Good morning, everyone. I'm Sabra Purtill, Head of Investor Relations for The Hartford. Thanks to all of you for joining us today for The Hartford's 2011 Investor Day. Today's speakers are on this agenda. Liam McGee, our Chairman, President, and CEO, is our first speaker. He'll be followed by Doug Elliot, Andy Napoli, and David Levenson, the presidents of our business divisions. We'll then be followed by our CFO, Chris Swift, who will give a financial overview. Then we have a Q&A session until about 12:30 P.M. Liam has a few closing comments. Then we hope that you'll join us all for lunch across the foyer. Please note that other members of The Hartford team are also here today, including Robert Rupp, our recently appointed Chief Risk Officer, and Hugh Whelan, Acting Head of HIMCO, our investment management company.
Please feel free to introduce yourself to them this morning or at lunch. Please note our forward-looking statements made today are covered under the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, and actual results may differ materially. We assume no obligation to update these statements. If you are reading or listening to today's presentation or at a later date, you should check our most recent presentations and SEC filings, which are on our website for any updates. You should consider the important risks and uncertainties that may cause our actual results to differ from our forward-looking statements, including those in our SEC filings. 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.
Good morning, everyone. Oh, come on. Good morning, everyone.
Good morning.
It's great. I know you've been going to many of these, 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 separated into operating and run-off 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. We're determined to give you greater transparency into our company. In October, we reviewed with you the balance sheet and the significant improvement in risk management at 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 three 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, multi-channel distribution. With more than 175,000 life and wealth agents and more than 15,000 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 services profits, excluding commercial bank deposits and loan business.
To better leverage these strengths and create execution focus, we organized the company, as you know, around three customer segments. Commercial markets, which includes small commercial, middle market, specialty P&C businesses, and our group benefits business. All our protection products targeted at companies are in this business. 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. 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.
As you'll hear from the three 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 three businesses are working together to maximize enterprise capabilities in ways that simply did not occur previously. We see this, as you'll learn, with commercial P&C group benefits teaming on sales opportunities and retirement plans and individual life businesses leveraging P&C agency relationships as a growing sales channel. We're 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, 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. As you'll hear from the team, The Hartford has made good progress on a number of fronts. 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. 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 two years ago, clearly. Much of this was discussed in great detail at our investor meeting in October. We're not going to repeat that today. I do want to reiterate that The Hartford's balance sheet is strong. 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. Finally, management is running the company with a disciplined focus on generating value for shareholders. 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 non-cat weather. These factors collectively have offset much of the improvement that we've achieved throughout the company.
We're 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. I can tell you, we are accelerating our already fast pace of 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. 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 two 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. As you can see on slide six, 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 seven, 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 in-force and new business. 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 in-force book. For those businesses in 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 with a sharp focus on reducing risk and on the aggregate sensitivity to 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 will be pragmatic as to how value is realized. Starting on slide eight, 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. This is an extremely fragmented market, where 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 sub-segments, 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 in 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 funds 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, David Levenson 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. Given the current interest rate environment, we recognize 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 rider strategy, which David will get into more in detail. The riders have been well received by customers and distributors because traditional life insurance at The Hartford with longevity and chronic illness riders 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 align 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 a profitable and eventually meaningful player. In aggregate, we do expect the decline of the in-force 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.
Based on our current outlook, we expect the ongoing businesses to have a 2012 core return on equity of greater than 10%. In general, we like the current portfolio of ongoing businesses and, as I said earlier, are working hard to further increase their value. As evidence of our focus on these businesses and our pragmatic approach, we've been disciplined about divesting non-core businesses, such as the Brazilian operation, SRS, Canadian Mutual Funds, Trumbull Services, and most recently, the Crowley Boles business. We're determined to reduce the size, risk, volatility, and capital consumption of the runoff businesses. We've established a new business segment focused on managing the wealth runoff businesses, which will include the international variable annuity business, obviously primarily Japan, COLI/BOLI, and the institutional investment products business, which includes products like GICs and terminal funding.
This segment will be similar to our P&C other operations, where we've been focused on managing our asbestos, environmental, and other legacy liabilities. Although these wealth management businesses have effectively been in runoff for some time, their financial results have been included in our ongoing reporting. We're now going to break them out so you can better evaluate progress on our ongoing businesses, as well as our progress in those runoff businesses. The runoff segment will have a dedicated management team with some of our most talented executives with expertise in managing the complexities of these products. As we discussed in October, we've already taken steps to reduce risks in this business, with the Japan hedging program as just one example. As we move forward and the capital markets improve, we believe we may have additional options to accelerate the achievement of our objectives.
We are prepared to act decisively, economically, and in the best interests of shareholders. I can tell you with confidence that The Hartford is making progress on its transformation. The economy and capital markets have done us no favors. However, we are accelerating the pace of change, and I feel very good about the potential of our ongoing businesses. I hope that you leave here today sharing my view that, first, The Hartford has a solid foundation and strong ongoing businesses. We are operating these businesses with the appropriate discipline and strategy to increase their value. With the Japan hedging program in place, the investment portfolio dramatically improved and the enhancements we've made to enterprise risk management, our risks are greatly reduced and much more tightly managed.
Balance sheet strength and the diversity of our businesses give us the ability to withstand market and economic stress. With our strategic and efficiency actions, we're positioning the company to accelerate superior performance as the macro environment improves. We are dedicating some of our best resources to more effectively manage the runoff businesses and, over time, release capital. Finally, this is a management team with a sense of urgency on The Hartford's transformation, and we're focused on creating shareholder value by aggressively managing all the levers that are under our control. We are working to increase the value of each of our ongoing businesses. Management will continuously evaluate the business portfolio and strategy and is pragmatic about how value will be realized. I'll now turn the conversation over to Doug Elliot.
Thanks, Liam, and good morning, everyone. It's a pleasure to be with you here to talk about commercial markets and our Hartford opportunities. I've been on the job now about eight months, but I'll tell you, it feels more and more like home every day to me. Many of you know I've been personally invested in this commercial market space for the past 25 years. My operating style is not going to change. Continue to be hands-on and frontline focused. Over the past eight months, I've been out in the field working with our underwriting and sales folks, listening and visiting with our top agents and brokers, and evaluating the engine back in Hartford. My purpose has been to gain a thorough understanding of our competitive strengths, what needs adjusting, and where our future opportunities lie ahead.
