Is moving. It's great to have Liam McGee here. He is the Chairman, President, and CEO of The Hartford. He's been in that role since September of 2009. Prior to that, he was President of the Consumer and Small Business Bank for Bank of America Corp. I also have here with me Chris Swift. He's the Executive Vice President and CFO, and he's got quite a role in terms of finance, treasury, capital, accounting, investor relations, and he had a number of very important financial roles at AIG, and prior to that, American General, and then before that at KPMG. In any event, both Liam and Chris have really helped Hartford along in some challenging markets. It's pretty clear that there are many challenges ahead of them, and we're very confident that they'll meet them, and thanks very much, both of you, for being here.
Thanks, Andrew.
Good morning. Thank you, Andrew, and thank you for acknowledging Chris, my partner. Good morning, everyone, and thank you for joining us here today. Before I begin, obviously, I want to do the required legal presentation. I want to note that my presentation and the Q&A session are covered under the safe harbor provision of the SEC, as noted on this slide. Last week, as you know by now, we announced strong first quarter results, with core earnings up 11% to $1.25 per diluted share. Book value per diluted share was up 12% compared with the first quarter of 2011. Our property and casualty combined ratio was 95.7%, a very good result. Strong pricing momentum continued in the P&C Commercial segment, and we had significantly improved new business growth in Consumer Markets.
Like most in the industry, Group Benefits results were disappointing, and we have several initiatives underway to improve earnings in that business for The Hartford. Finally, mutual fund assets under management rebounded from December, and fund performance has improved significantly. As Andrew was kind enough to note, The Hartford has made significant accomplishments over the past two years, in particular, strengthening the balance sheet and also improving financial flexibility and risk management. The next leg of our journey is to achieve sustained, consistent, superior returns and to create long-term shareholder value. As you recall, at our December investor day, we presented our goals and expectations for the operating businesses, including an evaluation of their strengths and weaknesses and their relative returns, and margin and growth requirements going forward.
We also said we were in the midst of an ongoing evaluation of those businesses and their ability to create enhanced shareholder value. On March 21st, we announced the conclusion of this business evaluation, which examined many factors, including capital requirements, returns, risk profile, the scale of the businesses, and future growth potential. We concluded that the best path for The Hartford to create sustained superior performance and shareholder returns was to sharpen the strategic focus of the company on property and casualty, Group Benefits , and our mutual fund businesses. Since the announcement, we have begun executing our plan, let me update you on our progress. First, the individual life, retirement plans, and Woodbury Financial sales processes are going well. The offering memoranda are in the marketplace, and there is significant interest in each business.
We'll update you when we have reached definitive agreements, which we expect later this year. In addition, two weeks ago, we announced an agreement to sell the individual annuity new business capabilities. To be clear, this does not affect the in-force annuity block, which has been put into runoff. However, it does transition our innovative products, strong distribution capabilities, and talented employees to an organization committed to the annuity space. Second, we are also working on initiatives to further reduce the size and risk of now the complete life runoff segment, which as you know, will already shrink over time through policyholder lapses. While our ultimate goal is to isolate or separate the annuity block from our go-forward businesses, the management team is currently concentrating on transactional and operational opportunities for individual books of business.
With respect to transactions, we are exploring a wide range of potential opportunities, including sales, reinsurance, and other structural concepts. A variety of parties have expressed initial interest in parts of the blocks. To be clear, any transactions will need to balance the short-term economics with the long-term objective of reducing liabilities, which would allow us to redeploy some of the capital currently allocated to the runoff block. In addition, we're evaluating operational initiatives such as outsourcing or different fund options that will reduce risk or expenses in life runoff. In April, we also refinanced the Allianz debt and repurchased their warrants. These securities, as you know, were issued during the financial crisis in October of 2008. The refinancing strengthens our balance sheet by reducing interest expense paid and improving financial flexibility by extending the debt maturity schedule. Furthermore, the warrant repurchase eliminates a material source of future dilution.
Allianz continues as a significant shareholder, we appreciate their support. With these accomplishments and decisions now made, we are concentrating on execution. We believe we can achieve sustained superior returns and long-term shareholder value by focusing on the following three areas. First, continuing to improve margins and ROEs in our go-forward businesses. Second, strengthening overall capital generation. Third, reducing the volatility of our earnings and capital. Let me go through each of these in a little bit more detail. Our go-forward businesses have strong ROEs, although there is clearly room for improvement. Combined, we expect to generate a 12%-13% ROE for 2012 in these go-forward businesses, and we're working to improve this in 2013 and beyond. To achieve this improvement, we're concentrating on improving margins in Middle Market, Group Benefits, and Consumer , and growing the top line in Small Commercial and Mutual Funds.
