The Hartford. We've got the CEO, Chris Swift, and Chairman, a relatively new announcement, and the CFO, Beth Bombara. Chris is going to make some opening comments. Then we'll do a Q&A. Throughout this presentation and others, I certainly have a list of questions prepared, but we want to hear from you as well. If you have questions, we'll have mics circulating. Feel free to raise your hand and throw out your question. With that, I'll turn it over to Chris and Beth.
Well, thank you, Jay. I haven't been here for 22 years, but it is good to be with everyone this morning. I do have a few comments to make introductory-wise. Then we'll get into the Q&A. 2014 was an outstanding year for The Hartford. We really executed our strategy, I thought, very well. We continued to create value for shareholders, along with the accelerated transformation of the company. If you really look at why we say we accelerated the transformation of the company, we expanded profit margins significantly in 2014 and increased our ROE. We reduced risk in Talcott, particularly with the sale of our Japan annuity operation. We returned over $2 billion in capital to shareholders this year. We executed a seamless leadership transition. Our 2014 financial results were equally outstanding. Core earnings grew 9% to $1.55 billion.
On an EPS basis, we increased the core EPS 16%. We increased our full company ROE one point to 8.4%. I think these results were largely driven, again, by expanding our business margin and focused on new product and new capability as we went forward. If you look at the details beneath that, we increased our, or actually improved our combined ratio three points year-over-year, really driven by our pricing discipline and our ability to grow in certain aspects of the marketplace. In Group Benefits, we increased our profit margins of 5.2% this year. Really, I think I was most pleased with the balance that our businesses were maintaining between growing top-line and maintaining our strong profitability presence also. I said Japan was key.
We closed that transaction at the end of June, but it really significantly improved the company's risk profile, reduced a lot of the hedging that we had put on, and really will allow core earnings and net income to be much more closely matched going forward. That transaction did enable us to expand our capital management program. As I said, we did buy back in $2 billion worth of shares in 2014. Our 2015 outlook is again geared towards profitable growth. Beth provided our outlook, which we see in core earnings in the range of $1.55 billion-$1.65 billion. We are striving to expand our profit margin, particularly in our P&C business going forward, recognizing that pricing environment and the low interest rate environment does provide a little bit of a headwind, but nonetheless, we think we could modestly increase those margins.
A lot of our P&C lines of business are already at great adequate margins. There are some, though, that are not. Particularly, we've always talked about getting more rate into commercial auto, which is a big objective for us in 2015. These targeted pricing actions, along with growth initiatives, we think give us a chance to modestly expand margins in 2015. Group Benefits, we expect our margins to be relatively stable there. The real story in Group Benefits is a recovery of our top-line growth, a recovery in our top-line growth. We are committed to improving our overall ROE and book value per share and to drive top quartile shareholder performance over a longer period of time. We really focused in on four areas to accomplish that goal. First, we are expanding our product offerings and our underwriting appetite.
Specifically in middle market, we're going to focus on new industry verticals. From a geographic perspective, we want to make investments in certain regions of the country, mostly in the Midwest, where we have been underrepresented in the past. Second, we are working on our distribution effectiveness. I always say we have wonderful distribution relationships, but we're trying to maximize them even more. In small commercial, for instance, we are taking an omnichannel approach to the micro end of small. Micro for us is five employees left. We're going to continue to support our agents and our brokers in that, but there will be other channels that we'll explore to get to the small end of small. Also, we're very excited about our AARP small business relationship and are going to focus on growing that and improving that offering going forward.
Really in small, we're really focused on simplicity and speed for the business owner and ultimately our distribution partner. The third item we're focused on is improving our customer experience and operating efficiency. Really, what that's code for is we've talked about the significant investments we're making both in process and technology, all while trying to have an expense discipline and use our operating expense dollars as efficiently as possible. Fourth, we'll continue to manage capital in the most accretive ways for shareholders going forward, including the runoff of Talcott. We are currently executing our two-year plan through the end of 2015. That two-year plan calls for about $1 billion of equity repurchases in 2015, and we're targeting to pay down debt by $1 billion in 2015 also.