I continue to be excited about what I see and our opportunities as we move forward. Today, I'll go through a segment-by-segment review of each of the businesses. Right now, I want to look across commercial and share a couple of thoughts. There are three key priorities as we think about the next several quarters in front of us. First, we're focused on building on the company's historical strengths, excellent underwriting depth, terrific product spread, and excellent distribution platform. Second, we're focused on addressing those areas of recent profitability challenges, including group disability, middle market, and public D&O. We also focus considerable attention to the workers' compensation line and the increased frequency and paid loss dynamics across the last several accident years. Third, we're investing in businesses where we can excel.
We're expanding our property appetite, we're tackling industry verticals, we're building a more responsive middle market operation, and we're looking at selling other Hartford products through our P&C and benefit sales channels. We have an expansive portfolio across commercial markets. The pie on the left side of slide three reflects our overall balance from a net written premium perspective. We wrote $7.7 billion of business through the third quarter of 2011, and the overall property casualty versus group benefit split is approximately 60/40. The P&C portfolio is well-balanced, with small commercial 29%, middle market at 19, and specialty 13. The product family has great breadth, ranging from workers' compensation, property, general liability, to group life and disability. Our ambition is to be the leading provider of P&C products, as well as group life and disability.
There are so many facets to building a franchise which achieves this level of performance, but the foundation always comes back to execution and underwriting discipline. We will discuss each of those blocks within our segment discussions this morning. Before we move ahead, I think it's important to reflect on where we've been. Slide five represents the overall market share and rank of our businesses over the past decade. From a P&C perspective, the market story is essentially flat. Other than one small acquisition, the focus has been organic and conservative. Our market share of 3.1% in 2010 is exactly where it was in 2000, and our ranking sits at number 7, a top 10 position. The group benefit story is slightly different. The acquisition of the CNA block in 2003, along with consistent growth, has moved this segment share from 5.9% up to the 9.7 in 2010.
As the number 3 player in group benefit today, we have a terrific position to compete effectively in the marketplace. Twice a year, Goldman Sachs reaches out to agents and brokers and develops a survey of property casualty carrier performance. One of the questions they ask in their survey is, "Name the top five commercial carriers that your agency does business with." Look at our position noted with the blue bars. The results over the past five years demonstrate The Hartford has consistently been in the top three. I look at the score from an overall shelf space perspective. Our franchise is positioned with agents to continue to grow the business into the future. This chart shows we have an excellent base to deliver that result. In fact, although our rank moved from two to three over the last two years, our score actually improved during these challenging times.
There are quality competitors surrounding us on the chart, but we continue to exhibit very strong presence across the commercial P&C channels. When I consider our strong agent broker profile and reflect on our flat P&C share, the combination provides me optimism that there's real share of wallet growth opportunity when we get our execution skills honed. My view of the commercial team is that we've been thoughtful underwriters, but we've let business flow our way. We need to more intensively search for opportunities that lever the strengths we've built. We'll become more aggressive in our approach, but not in our pricing. That's what our team is thinking about every day as we move ahead. Sustained performance is the mark of great organizations. The track record of both these businesses is well documented. Both businesses have generated strong historical returns since 2005.
25% actual year returns in P&C and 15% returns in group benefit. The market positions of our businesses also are very solid. Clearly a leader in small commercial. Group disability and life, number 3 player, and a top 5 position at 4 with our workers' compensation line. Our service capabilities continue to be among the best in the industry and provide us the positioning to take this franchise forward. Before we dive into the individual segments this morning, let's just talk about what we're seeing across our businesses. Over the last several years, the industry has been challenged by headwinds. They include slower economic growth, sustained high unemployment levels, investment yields near all-time lows, and higher levels of natural catastrophes. We're not waiting for the economy to bounce back, but are proactively taking rate and underwriting actions on our book as we speak.
We are pleased with the sustained rate progress achieved across our businesses this year. There is still much more work to be done, but we believe the pendulum is shifting and the market is clearly firming. I don't know how to define hard market anymore, but I can tell you this market's in a different place today than it was 180 days ago and clearly 90 days ago, and we'll talk more about that. As Liam mentioned in his earlier comments, we have 4 operating segments in commercial markets. At the moment, 2 of them have strong margins, small commercial and specialty. Both businesses have had high single-digit growth this year, except for the public D&O component of specialty. We expect those trends to continue out into 2012. Our other 2 businesses, group benefit and middle market commercial, have some financial stress.
We're working hard on improving those operating margins, even at the expense of some top-line growth. Both middle market and group benefit have specific account and product line strategies to improve their bottom-line performance, with rate action being the core driver. Now let's take a look inside each of our businesses, starting out with small commercial. Small commercial is big business for The Hartford. Our business is focused on firms with less than $15 million in revenue and typically under 25 employees. Some would consider this the smaller end of small commercial. We consider it our sweet spot. Our average policy size is about $2,600. With close to 900,000 customers and nearly a $3 billion in-force premium base, we are a leading player in small commercial.
We earned that position as a result of a very efficient business model defined by terrific technology, accessible and responsive underwriters, high-value products, and an effective service model. In fact, agents have trusted us to provide the post-sale servicing on over half of our customers. Our product mix is 50% workers' compensation, with 20% of this being our payroll alliance business. Our BOP product, called Spectrum, is 39% of the portfolio. Many consider our Spectrum product the gold standard in this business. The balance of 9% is automobile and a series of other miscellaneous products. Today, we're delivering very strong performance in this business with year-to-date combined ratios under 90%, ex prior year and ex CAT. At these margins, we're generating excellent performance for the commercial market group. We've also been known as an innovator.
Over the years, we've led the way through innovation, providing a differentiated experience for our agency partners and also our customers. The Hartford was the first company to set up a dedicated unit driven at small business over 30 years ago today. We now have over 150 sales professionals across the country, nearly 300 underwriters across our operations, a dedicated unit driven at serving our payroll partners, service centers that are state-of-the-art, and a sales and placement support center for our agency partners who require it. We believe we have an advantage in developing sophisticated pricing tools driven by years of data and experience. Underlying our Spectrum product is a proprietary class plan, which allows us to out-segment the competition. Similar capabilities also drive our workers' compensation and all auto lines as well.
We are extremely excited about the rollout of our new online workers' compensation submission tool, which is being met with rave reviews by our agents that are using it now. We initiated the rollout in September, and we'll complete it by year-end 2011. The ease of doing business scores across that agency base continue to be outstanding, and we believe this tool is a major step forward for us at The Hartford. We're hard at work, working on Spectrum, getting that ready for a late 2012 rollout on the same application. Driving innovation is a fundamental differentiator for us in small commercial. Let me share one small example of innovation relative to product development. We serve many outpatient healthcare businesses throughout the country, doctors, dentists, and clinics.