In the P&C Commercial segment, first quarter earnings were $162 million. The combined ratio ex-CATs, ex-prior year, was 96.4%. We continue to see strong price momentum with renewal price increases of 7% in standard commercial, the highest level since the fourth quarter of 2003. We are especially pleased with the renewal price trends in Middle Market workers' compensation, where first quarter price increases were up 14%. Doug Elliott and his team have many initiatives underway that will drive further margin and return improvements in this segment. Our actions are targeted by business, this quarter we broke out financial statistics in more detail for Small Commercial and Middle Market so that you can see and track our progress going forward. Our Small Commercial business is a longstanding market leader with good opportunities for continued profitable growth, particularly as the U.S. economy and small business formation recover over time.
Written premiums were up 8% in the first quarter with a 91.8% combined ratio. At The Hartford, we continue to be a preferred company for small business customers, driven by our long-term record of innovation ranging from product to technology to service capabilities. Our small commercial team is focused on improving the customer experience through online bill pay, mobile applications, payroll billing for workers' compensation, and innovative products for emerging risks, including data breach protection. In Middle Market , we are improving product diversification and pricing. We are building out property capabilities where our new business production continues to expand. I am especially pleased with the pricing we have achieved over the past six months, although that has meant some reduction in top-line growth.
Middle Market's combined ratio ex-CATs and prior year was 99.2% in the first quarter, down from last year, but still above what we need to achieve acceptable returns in our view. Retention remains solid despite price increases of approximately 10% for the total Middle Market retention . While Middle Market retention has declined just a bit over the past year, this has been more than offset by improved pricing. We are very pleased with this trade-off as it will lead to margin expansion and ROE improvement. In Group Benefits , we achieved good rate increases in the first quarter renewals, but core earnings of $5 million remain well below our expectations due to poor group long-term disability results. Our group life book is actually performing well, but elevated incidents and lack of improvement in termination trends in disability has eroded profitability for us and for most in this industry.
On a long-term basis, we like the mortality and morbidity underwriting margins of this business, as well as its long-term growth and return prospects. We have a strong franchise with a top-tier market position and excellent sales and distribution capabilities. Our performance must improve here. Our initiatives in this segment are focused on two areas. First, we will continue to take rate actions on accounts that are not meeting profitability targets. You could see in the first quarter the impact of our actions on persistency and sales. We are willing to give up top-line growth to improve margins in this line. Second, we recently appointed a new leader for this business who brings a fresh perspective and ideas for improvement. We are reviewing all operational processes, including underwriting and claims management, to identify ways to improve profitability.
It'll take some time before the financial benefit of this work falls to the bottom line, particularly on pricing, given the three-year contract terms in this business. With success in our initiatives and some lift from an improving economy, we believe Group Benefits can improve profitability and margins to target levels. The principal goal for Consumer Markets has been to improve margins, and Andy Napoli and his team are making great progress. Consumer Markets reported first quarter core earnings of $102 million. The combined ratio and retention improved, and new business production was strong. The first quarter's current year combined ratio ex-CATs was 88.8, and it has improved year-over-year for four of the last five quarters. We are increasing rates in homeowners to keep pace with high CAT and non-CAT weather experience.
With better margins, Consumer Markets is now striving for top-line growth through higher retention and new business growth. We're doing well on both of these metrics. Overall retention was up two points to 84% in auto and 85% in homeowners as a result of customer outreach and pricing initiatives. New business levels have also improved strongly. New business written premium was up 30% in auto and 32% in home. After declining in the first half of 2011, new business premiums as a percentage of total written premiums is now back to acceptable levels. Most of the new business growth is coming from our more profitable channels. For example, written premiums in AARP agency almost doubled from the prior year. As in P&C Commercial, we provided additional details in our financial supplement on written and earned premium by channel. Again, you can track our progress.
In total, we're encouraged by these positive results. With improving margins, Consumer Markets is now poised to profitably grow while also continuing to improve its ROE. In mutual funds, we are confident that going forward, we are well-positioned to generate good growth in this high-return business that requires very little capital. In the first quarter, mutual funds' core earnings were $20 million. First quarter fund performance improved, particularly in our largest fund, the Capital Appreciation Fund. Overall, more than 80% of the funds outperformed their benchmarks. This strong quarterly performance contributed to an increase in non-proprietary fund deposits of 18% on a sequential basis. Our expanded relationship with Wellington is key to future successful growth, and we are moving very quickly to capitalize on it. We will have transitioned all of the fixed income investment management to Wellington by the end of June.