We haven't made any changes to that plan, but what we are increasing is what we believe is our capital flexibility for the future. What we did announce on our earnings call was that we plan to extract over $1.5 billion of excess capital from Talcott over the next 12- 14 months. We're going to continue to execute the plan that we're on, and in the second half of 2015, we'll update our capital management plan and communicate with our shareholders accordingly. In summary, 2014, we believe, was a pivotal year for The Hartford. The strategic transformation and restructuring is largely complete. As we really head into 2015, we think we have strong momentum, and we're a good competitor in our marketplaces.
We are augmenting and enhancing our core capabilities in underwriting claims with new product, new distribution, and service initiatives, which gives us great confidence about what we think we could do with this platform going forward. I really believe the company is positioned to create shareholder value going forward on a consistent and stable basis. Jay, happy to address any of your questions.
Yeah, sure. It's always interesting to have a relatively new CEO of a company up here, you've said that there's no major dramatic change in the strategy. What you have said is you'd like to accelerate the strategy. Can you pick two, three, four points you're telling your team we need to drive this faster?
Yeah. Again, the four we talked about are really integral to our thinking just about every day, every week. When Doug and I are on the road, he and I are on the road quite a bit, meeting with our distribution partners, meeting with our employees, really getting a sense of what's happening in different parts of the country because there are differences. What we take away ultimately is we have worked so hard over the last three years just to improve our profitability and our core capabilities. Our core capabilities are comp, property, commercial auto in our small business at Spectrum. We think we could use those capabilities and really target them at different parts of our economy where we really haven't been a significant player. Really what we talk about is the real economy. Real economy meaning real estate-related activity, construction, property.
We've expanded our property reinsurance capability, where we're able to write a scheduled property up to $500 million. We think we've really augmented our capability. Now it's really getting out there with our distribution partners and convincing them to give us the opportunity to write an expanded array of business that historically maybe we weren't very competitive on. It's product related, it's industry vertical related, it's real company related. I think the other thing we also talk about quite a bit is geography and specialty. Specialty for us really means our E&O and D&O capability, really means our marine, our surety capability. We'd like to integrate those more closely with our middle market. In the last earnings call, Doug announced sort of that realignment of activity. We think we could grow with better sales and marketing execution internally. I alluded to our geographic presence.
We have a wonderful East Coast, Eastern Seaboard presence and a Western presence. If you go from the Midwest, really from Minnesota down to Texas and over to Phoenix, I think we've been underrepresented, Jay, and we have the opportunity to capture, I think, more of our fair share of business as a national carrier. There's a lot of great competitors in the Midwest, but we think our capabilities, our distribution relationships should give us the opportunity. Those are the, I'll call it the go-to-market activities that we really talk about, either from an underwriting side or a product side.
I guess if I'm thinking out five years and I gave you a magic wand, and I said, "You can wave this magic wand and create the company that The Hartford wants to be five years from now, geography, product, global capabilities, potentially." What does that company look like five years from now?
Is that the magic wand?
This is a magic wand. I can't give it to you right now, though.
It's a great question. We talk about it and do have a visualization of it. The way we think about it right now, Jay, we're about a $10 billion, $11 billion property casualty company. We focus on the small and middle market. We have a great brand. I think we can do more. A lot what I talked about is our organic growth plan which will allow us just to grow and be a more meaningful and deep player. The reason why we say that, we do see a lot of consolidation happening in our agents and brokers. I think as that marketplace consolidates, you have to be able to do more with your larger players. You have to be able to offer them a broader array of product suites, capabilities. You can't take all the easy stuff that you earn superior margins.