Our product team hit the road spending time visiting those businesses, talking to practice leaders and doctors, observing them at work, and understanding their business. We learned a great deal and have translated that learning into the innovative solutions in this customer segment. This morning, let me just share three examples. First, studies indicate every year, one in 10 healthcare workers are stuck by a needle. When an accident occurs, their first thought is, "Have I been exposed to something?" We now have introduced a service enhancement whereby we offer the testing of the patient to determine if an exposure is present. Our customers love this service and appreciate the peace of mind it offers. Second, medical businesses are increasing the use of high-value diagnostic equipment. Obtaining the correct coverage usually meant a separate policy from the business owner's policy, which was a headache.
We now have embedded that coverage inside our core Spectrum product. Last, we've also enhanced our business interruption coverage on our Spectrum policy. Typically, if medical appointments were rescheduled, they were not considered lost business. Time is money to our dentists and our doctors, so we now offer a daily limit option to provide protection when businesses are unable to open. These are all ideas that came from us listening to our customers and working with their teams. By offering differentiated products, we attract more of the high-quality classes we want and write them at profitable price points. I hope you get the sense of enthusiasm we have for small commercial. We're an innovative leader and intend to raise the operational bar for years to come. Next year, we're excited as we roll out the Spectrum BOP product by year-end.
If the market reaction is at all similar to comp, which I expect it to be, we'll be very pleased. We continue to shape our future as innovative work continues with our top agents and brokers. There's no question the sales and service model will evolve, and we will be on the cutting edge of that change. Pilots across our product families will continue out into 2012. The demand from our agents continue to challenge us to find ways to simplify our product set and bring more Hartford solutions to their small business location. Small business is big business and will continue to be so at The Hartford. Let's now move on to middle market. Our middle market business has a $2-plus billion written premium platform with excellent geographic and customer diversity. Several key drivers differentiate our business.
Local feet on the street is pivotal for success in the middle market. The Hartford has the local presence with strong underwriters at point of sale across the country in over 30 locations. We also have a growing list of target classes that continue to present us with underwriting opportunities. Our pricing analytics continue to get stronger and will play a key role in our profit improvement efforts moving ahead. Our middle market book is heavily geared to workers' compensation, with 50% of our book in that line. We intend to rebalance that concentration moving forward. I'll talk about that this morning. Our overall combined ratio of 101.6 is several points higher than our target and unacceptable from a return perspective. There's no question we have work to do with this segment. With that said, the foundation across middle market is still solid.
Over the years, our frontline underwriters have earned respect as responsive and talented executives. There are improvements that will provide excellent upside for this business moving forward. Some of these changes are already underway with our new focused leadership team, as well as our renewed emphasis on property. We'll continue to roll out other enhancements, such as the expansion of our industry verticals and our improved diagnostics over the coming quarters. Let me take you through four key examples this morning. First, several weeks ago, we adjusted our frontline leadership to become even more targeted at the middle market. Traditionally, our top 40 executives or so have been franchise leaders responsible for all of our P&C businesses, including Consumer Markets. They were compensated for franchise results and organized in four geographic territories, as noted on the left side of the map.
The territories were so vast it was difficult for us to have the appropriate presence necessary to win in the local market. Their daily agenda bounced from consumer product filings to small commercial agency matters to a new national account prospect. With many of our best underwriters and leaders in this group, we now have shifted their focus. We have selected nine executives to be division presidents across our new structure. They'll focus a predominant share of their time driving our middle market business while also maintaining the critical presence we have with our key agents. They will become much more proactively engaged in our local market risks and our customer issues. I expect them to be personally involved with our key accounts. I believe this change will accelerate our execution quality in the middle market.
This realignment also moved the frontline sales underwriting teams back inside their respective businesses to more directly drive line of accountability and focus. We did this for all our businesses: small, middle, specialty, and consumer, which Andy will talk about. The initial market reaction from our top agents has been extremely positive. You can have great products and terrific talent, but if you don't execute on the front line, it does not matter. A key component of our execution is the ability to measure exactly what's happening. We've enhanced our foundation of management information over the last several quarters. I'm a huge believer in you get what you measure. Effective month analytics by office, by line, measuring rate, retention, exposure, new business are all core components of this strategy. Our discussions by office and underwriting manager now have become very specific.
I expect our leaders to be all over their numbers and running and managing their businesses. Our team back in The Hartford can be much more efficient with our focus as we lever the information we're now working with. For over a decade, The Hartford has established a successful workers' compensation platform. Strong product underwriting, technology innovation, and superb service have generated not only solid financial returns, but many satisfied customers. As you can see, the operating momentum has accelerated over the past decade as our workers' comp share grew to 50% of our middle market book. Given recent frequency and paid loss trends, the line has certainly come under financial stress. We're actively engaged day in, day out in rate and underwriting actions on the portfolio. Moving ahead, we'll also be focusing much more of our attention on building out the Property, General Liability, and Auto lines.
We see great opportunities to write the other lines on accounts where today we participate solely on workers' compensation. We intend to reach effectively across the other lines. As we look ahead, we intend to rebalance our middle market portfolio. We expect workers' compensation move much closer to 40% than the 50% today, with General Liability and Property, in particular, increasing share. These targets are directional guideposts rather than absolutes, but they give you a sense of where we're headed. We've recently hired a seasoned senior Property executive to lead these efforts. As we build out our capabilities, we'll have an excellent opportunity to account round these customers. In the middle market, Property is approximately 10% of our book and where most of our top competitors have at least twice the concentration.
We are not charging headfirst into cat-prone territories, but rather we're going to build our Property competence brick by brick, starting with a base product, automation, engineering linkage, and underwriting focus. The final example of our strategy for middle market is to expand where we head on vertical market segments. There's an increasing trend across middle market where business is moving to companies that have specialized sector analysis. Risk managers and CFOs want insurance carriers who understand their particular unique needs. Several years back, we developed a dedicated and specialized underwriting group that delivers E&O and professional liability products and capabilities to the technology and life science sector. Our emphasis was on brokers and agents that had specialized tech industry units. We established dedicated loss prevention and claim services for these accounts. This is a complete product tool set with loss prevention and claim right at the risk table.