At that time, Wellington and its strong brand will be sub-advising all Hartford Funds. We expect that the second half of the year, as a result, will produce significant improvement in net flows. In addition to our concentration in improving margins and ROEs, we also remain focused on continued expense efficiency actions across the entire organization. Notwithstanding our announcement, we are continuing to execute on the efficiency objectives we established last year. After reducing run rate expenses by $150 million in 2011, we took out another $30 million in the first quarter. As you know, we anticipate achieving, in addition, another total run rate expense reduction of $100 million before tax in 2013 as a result of placing individual annuity into run-off. Furthermore, we recently established a dedicated business transformation team to ensure that we remove all costs associated with the three businesses being sold.
That corporate overhead and other expenses are right-sized for the go-forward The Hartford businesses. Our second goal for creating sustained superior performance is improving capital generation in our company. Our go-forward businesses have historically been strong capital generators, but the run-off businesses and individual life and retirement plans have not. As a result, our life statutory capital generation has been constrained over the past several years. The proceeds from the business sales will give us additional financial flexibility that over time we expect to use for capital management actions and some debt reduction. We will also consider options for reducing risk in the run-off businesses or reinvesting in our go-forward businesses. As I've noted, we're working on operational and transaction opportunities in life run-off with the objective of reducing the risk and size of this book of business.
It's still early, but we do expect some of these potential opportunities to materialize, particularly as the capital markets continue to stabilize. In short, we believe statutory capital requirements on the life company should decline over time with the sale of the three life businesses and the reduction of the run-off book through lapses and/or management actions. The statutory earnings power of P&C, Group Benefits, and Mutual Funds should also grow in the future. Combined, we expect our total capital generation going forward to be much stronger than it has been in the past few years. Finally, a third goal is to significantly reduce the sensitivity of our capital and earnings to financial markets risks. Our go-forward businesses, P&C, benefits, and Mutual Funds, are much less sensitive to changes in the capital markets.
We're focused on reducing the size of the variable annuity block, which is the primary source of our current market volatility. We will pursue and be prepared to take advantage of potential opportunities to isolate or separate the run-off block that are both feasible from a regulatory perspective and that create shareholder value. Through these efforts, we will ultimately free up capital from our divestitures and run-off businesses that we will return to shareholders or redeploy in our businesses. Over time, The Hartford's financial profile will evolve into that of a property and casualty company with strong returns and capital generation and much less limited sensitivity to capital market volatility. The Hartford had a strong first quarter. We had good financial results, favorable momentum in many of our go-forward businesses, and a successful debt refinancing and warrant repurchase.
By focusing on the property and casualty Group Benefits and Mutual Fund businesses, I am confident that we will, over time, deliver sustained superior returns and greater shareholder value. As we execute on our plan, we are concentrating on three key areas. First, improving margins and ROEs, not only in the property and casualty Group Benefit and Mutual Fund businesses, but also in our run-off operations. Second, strengthening overall capital generation, both from our go-forward businesses as well as from the run-off division and from the sale of individual life, Woodbury Financial, and retirement plans. Third, reducing the volatility of earnings and capital by concentrating our capital in traditional insurance underwriting businesses and reducing the size and risk of the run-off business, which is the source of most of our volatility.
With our sharpened strategic focus and the successful execution of our plan, Chris and I are very optimistic and excited about our future. Thanks for your attention. Andrew, thank you for inviting us, and we'll be happy to take your questions now.
Okay. I'll kick off with a question and then open it up to the audience. Given all the change now, Liam, capital generation is an issue on the forefront right now. How much capital is currently allocated to the variable annuity runoff business? That's part A. Part B of it is, once you sell the pension business, the individual life business, which we estimate could generate, would be anywhere between $1.5 billion-$3 billion. Once you generate that capital, what are your priorities with it? Would you want to buy back stock? Would you need to put it in the variable annuity business? What would the priorities be?
Well, I'll answer the second part first, and Chris can give you the.