You have to be able to take on some classes of business that stretch underwriting capabilities, and again, appropriately. We want to be a more relevant player in the future. Our plans are largely organic, but again, all the hard work that I think we've done over the last three years does allow us the opportunity to think differently about growth. I would give you examples such as acquiring underwriting teams, renewal rate deals, legal entity deals that would increase our core commercial personal lines capabilities, primarily in the U.S., Jay. We're a U.S. company. We have a London runoff operation. We do aspire to, for some of our middle market accounts, have the ability to, over the longer term, cover some of their risk that aren't U.S.-based.
I would say for the near term, we think we have a lot of growth potential and a lot of capacity to grow our presence here in the U.S.
Got it. I guess if I looked at the runoff business, Talcott, I assume you would hope not to be talking about this all that much going forward. It doesn't go away either. If I'm looking there three, five years, do you hope this is gone or is it just going to be a normal part of the business that you can't get rid of? Let's assume that interest rates rise from here. I don't know why I think that, at some point that actually might happen.
You could use your magic wand for that.
I'm going to let Beth share her views, too, as she used to lead that business. I think you are right. It's not going to go away, I want to give the utmost confidence to your audience that it is a well-contained, well-managed book of business from a risk side. We've worked hard to make it capital self-sufficient. We've reduced our capital targets going forward. We're going to extract excess capital and ultimately reinvest that in the businesses or return it to shareholder in the form of paying down debt or equity. I think it's well contained, Jay. We'd like to take that capital, reinvest it, and do creative things. Those are my points of view. Beth, how would you add?
Yeah, I completely agree with that. I think when you look at where we are now with our Talcott runoff business compared to where we were when we put it in runoff in 2012, it's just a totally different picture. We're very pleased with our plan to be able to extract the excess capital, the $1.5 billion that Chris alluded to, $500 million of which we already took out in January. As I know you know, that requires approval by a regulator, and they approved that. We feel very good about that, and we do have it contained and look at it as a way to manage that book of business down over time and, as Chris says, continue to extract capital and be able to deploy it in other ways in our businesses or return to shareholders.
The potential transaction, a sale of that business. You guys have obviously had a fair amount of dialogue over the past two years talking to potential partners. Obviously, nothing happened. Tough with interest rates this low. My question is, you may not be able to answer it, but see if you can. How high would interest rates have to go based on your dialogue with, again, potential buyers for this to be a saleable business?
Yeah. Again, when we think of the impact of interest rates, it primarily focuses on the fixed blocks that we have. Because obviously, those are very long-duration liabilities, low interest rates obviously has a very significant impact on valuation. I know in the past, we've typically talked about seeing the 10-year at least have a three handle on it, I think opens up the possibility for more of those dialogues. What we've always said with the way that we look at our Talcott businesses and the potential for transactions is that we're always open to it, but we want to make sure that it makes the most sense from an economic perspective. The Japan transaction met that hurdle and then some, again, because the way it allowed us to reduce the risk profile of those businesses, hold less capital, and so forth.
As we move forward and we look at what opportunities there might be for a transaction, we'll continue to look at it from that lens. We believe that we start from a position of strength and that we can manage this runoff. We do have the risks well managed, and we can afford to make the right decisions that have the best economic value for the company.
I think the only other important thing, Jay, is as you observed on some of our prior deals, they were reinsurance deals. We tend to think in terms of legal entity more finality if there is any transaction to pursue. That has an element of complexity, too, when you're dealing with legal entity sales versus just reinsurance. Again, it's manageable, but there is an element that we'd like to target for if we're going to explore that of real final permanency.
I guess retaining it since it's self-funded, there's not a huge risk. It just drags down the ROE to some extent.
Yeah. It is a low ROE business. I would say on a cash flow basis, Beth talked about, it's going to generate statutory earnings of $200 million- $300 million. We could take that out in addition to the excess capital. It does have a low GAAP basis ROE primarily due to what I call a lot of intangible assets, deferred tax assets on the books or DAC, that will be monetized over time. We are providing, and I know you noticed the first time this year, sort of ROE breakdown by segment of business.
That as much as that's a low ROE business, we're very proud of the ROEs of our go-forward businesses and their ability to grow them going forward, Jay.