We see this as a $6 billion market opportunity and have grown our writings across all of these lines with 11% cumulative growth since 2006. We're pleased about our growing momentum in the middle market, but right now, our first priority is to drive rate across this portfolio. In the fourth quarter, we'll be adjusting our 2011 and 2010 accident year loss ratios for comp. We believe we've been thoughtful in our response to the increased frequency and pay trends of that line. This fourth quarter adjustment is a proactive step to address these adverse trends. We are watching this book incredibly carefully. Our achieved pricing renewal numbers for 2011 have been solid, 3% in Q1, over 5.5% in quarter two, and over 6% in Q3. As I indicated last quarter, we were increasing our workers' compensation rate goals moving ahead.
I'm pleased to share with you this morning, we achieved 7.5% positive rate gains in October and over 9% in November. We're encouraged by the progress, but we still have work to get done. I'm confident that our leadership changes will absolutely accelerate our execution in the middle market. I know that because I understand these folks, and I'm hearing it back daily from our top agents and brokers. The reevaluation of our property product has already begun. We'll continue to intensively evaluate our offerings and making sure we're looking at all of those customer-based solutions driven at industry segments. It will take some time, we will energize and re-energize our market profile in the middle market, and we're going to improve our profitability along the way. That's where we're headed. Let's move on to specialty commercial.
Specialty commercial is a complementary business to our core middle and small franchise. Proven success in areas such as national accounts, bond, financial products, captives, and programs make up this substantial book. Strong, disciplined underwriting with excellent service are trademarks of our offering. We have very specific risk appetites and tight pricing targets in these businesses. A highly disciplined credit approach driven through our finance organization maintains independence and rigor. Finally, sophistication of tailored product offerings with outstanding engineering and claim service is a must. We bring that positive execution every day to these clients and have established a $1.3 billion franchise. Performance is strong, with the key exception of our public D&O book, where we're currently taking aggressive rate action. The overall combined ratio is largely influenced by our excess workers' compensation book of business.
As many of you know, these lines have much higher combined ratio targets given the extended payout durations. Our program unit has strong and centralized underwriters back in Hartford, Connecticut. We've become the second-largest group captive player in the U.S. Our program business is written guarantee cost and comprised of small and medium-sized businesses that are well controlled, but represent exposure slightly outside our normal mainstream appetite. Two examples would be product liability and transportation. The distribution of these programs is heavily derived from our top 100 producers and agents. The programs and the financial success have grown over the last five years in a very balanced and measured way. We've seen solid growth of 9% since 2005 while maintaining very acceptable returns. We now have 55 accounts and growing as I speak.
Our specialty franchise has done an excellent job over the last few years, continuing to be a disciplined player in their space. We've grown selectively, taken advantage of our competitive strengths, and passing on risks that just did not fit our profile. We will not compromise this approach but will continue to seek opportunities to bring our competencies to the table. We are concerned about the overall price adequacy of the public D&O sector. Until we see significant change here, we'll continue to shrink this book of business. Our claim underwriting and loss prevention skills will continue to be a foundational value add for our specialty business. No major course adjustment is necessary here. We're pleased with our results. Now let's move on to Group Benefits, the fourth business. Our Group Benefits business is an industry leader.
Through the second quarter of 2011, our new business sales and disability ranked 2, life, 4, and voluntary benefit, 7. Strong relationships are critical with key producers and clients for our success. Disciplined underwriting is a core value. A very strong team of sales professionals across the country, coupled with some terrific underwriters back in The Hartford, make up this team. The goal of our claims management model is to return employees back to work and to keep our customer costs down. The Group Benefits claim model puts our customers in direct contact with clinical professionals from day one. Over the past 10 years, we've developed a strong competency in leave management. Our leave management capabilities, coupled with the fully insured business, represent over $350 million of business today.
More recently, we developed The Hartford Productivity Advantage, a solution that integrates disability with workers' compensation and leave management while delivering the flexibility to expand into other time-off programs. The Group Benefits business has developed extremely strong relationships over the past years with the best brokers in this industry. These brokers are sophisticated and specialized, and we support them with unique skills, capabilities, and the execution of dedicated teams. Our seasoned sales force includes 110 reps across the country. We serve all customer size segments and have a local management service model. We also devote critical resources to maintaining relationships with those producers and our top clients. We see higher persistency and profitability from our top 20 partners. Through the third quarter of 2011, 44% of our top sales came from our top 20 players, and 80% of our production came from our top 100 producers.
Our number 1 focus right now in our Group Benefits business is to improve the profitability of our disability book. The business is under pressure from continued low investment rates and elevated claim incidents, which has largely been driven by the sustained high unemployment levels. Our approach in Group Benefits is similar to the one that I described to you in the middle market. We segment our book by profitability account by account, aggressively working on those outliers that need rate, and we have to find ways to deliver that. Each account has a target price level which we seek to achieve. We roll up our data every month to review the results. This slide is an example of one of those periods at a very summarized level. We're driving rates on cases that need change and are willing to walk away from those that don't meet our targeted returns.
We like our position in group benefit. We're an industry leader in group life and group disability and have excellent producer relationships. We anticipate the current economic pressures will continue out into the future. That's why our number 1 focus right now is driving rate across the disability line. We've made progress in 2011, but with only one-third of the book renewing each year, we still have much more work to get done. We're excited about leveraging our group life and disability capabilities into the voluntary space. We expect voluntary products to increasingly become important as healthcare reform takes hold. We're also focused on leave management offerings. We continue to hear from brokers that absence management is a pain point for their customers. Leave management is a great fit for The Hartford with our combined workers' comp and disability offerings.
We strengthen the price in our book of business, we'll be well-positioned for future opportunity as the market recovers, and it will. Since my arrival here eight months ago, I've been pleasantly surprised by the success we continue to achieve working as One Hartford. Let me just share a few observations. In 19 cities, group and property casualty associates are now co-located. These teams talk about client needs and opportunities on a daily basis. This collaboration is just beginning, but we can already see much progress. As of the end of October, we've written $115 million of new business. That's $115 million of business where we either had the prior existing group relationship or P&C and now have written the extended other side of the client profile. Two-thirds of this premium is P&C related and the remaining third group.