Great
to the degree that he wants the details on the capital allocation. Andrew, let's take a step back. Clearly, we think that this company is capable of generating significant capital over time. First, by ceasing new product sales in life businesses, which generally have been capital consumptive. That's good news for capital. Second, our go-forward businesses are strong capital generators, and with the actions that we've taken and the improvements you're seeing in those businesses, we think we'll get stronger over time. Third, selling the businesses, as you point out. It's far too early for me to comment on valuations.
Right.
You can appreciate.
Absolutely
the delicacy of where we are in the process. Those proceeds will generate capital. I will say that obviously selling those businesses will reduce some top-line revenue, and the balance sheet will be a little smaller. To preserve our leverage ratios, we'll pay down some debt, whatever's appropriate, just to be sure that we've got our leverage ratios in line. Apart from that, it's going to generate net available capital. Of course, just the natural lapsing, particularly in the U.S. book, which has historically been 13%-14%. We've seen a spike. We'll watch that carefully and report on it. Over time, that's going to generate capital.
Any actions that we're successful in taking, and I want to reiterate what I said, actions management might take in the runoff book need to balance short-term economics with the ultimate goal of, just to be blunt, getting that off our balance sheet and liberating capital. I think all those things point to a company that should generate capital over time. As I said, and that will generate capital over time. As I said, we'll keep our leverage ratios in line. We'll pay down debt as necessary, which you'd expect us to. With the capital that's freed up, I think some of it, and I know this is frustrating to some investors, but some of it will depend on when it's available as to exactly what we do. Clearly, if it was today, the most accretive thing would be to buy back shares.
We'll also look at does that capital give us the opportunity to do trades on the runoff book that are economic and will liberate further capital? Of course, we'll always be mindful of investing in our go-forward businesses. We think we've got great franchises, particularly in the commercial and Consumer P&C business. I think the main message is management and the board, I think, have laid out a plan with clarity and certainty. We need to execute. We understand that. I think in the first two years, we've taken a company, as you noted, that had some significant difficulties, and we have executed. We have created strength and stability. Now we need to execute similarly to create the kind of shareholder returns that I know shareholders want and are impatient for. We will execute.
These actions, I think, create a much more focused company that, again, has a platform to grow, leadership positions in those businesses, and an opportunity to grow. Secondly, much less sensitivity to capital markets. Third, generate capital. The actions we're taking in addition to that should generate more and give us the kind of flexibility. Chris, did you want to comment on the first part of the question?
Sure. I think from a capital perspective, two points I would make. One from over the last 18, 24 months, some of the actions that we've taken to strengthen the balance sheet have given us a lot of flexibility. From a capital strength perspective, we are highly confident in the balance sheet. From an actual allocation side, Andrew, I think what we've talked about as far as the runoff businesses in total is approximately 50% of our GAAP capital. On a statutory basis, we really haven't disclosed that, but I think you could assume that a substantial majority of the life entity statutory capital is devoted to the runoff blocks, particularly the VA block.
Got it. Any other questions?
Other questions. While if somebody's looking at new questions in the process. Liam, share repurchases, it could be a very high priority, but it sounds like there's a lot of dynamics at that time when you sell the business. It's not going to be cut and dry, but it's something you'd want to do is repurchase shares?
I think any option, Andrew, to be, I think this is what you're getting at, will be guided by what is going to create the most shareholder value. My comment is, if such proceeds were available today, hypothetically, the most accretive action we could take would be to buy shares. That's not necessarily going to be the case a year from now.
Okay.
That's why I know, again, I'll repeat what I said. I know people would like us to give a percentage of this, and this. I think that will depend on market levels. It'll depend on where the share price is at the time and other variables. Again, we've always said that after paying down the requisite amount of debt, just to keep our leverage ratios in check, that capital management actions are a high priority.
Got it. A quiet group today. Speaking of group, the 83% benefits ratio.
That was pretty good.
Yeah, spontaneous and everything. The 83% benefits ratio in the group LTD business, Liam. Do you have a sense of the trajectory over which you could improve that ratio and where it could go? It may take three years, but where could it go? What time frame?
Well, I think while certainly termination trends in particular are not where we want them to be, we are beginning to see a stabilization of them, albeit at higher levels. I think there's two things, Andrew. First of all, the pricing, we're being very aggressive in the pricing. Only a third of the book renews every year. As you look deeply at our numbers, you saw the kind of price increases we got, and we did take a dip in persistency as a result. That's a trade-off we like because we're really running this business for profitability. There are others in the marketplace who apparently are not, and we want to be in it for the longer term. Second of all, I think this is highly correlated for unemployment.