With the capital plan that was announced, I sensed there was a little bit of disappointment from people. Here you're freeing up potentially $1.5 billion, yet your stock buyback split in change for this year. I know there's some other issues around that. I'd love for you to address them. Why isn't it a bit more aggressive early in the year?
Again, one, we're very pleased with the plan that we have to extract the capital out of Talcott. We are executing a plan that we just updated last July, after the closing of Japan, a pretty significant plan over the two years, close to a little over $4 billion when you look at share buyback, money allocated for debt management, as well as increase that we made in the dividend. We feel really good about that, our view was to continue to execute on that plan. As Chris talked about, in the second half of this year, we'd look to make any updates. Right now, we feel really good about the plan that we have, and we're executing on that.
What about the dividend? How does this fit in? You're committed to the annual increase. Are you shooting for a particular yield?
Yeah. As we said, we did increase the dividend this past year from $0.15- $0.18 per quarter. The way we think about dividends is we really look at the power of our ongoing businesses and can they support dividend increases. As we look to balance our capital management plans, that is something that we obviously would consider with the board. We do look at that as something that we would continue to evaluate. We do target dividend yields that are consistent with other peers that we have.
Yeah, we do have a mindset, though, that increasing the dividend as we expand our earnings base, those are linked. Again, given the business performances, particularly over the last two years, it does give us confidence that we can continue to always recalibrate our dividend strategy going forward.
Right. If there are questions out there, I can't see very well, but just feel free to raise your hand. Let me get a question here. If we have mics. Mic is coming. Let me just throw one out there, and then we'll get to you. Question is on Personal Lines. Hartford is a somewhat targeted player given your distribution, but it's not a very big player relative to some of the big guys. What's your outlook for your Personal Lines business going forward? Where do you want to take that?
Personal Lines is an important part of our overall strategy. When we think of our strategy going forward, Jay, we would like to be a commercial player, a Personal Lines player, and ultimately add more specialty capabilities over a longer period of time. That book of business is almost $4 billion of premium. I tend to think of it as 70% AARP relationship base through that 30-year great partnership, and then 30% really through independent agents. Our real focus going forward is to increase our penetration into that AARP base, whether it be on a direct basis or through AARP through agents. I think we've been very successful growing that AARP through agents program out because in that more mature market, there is a still significant segment of that population that wants advice and counsel from an agent.
We're very committed to both channels, improving experiences in both channels. Our growth in AARP through agents has been large percentage-wise, but it's still a relatively small premium base, about $300 million. We feel good about where that growth is occurring. We do have a new, I'll call it rate plan out there. We call it Open Road 2. That gives us the ability to segment better, to price risk better, and to ultimately grow our profitability. It is an important part of our strategy. We don't aspire to compete in the broad market with the bigger players that I'm sure you'll have in your conference here today. But in our targeted niche markets, mature markets, direct-to-consumer markets, those are the places that we'd like to play and compete.
What is the penetration with AARP? Do you have any sense of where that is roughly?
There's a number of ways to look at it. The easiest way to look at it is AARP almost has 38 million-40 million members. And we have a little over I think 2 million customers in that. But a lot of the 40 million members really aren't insurance-buying members also.
Yeah.
It just depends on how you look at it. Either way, AARP is committed to growing its membership base. We're going to be a strong partner with them offering home and auto products to their base of customers.
You have to be 50 to join AARP?
That's the official enrollment.
Okay.
Would you like to see my card?
No, but I'm getting close myself. Craig, do you have a question?
Yeah. Thanks, Jay. Chris, really, you talked about before how you all wanted to expand in new lines of business, new verticals, and on new geographies. That's going to require you. Well, question, are you going to add a lot of staff to do that? How are you finding the competitive situation out there for talent right now?