When I travel to our top producers, they now want both their group and P&C teams in the room discussing opportunities moving ahead. That just didn't happen five and 10 years ago. In June, at our top P&C annual agency off-site meeting, the group benefit meeting had standing room only attendance. There weren't enough chairs in the room for all those P&C players that wanted to be a part of that dialogue. Financial pressures on agents and brokers are real, and our top agents are looking for ways to lever their possibilities moving ahead. Over time, we'll continue to explore possibilities with wealth management and consumer markets, as Andy and Dave will discuss with you this morning. I'm excited about the breadth we bring here at The Hartford. We've got great competencies, and we will continue to drive this opportunity aggressively forward.
Let me share one small example from this past summer. It's a great example of how The Hartford franchise has delivered a terrific disability account, and now we've got the other side. We had an existing disability relationship. At a broker meeting, the P&C opportunity surfaced. The team created a strategy and focused on the breadth of service and coverage that we could provide from a P&C perspective. We mobilized 15 people from across disciplines to answer and respond to over 300 questions from the customer. We went into an RFP contest against one strong incumbent and a series of strong competitors. Our service and claim capabilities provided us an excellent edge. We were successful in writing the P&C coverage, and while we were quoting on P&C, we were asked to quote on group life and wrote a $9 million group life case as well.
Working together, we will find more of these opportunities in the days ahead. I'm certain of that. I've covered a lot of ground with you this morning. I want you to walk away with a few key thoughts. We have an excellent commercial business platform, one that offers us unique possibilities moving ahead. That's the reason I joined The Hartford eight months ago. The competencies of our franchise are broad: disciplined underwriting, great producer shelf space earned over time, and service excellence surrounding risk. We have selected nine top executives to drive this field organization forward with renewed commitment to the middle market, while also maintaining our continued One Hartford approach. We continue our focus on profitable growth in small commercial and specialty, while targeting rate improvement across middle market commercial, disability, and D&O.
We have work to do across our businesses to achieve our goals, we are excited about this journey. I look forward to sharing more about that, I like our chances. Thank you all for your attention this morning. It's now my pleasure to turn the mic over to Andy Napoli, President of Consumer Markets. Andy?
Thanks, Doug. Good morning. I appreciate the opportunity to discuss the consumer markets business with you today. I thought I'd start out with a brief description of my background. I'm a West Point graduate and served as an active duty army officer for 15 years, including a combat tour in the first Gulf War. I've been in the insurance industry for 10 years, serving in a variety of roles, including personal lines, product management, pricing, R&D, and several operational leadership roles as well. With an academic background in mathematics and statistics, it's safe to say that I'm a bit of a quant, probably like many of you in the room, I have a strong appreciation for the power of analytics and pricing segmentation in the personal line space.
During my first 15 months here at The Hartford, I've come to more deeply understand the brand and the power of the AARP franchise that we've built over the past 27 years. As Liam mentioned earlier, our primary objective in Consumer Markets has been profitability improvement and setting the foundation for future growth. While there are economic headwinds facing our business, with actions we've taken over the past year to reposition our book of business and improve profitability, I'm confident that The Hartford's Consumer Markets division is poised for future growth, I'm excited by the opportunity to share some details with you this morning. I'll talk about some of the recent trends impacting personal lines and how we're positioned to capitalize on those trends through our strategy to grow profitably. I'll transition to our near-term priorities, action plans, finish up with some takeaways.
Our vision is straightforward. Over the past 27-plus years, we've developed an ability to market to, price, acquire, and service our nation's mature preferred market as part of our partnership with AARP. We want to solidify our position with AARP even more and extend that model to adjacent channels in ways that provide profitable growth opportunities for the division. As illustrated on slide four, consumer markets is a multi-channel personal lines division with three-quarters of its business written direct-to-consumer through our exclusive relationship with AARP. While only one-quarter of the book, the agency channel is a very important part of our strategy, as 75% of consumers, including AARP members, prefer to buy auto and home insurance from agents. We have a balanced portfolio mix of auto and home, and actively pursue multi-line business as it helps acquire and retain more preferred accounts with higher lifetime value.
I'd like to describe what distinguishes The Hartford from others in our space and will facilitate our growth strategy. First and foremost, our AARP Direct business is the cornerstone of the division. Over the past 27 years, we've built a very successful personal lines franchise that has historically outperformed the market. AARP and its nearly 37 million members represent the largest and arguably most successful affinity organization in the country. The demographics of an aging U.S. population align well with this business, with 78 million baby boomers representing the largest and fastest-growing age cohort in history. As a group, they control 60% of market premium, making them very desirable customers, and competition for this group is intense. Thanks to our experience with the AARP program, we've developed a sophisticated direct-to-consumer operating model with multimedia marketing components, outstanding phone and online sales capabilities, and strong policy and claim service.
Over the years, we've developed deep insight and expertise in serving the needs of the mature market. In other words, we know how to target, price, acquire, and service this key market better than anyone else in the industry. It's our intent to leverage these strengths in pursuing other strategic growth opportunities. As I just described, the core of consumer markets is our AARP Direct model, and this model aligns well with the ongoing channel trend that has shaped personal lines over the past decade. Increasingly, consumers are buying and interacting with insurance companies directly. This makes sense. Direct is a convenient way of doing business, and more people use the internet, especially to get auto quotes. While the shift to direct is notable, three-quarters of consumers, including AARP members, prefer to buy from a local agent. This strong preference for agency yields a significant growth opportunity for consumer.
We have strong partnerships with over 8,000 independent agents and expect to increase that number significantly in the next two years. We've successfully started offering the AARP Agency product to capitalize on this multi-channel dynamic. Turning to slide seven, AARP Agency provides a mix of business that we know how to price competitively and profitably. In fact, our in-force policy mix suggests that AARP Agency offers a higher proportion of mature preferred business than our core AARP Direct channel. The AARP Agency customer base is not only age 50 plus, but heavily preferred, and that's business we're particularly good at writing. By preferred, we mean full coverage, high limits, multi-line, and high credit score type risks. Successful expansion requires an onboarding approach that drives immediate and sustainable engagement, and we're now focused on actively growing with our newly authorized agents.
As Doug mentioned earlier, our sales and distribution organization is being realigned by division. For consumer, this means increased focus and accountability for personal lines, keys to driving the AARP Agency strategy. What makes this program unique is its ability to help agents generate highly productive leads in their communities, which has always been a challenge for this channel. This is a win-win for The Hartford and our agents. We help them grow their business and The Hartford earns a higher position in their agency. Let me provide a sense of our pace with this initiative. We've authorized nearly 4,000 agent locations, representing about a third of our appointed agents in the 42 states where the AARP auto product is available. By the end of 2012, we expect to authorize about 6,500 agent locations, a meaningful step towards our ultimate goal of nearly 8,000 agent locations.