If and when we see an improvement in both job creation and unemployment rates, we should begin to see some improvement in termination rates. Thirdly, I can tell you we have made significant changes in management there. We are looking at this business soup to nuts. We are not accepting the fact that it's just macroeconomics. There are clearly things we can and will do better, and we've dramatically upgraded our leadership team to do that. Chris, any other perspectives you want to give?
I would say two points. One, I read a great analyst report yesterday from someone that wrote on the group business.
I like the great part. Yeah.
Again, it fits strategically into what we're trying to build. In the commercial market segment, Liam, as you've always talked about, of marketing workers' comp, property and casualty, and Group Benefit products to our targeted customer base fits well. We like the diversification benefits that we get with the life and morbidity business. The improvement trend is occurring particularly given that we've been at it for four quarters of really raising rates aggressively. I think we were one of the first to call it and react to it. It is obviously tied to the three-year rate guarantee, so it'll take a little bit of time to work through all the books. We're no less committed to improving the business and making it work from a strategic side going forward.
On the expenses. Liam, you outlined that you'd saved $150 million in 2011, $30 million in the first quarter, and now going forward into next year, VA business could generate another $100 million in savings. There'd also be some right-sizing in corporate. Could you give us a little color on how much more expense save you could squeeze out?
Well, go back and repeat what I said. We took out the $150 we committed to last year. We're going to continue the same process improvement work, notwithstanding the announcement we made this year. Obviously, as some of those businesses were going to be undergoing some process improvement. We're not going to invest money to create those improvements, Andrew, since we're going to be selling them. I think notwithstanding that, we'll come close to the $150. I can't give you a precise number because it's part of our culture now to do that. The $100 million will occur full year 2013. I think the other thing I want to emphasize is we have built some capabilities at The Hartford that did not exist before around process improvement, managing the business for efficiency as opposed to within silos across the enterprise.
We are committed to getting all the costs out that are either direct or allocated to the businesses that are sold. We're in the process of understanding exactly where every penny is, and as we learn that and identify that, we'll communicate that to you. I think it's a bit premature to give you that number today because we're finalizing that work. The other thing that's important that I really want to emphasize is this is a historic moment for The Hartford. It's not just a strategic change. We're very excited, and we're more confident in our decision today than we were the day we announced it. Secondly, it is an opportunity for us to really reshape our company in terms of how work is done, processes, accountability, decision making.
Out of those efforts as well, in the periods ahead, we will become a more efficient company, largely by doing things simpler and better. Because we have clarity now about our go-forward businesses. Our company before was very complex, as you know, and had traditionally been run as a group of silos. We've changed a lot of that. Chris and I and others have done that in two years. This gives us another opportunity to take it to another level. I think this year, we'll come close to the number. You can appreciate some of the businesses that are going away, some of the work that's going to be done there. The $100 million we're confident we'll get. We'll get more from taking the costs out from the business we sold. Then there's more to come in terms of as we reshape The Hartford.
We'll communicate the quantification of that in the periods ahead. If anything, expense management, which I think we brought to The Hartford in the last year or so is going to be even more important. It's not just to run more efficiently, it's to create the capacity to invest in our businesses as well, to grow.
Just with the last few seconds on the clock. If we're sitting here three years from now, Liam, and there's so much going on with all the business, so much transition, how excited are you that we're going to get to maybe an 11 ROE or that people are going to be excited about The Hartford? How do you think we'll feel in three years about the company?
Well, I was very intentional in my remarks, Andrew. I don't know if it's three years, and I don't know if it's 11%. I'm not going to go down that path again.
Yeah.
Rookie CEO. I will say that in some reasonable period of time in the future, we are going to look much more like a property and casualty company that has a leading benefits business and mutual fund business. The benefits business is, I think Chris articulately said, is a wonderful strategic fit for us, and it will recover and become a much more significant profit generator. The value creation in a mutual fund business is remarkable. I think we will be very excited about a company that is a leader in those spaces. We should trade more like a property and casualty company .
We'll have a much stronger, consistent capital generation, much less market volatility, and an improving ROE because the businesses that we're in have good ROEs, and we have operators and a culture that knows how to, and is focused on the right things to improve those ROEs. The key to the aggregate ROE of the firm, obviously, in that three-year period, will be the combination of lapses and annuitization and the success of some actions that we take that are both economic and reduce the risk and get some of that variable annuity stuff off our books and free up capital.
Thanks for an excellent presentation.
Thank you.