Yeah, that's a great question. I would say some. I think on the geography side, we have a plan to roughly add 25, 30 people this year to different parts of the country. It's not a lot. It's geared towards, obviously, a premium flow number of just how much premium we would expect them to generate once they're up to speed. It's not anything, I'll call it, really significant from a geography side. It is increasing our presence in areas where we think we are underrepresented. On the new product side, our current thinking is right now, again, we have a lot of core capabilities. As we expand, this business seems to pick the market, pick parts of the real economy to expand in, add any capabilities, primarily on the loss side, loss control side, engineering side, as we get into some of those aspects.
We don't expect a significant add to staff to accomplish some of our revenue goals.
Any other questions out there? One question on the commercial side. I think we know what's happening with pricing now. I'd love to get your outlook. As you talk to your team and Doug, what are you thinking pricing's going to do in Commercial Lines over the next year?
It's really hard to say. On one hand, you think of, I'll call it, all the competitive pressures and capital that's been built up in the industry, and you could see why we're potentially where we're at. On the other side, the 10-year's hovering around 190 to 2. Whether it be our long-dated lines comp and GL or Group Benefits, the contribution you get from a relative overall economics on your product side to interest income and yield is so smaller these days compared to a higher rate environment. You would think that the people would continue to be disciplined because most of your margin is going to actually have to come from underwriting going forward in this low rate environment.
Even if rates rise, as you know, Jay, it'll take a while for that yield to burn into the portfolio as new cash flows get reinvested. A rapid rising rate environment is not an overnight panacea to economics. It helps. We'll take it. Maintaining that underwriting discipline is important. I'm really avoiding telling you because it's hard to predict where it's going to go. We know from a strategy side, we like the overall profitability of our book of business, the rate adequacy in certain lines. We're trying to lock up our best-performing accounts and be very, I'll call it, selective in competing for new business where we think we can make good underwriting decisions and proper returns over a longer period of time.
While it's obviously hard to make a prediction, your message at least is you guys should be staying fairly disciplined from a pricing standpoint, given the interest rate and thus the implications for return.
The economics of how you make money would dictate being disciplined in a low rate environment.
I guess the one business within property casualty, and only pieces of it that have struggled, is the specialty business. You look at the margins in 2015, they've gotten certainly better over the past several years. Is there room to improve that more specifically in that area?
I think the context of a specialty, let's talk about it. We consider specialty the way we characterize that business in our investor supplement is really national accounts, historically E&O and D&O, and our programs business. I think it's been well chronicled. We had significant improvement to do in our programs business that just was not performing, and we really closed down a lot of programs, shed a lot of business. The book of programs we have today we're very, very comfortable with. The national account business is just a long-duration, long-tail business. You would expect higher combined ratios compared to middle market or small because you're able to earn more float with the investment income and still make the overall targeted return. You can operate it at a higher combined, around 100, and still make money.
In the E&O and D&O business, I think you know we've worked hard, again, over the last three years to fix that, improve that, shrink that national financial institutions platform really down to more of a targeted middle market, non-financial exposure E&O and D&O book of business. We've aligned that now to our middle market head, again, to increase the penetration of D&O, particularly in our private client base. We feel good about our specialty book. We would like to grow other aspects of what we consider specialty. As I said, marine, construction, surety, along those lines. We think that plays in the real economy, and we want to be more of a real economy player going forward.
Great. I still have about 40 more questions, the clock is telling me we've got 15 seconds left, we'll squeeze one more in over here.
I was just wondering if you could go over the small-end market. You were talking about even trying to go smaller, especially to our issuance. Could you educate a bit on what are the products that are different in the small versus the middle market, what you're really trying to extend down to them for your profitability in that business line?
Yeah. It's really the basic BOP policy. We call it Spectrum. The business owners covers general liability, the property, comp, and commercial auto. The beauty of small commercial for us is our technology. I think if you've heard Doug speak, we've completely revamped our ICON technology platform for all our lines of business in small. The competitive advantage that we have is the employer that has five employees or less, an average premium of $2,500. We can make good returns on that because the simplicity, ease of use with our distribution partners in that ICON tool is a deep competitive advantage for us. The product is a basic business owner and comp and commercial auto platform.
That is all the time we have. Join me in thanking Chris and Beth