I'd like to shift to the final component of our growth strategy, where we'll leverage our direct model experience to grow in a very targeted, disciplined manner. In the past 12 months, we've established partnerships with three affinity groups, the American Kennel Club, the Sierra Club, and the National Wildlife Federation. These three organizations provide a marketing universe of over 10 million members. We're currently marketing to AKC and Sierra Club and are quickly adapting to each group's underlying response profiles and channel preferences. These partnerships have a member base that aligns well with our target demographic. As we pursue new affinity partnerships in the future, the strategy will be to align with the best target markets for our competitive products and services.
We'll begin marketing to National Wildlife in the first quarter. In 2012, we plan to pilot other initiatives to supplement new affinity with other strategies in the direct-to-consumer space. To be clear, we're not trying to compete with the large direct carriers that appeal to the mass market. Rather, we'll seek to be opportunistic in marketing The Hartford brand to other targeted segments. We'll leverage our multi-channel marketing model to pursue specific geographies and customer segments where we're most competitive. Altogether, our current best estimate is that our new affinity and Targeted Direct business will achieve about $150 million in written premium by the end of 2015. What does this all mean? Slide nine provides a depiction of how our sources of new business will change over the next few years. AARP Direct is and will remain our primary focus.
That said, an important component of our strategy is to diversify our channels. Business from AARP Agency and Targeted Direct will represent an increasing share of new business as we move forward. We expect Targeted Direct, including new affinities, will grow from 2% of new business in 2011 to 10% in 2015. Within the agency channel, AARP Agency will account for about 45% of agency channel new business in 2015, up from about 20% in 2011. With the growth of Targeted Direct and AARP Agency, we expect AARP Direct's share of new business will decrease from 63% in 2011 to 59% in 2015, but still represent the majority of new business. Our highest priority in consumer markets is to improve profitability. Sustaining and growing top line is part of that equation.
While we evaluate our consumer markets business as a whole, there's clearly a difference in performance between AARP Direct and the agency channel. Our AARP Direct business has been very profitable for us and has grown to nearly $3 billion in written premium. In the past couple of years, we took above-market pricing increases in AARP Direct in response to rising loss trends, and those actions affected our top line. Returns in auto have improved significantly in 2011, and we are now positioned for a return to growth. Profitability has been a bigger challenge for the agency channel, specifically our non-AARP member business. While ex-cat margins have improved in 2011, further improvement is needed, and near-term strategic priorities will address this need. Up to this point, I've described where we're headed to drive top-line growth through expanded distribution in AARP Agency and Targeted Direct.
I'd like to discuss the near-term priorities for consumer markets. Our overarching objective is to achieve targeted profitability in all our states, products, and channels. We'll do so by improving execution of the fundamentals of pricing accuracy, product development, and distribution channel management. Specifically, we're focused on the following: returning AARP Direct to top-line growth, continuing to improve profitability in agency, and continuing our aggressive response to increased homeowners' weather-related losses. Our focus in AARP Direct is to maintain auto and home profitability and restore growth to the channel. Earlier in the year, we implemented a series of initiatives designed to recover AARP Direct new business production. This rebound occurred in the third quarter and is expected to continue into 2012. We improved execution across all media channels, generating a 12% lift in direct marketing response productivity.
Our conversion rates also improved, driven in part by new business discounts in certain states where profitability was strong. We also improved online throughput and phone sales execution, the latter being where the vast majority of our leads end up as potential acquisition opportunities. The pricing actions we took over the last couple of years lowered our policy retention at AARP Direct. While we've seen a lift in retention since rate increases began moderating in mid-2011, retention needs to improve further to restore AARP Direct's top line back to growth, and it'll take some time to accomplish that. As a result, while growth trends improve in 2012, we still expect a decline in AARP Direct written premium during the year. Improving retention is a primary focus for AARP Direct, and we're taking a number of steps to maintain price stability, develop better billing options, and improve the customer experience.
We've seen an increase in retention over the past year, particularly in auto, and are confident retention will continue to improve in 2012. I'll address what's happening in each of the lines, starting with auto on slide 13. As I mentioned in previous quarterly earnings calls, we took steps to improve auto profitability in both AARP Direct and Agency. Pricing increases have since moderated to both channels, though will remain higher in Agency due to higher loss trends. AARP Direct profitability has come back in line with our expectations, and we expect market level increases going forward. For Agency, over the next two years, we expect to drive another three points of improvement in the auto combined ratio as we improve margins on non-AARP member business. The introduction of Open Road Advantage gives us a product with competitive features and sophisticated multivariate segmentation.
It's been structured to drive profitable growth in our target markets. As we move forward, it'll be critical for us to stay at the leading edge of pricing sophistication. As such, we're investing in telematics. This is the use of devices in insured vehicles to transmit information about driving behaviors such as miles driven, speed, acceleration, deceleration, and using that information to price the risk. Our telematics offering, called TrueLane, will be piloted in the first half of 2012. The data is compelling. We feel strongly that carriers who do not adopt telematics will subject themselves to adverse selection, as this capability has really redefined the way we think about pricing auto. While auto profitability has improved, homeowners has been a significant challenge for the entire industry, including The Hartford. For four years running, both catastrophe and non-catastrophe weather claims have been well above levels seen prior to 2008.
While loss ratio volatility in homeowners is significant, it's a short-tail line, and this allows us to adjust pricing fairly quickly to respond to higher loss trends. I'll speak about catastrophes on the next slide, but for non-cat weather, we typically look at five years of loss experience in our rate making, so the higher frequency and severity of weather events in recent years is being captured in our indicated rate need. In addition to pricing increases, we continue to be disciplined in our underwriting of homeowners, including the use of re-inspections and peril-specific deductibles to reduce our exposure to weather-related risks. Also, our new Home Advantage product uses by peril rating at an individual risk and peril level. This means we'll be more granular in our pricing approach, which improves our pricing accuracy and reduces the risk of adverse selection.
Despite the short-term volatility of weather-related losses, we believe the homeowners line is attractive in the long run. It helps us bring in more preferred multi-line business that has higher retention and ultimately higher lifetime value. Next, I'd like to describe how we're handling catastrophes in pricing. The Hartford employs a multi-model approach to estimating catastrophe losses across all perils, leveraging both third-party vendors such as RMS and AIR, as well as proprietary models calibrated to our own claims experience. In 2012, we expect our aggregate catastrophe ratio will increase nearly a full point to seven points. The primary driver of this has been the sharp increase of tornado hail losses in the middle and western regions of the country.
