical challenges in those businesses. Doug and his team are managing these lines so that we grow only where it makes sense from a return perspective. For Consumer Markets, our strategy is to significantly improve margins and to broaden the foundation for future growth.
As you'll see, Andy and his team have solid plans in place to improve profitability including increasing retention in AARP and the agency channel, improving pricing, and expanding the AARP through agents offering, as well as other targeted direct and affinity programs. In Wealth Management, the mutual fund business has attractive returns and requires very little capital. As a result, we're looking to grow it rapidly and build value. As you saw from our press release last night, Dave Levinson will share some exciting news and actions we're taking to do so. In Retirement Plans and Life Insurance, we want to selectively grow in those areas that are most profitable while also enhancing returns.
Now, given the current interest rate environment, we recognized the profitability challenges in Life Insurance. We've been able to offset some of that margin compression through recent price increases, as well as our writer strategy, which Dave will get into more in detail. The writers have been well received by customers and distributors because traditional Life Insurance at The Hartford, with longevity and chronic illness writers, is becoming a valuable financial planning tool for the living. We continue to believe there are opportunities in the Annuity business for The Hartford. Our new products, in line with our risk appetite, have appropriate returns and offer good benefits for consumers.
A more rational, competitive environment in combination with our distribution capabilities and new product pipeline make us optimistic we will be profitable and eventually meaningful player. But in aggregate, we do expect the decline of the inforce book to be greater than new sales. We are optimistic about profitably growing this business. But our timeframe is not unlimited, and we would expect to see meaningful progress in the near future. Separating the runoff and operating segments demonstrates that low runoff returns are masking acceptable returns in our ongoing businesses. Using our standard capital allocation methods, roughly 70% of The Hartford's current capital is attributed to the company's ongoing businesses, with about 30% allocated to the runoff businesses which have very low returns.