Along the East Coast, we expect a slight decrease in the cat ratio, driven by a decline in exposures within five miles of the coast and our exit from Florida homeowners in the agency channel. As a result, our estimated loss per total exposure in the coastal states is down by 28%. These changes more than offset the impact of a small increase in our expected catastrophe losses from hurricane. While we continue to evaluate the new RMS Version 11 hurricane model, we don't expect the new model to result in a material change to our current view of expected losses from hurricane. We're confident that we have an effective, comprehensive catastrophe risk control plan that tracks exposure by product, peril, and geography in a way that keeps us within enterprise risk limits.
In summary, I believe the consumer markets business is well positioned to grow profitably, leveraging our strong capabilities with the AARP Direct model. To broaden our reach in the mature preferred market, we'll continue to aggressively grow AARP Agency and will pursue targeted growth opportunities in direct-to-consumer, including new affinities. For 2012, we expect continued improvement in profitability driven by rate increases and a continued shift of the book to more preferred business. AARP Direct is expected to generate double-digit returns in 2012, and agency profitability will continue to improve as a result of rate underwriting and agency management actions. We have a really strong management team in place to drive results, and I'm really optimistic about the future. Now it's my privilege with that to turn you over to a break. I have 10:20. Let's be back in our seats at 10:45, and we'll get going again.
Thank you very much.
I hope everyone enjoyed their coffee break. I'd like to ask you to take your seats so we can stay on schedule for the webcast. Yeah, that was just the hold music. It's going to flip to you in just one second. That's what's showing in the webcast. Thank you, everyone. Thank you, everyone. We'd now like to start the second half of today's Investor Day. Thank you. Welcome back, and I'd now like to introduce David Levenson, president of our wealth management division.
Thank you, Sabra. Welcome back, and good morning. I'm Dave Levenson, president of our wealth management division, and I'm pleased to be here with you this morning to talk about our business and how we are growing profitably in the right areas, especially in this tough macroeconomic environment. At the onset, let me share three thoughts with you so you get a better sense for who I am and how I have and will continue to run wealth management. First, I am resolute in my conviction that we make decisions in line with our ultimate objective: profitable, responsible growth. While there may be a perception that in the past, wealth management was overly focused on growing sales without sufficient emphasis on risk management, we want to assure you that this is not the case today.
Second, I am comfortable making tough decisions as long as they are in the best interest of the company. These may range from personnel changes, to cutting expenses, to shutting down or selling businesses that are not profitable or core. It may also mean staying the course and having an appropriate amount of patience to let promising initiatives take hold. Finally, I'm a big believer in talent and believe that grooming and recruiting the best talent and matching our best talent to our most critical roles is one of my top responsibilities. We have significantly upgraded the team and are now operating at a level more consistent with where I want to be. Over the next 30 minutes, I'll talk about the transformation of wealth management, our current business profile, the attractive opportunities present in our ongoing businesses, and the priorities for our newly established run-off business.
With that as backdrop, let's turn to slide three, where we highlight several changes that we've made over the past 18 months. First, shortly after I assumed responsibility in July 2010, we established a new vision and new business priorities for the organization. Our vision is to be a leading provider of solutions for the accumulation, protection, and distribution of wealth. With our unique brand, unique breadth of products, and extensive distribution, we are confident in our ability to achieve this vision. Building on this vision, we have set priorities for each of our businesses that focus on creating shareholder value. The five priorities are to grow earnings, to increase ROE, to generate statutory capital, to grow sales with an appropriate sensitivity to risk, and to diversify into new distribution channels. You'll hear me talk about more of these priorities throughout my presentation.
The second change we made was around structure. To be successful, you need alignment, focus, and accountability. As such, we reorganized wealth management into four ongoing businesses: annuity, life insurance, retirement plans, and mutual funds. As part of this realignment, we decentralized the distribution and product organizations under individual P&L leaders. Now, everyone in each business is relentlessly focused on the five key priorities just mentioned. This is powerful, and we have already seen tangible results. Next, we are focused on driving profitable growth through innovation, product diversification, and multi-channel distribution. Innovation is one of my greatest passions. Each business has made significant progress here, which allows us to stay ahead of our competitors. Importantly, innovation is not just about growing market share, but also allows us to price products at margins that are above what we would price in a competitive environment.
We have a number of newly issued and newly filed patents. There's a lot more innovations coming, and I will describe a few of our most recent successes later in this presentation. Our focus on product diversification and multi-channel distribution is a significant change for the organization, as historically, we often relied on single product solutions through single distribution outlets. The challenges we face as a variable universal life company selling only through brokerage and bank channels is a prime example of something we don't want to repeat. When the market shifted to fixed products, we were caught flat-footed and lost significant market share. This is no longer an issue for any of our businesses. Last on execution, let me talk about several items that we've done in the last 18 months. In both 2010 and 2011, our profitability has improved.
Our operating expenses are down over $100 million since the end of 2009. Our efficiency ratio has improved by 270 basis points. We divested several non-core businesses, including Monday's announcement involving our COLI/BOLI business. It's important to note that we didn't give these businesses away. In fact, the five businesses we recently sold had aggregate earnings of approximately $30 million, for which we received or will receive cash proceeds of nearly $375 million. We changed the composition of my leadership team. Only two executives are in the same job today that they were in prior to my arrival. We significantly enhanced our new product approval process, which is now much more comprehensive and requires approval from actuarial, finance, enterprise risk management, along with the business. We also launched several new products and meaningfully increased distribution through new distribution outlets.
We are pleased with our progress to date and excited about where we're going. Slide seven shows the profile of Wealth Management. Today, as Liam mentioned, we are announcing the creation of a new business segment, our Runoff business. Runoff consists of international annuity, institutional investment products, and the components of the COLI/BOLI business that we decided to retain. Our Ongoing business consists of individual annuity, individual life, retirement plans, and mutual funds. As you look at the split of core earnings between Ongoing and Runoff, you'll note that our Ongoing businesses represent just over 70% of our earnings. We intend to increase that percentage over time. Before I go any further, let me talk about our individual annuity business and address a couple of questions that I know all of you have. First, why are we in the annuity business?
Second, can The Hartford reemerge as a meaningful player? As to why we are in the business, we believe there's a good opportunity to offer annuities at attractive returns with an appropriate risk profile. There is significant consumer demand for the solutions that annuities provide. We know that demand will continue to grow given the demographic trends. Also, we are confident we can deliver these products in a way that is attractive to customers while creating value for The Hartford and its shareholders. We've been in the annuity business for over 30 years. We learned some valuable lessons. We are better and smarter today as a result. As to can we reemerge as a meaningful player? Yes, we can. Our new variable annuity, Personal Retirement Manager, has only been out since June. After a modest beginning, is starting to build momentum.
Additionally, last month, we announced the launch of a new fixed indexed annuity for the first time in Hartford's history. While many variable annuity companies have scaled back recently from rich benefits, we think we've got it right. Our benefits are appropriately competitive with innovative risk mitigation techniques, like the use of our PDF fund, which drives greater stability and returns for customers with lower hedging costs to us. I'll talk more about the individual annuity business later in the presentation. Looking now just at the Ongoing segment, you see the breakdown of our core earnings by business. The individual life retirement plans and mutual fund businesses are 45% of our earnings today and are growing at a much faster rate than our individual annuity business. We would expect this earnings growth to continue, which will help us achieve a healthier, more diversified business.
Moving to the right of the slide, you can see that we have an exceptionally strong platform to build on. We have one of the largest annuity businesses in the country with strong relationships and a strong brand. We remain on the shelves at 17 of the top annuity distributors in the country, despite soft sales over the last few years. We're the sixth largest life insurance company, the number one insurance provider of 401 plan sales based on new plans sold, and the only mutual fund company in history to have grown from a startup to $50 billion in assets in less than 15 years. I think we've proven that we can build businesses and leverage success across the enterprise, and we will certainly continue to do that. Turning to slide nine, you'll see a chart that Liam shared with you earlier.
With respect to returns and growth, our objectives are clear for each of our businesses. In individual annuity, we need to drive sales and manage the in-force while improving ROE. Our retirement plans business, which is growing nicely, must achieve a higher ROE. With our individual life business, we want to continue to grow prudently while improving ROE. Finally, we have plans to grow our mutual fund business as aggressively as possible, given the low capital required and very high ROE. On slide 10, we highlight some key industry trends. Let me start with the first trend, the low interest rate environment, which is a challenge for everyone in the industry. With respect to the in-force, we've lowered the credited rates to guaranteed minimum levels on 99% of our retirement plans. We've lowered the fixed option in our variable annuity to guaranteed minimum rates on 100% of our contracts.
With respect to new business in retirement plans and in annuities, we lowered guaranteed rates to statutory minimum levels where permissible. In individual life, we repriced our guaranteed universal life product twice in the last six months given the declining rates, and will continue to monitor the rate environment for future action if warranted. In summary, we will continue to evaluate all opportunities to minimize our exposure to this low rate environment. Let me touch on another important trend, the consumer sentiment for less volatile returns. In the past year, we developed solutions like the Portfolio Diversifier Fund and our new variable annuity and The Hartford Lifetime Income product for our 401 business. Over the same time, we continued to build out our fixed income mutual fund lineup. All of these actions were designed to appeal to today's more risk-averse consumer.
Turning to slide 11, our ongoing business priorities are straightforward. We will drive sustainable earnings growth, we will drive improvement in ROE, and be particularly disciplined on those businesses with ROEs below acceptable levels. We will be focused on generating statutory capital through a variety of means, including product design, product mix, expense management, general account investment strategies, and the use of more efficient capital solutions. We will increase sales in each of our businesses while maintaining an appropriate sensitivity to the risk that we're taking on. Importantly, we will forego sales in any business if we are not comfortable with the risk. We expect to be relevant in every business. Should we fail to meet that expectation within a reasonable period of time, then we'll have to reevaluate our strategy for that particular business. We will accelerate our sales growth by diversifying our distribution into new channels.
Finally, as Liam McGee mentioned, we will regularly evaluate all of our strategic options. Now let me shift to a discussion about each of our ongoing businesses. As we begin, I'll make some observations about the market, describe where we are and where we're going. Let's start with individual annuity. Industry sales are $170 billion and have generally been flat over the last several years. Companies, as I mentioned, are scaling back from rich benefits and/or increasing fees while some have opted to completely exit the marketplace. Right now, the fastest-growing segment of the annuity industry is the fixed indexed annuity market, which is $30 billion in sales and on pace for another record year. On slide 13, the left side of the page shows you where we are. I'm going to focus on the right side of the page, which discusses where we're going.
To start, we've made significant headway to build out an all-weather portfolio of products for different customer needs and for different market environments. We now have five riders in our variable annuity suite. We will continue to explore adding additional features where there is customer demand and where it makes sense for us. Second, we are excited about our November entry into the FIA market. The Hartford has never been in this space. This is an area ripe for a reputable player to bring rational products to multiple segments of the market. We like the fixed indexed annuity market for a few additional reasons. One, many FIA designs, like the ones we brought to the market in November, have no policyholder behavior risk. Two, depending on the design, FIA liabilities can be negatively correlated with variable annuity liabilities.
As we look to expand into the FIA market, we'd like to develop products that appeal to customers and serve as a natural hedge to our in-force annuity block. This natural hedge concept is one that will get a lot more attention from us, whether within a business, across wealth management, or even across the enterprise. Think innovation. Three, FIAs appeal to a different customer than those interested in variable annuities. This reinforces the benefit of developing an all-weather portfolio. Let me illustrate the merits of an all-weather portfolio in a different way. At the beginning of this year, as highlighted by the red circles, we were only playing in about 10% of the market. Today, not even a year later, we're playing in 75% of the market, but only with products that are rational and make sense to us from a customer value, economic, and risk perspective.
Two months ago, we named a new head of annuity sales who is extremely focused and disciplined and has already had a positive impact on our business. We will maintain the number of wholesalers, but clearly, we'll be expecting a strong increase in productivity. We are also complementing our current wholesaling force through a new variable fee relationship with WealthVest, a highly regarded third-party wholesaling organization. WealthVest has invested in a dedicated team of Hartford wholesalers to support the distribution of our FIA product, an area where they have significant expertise. This broadened approach to distribution is very consistent with our objective to expand distribution into multiple channels. As we think about 2012, we're expecting individual annuity sales to be in the $3 billion-$5 billion range. Switching to life insurance, this is a mature industry with low growth rates.
Sales have been skewed toward mutual companies with captive distribution and toward fixed GUL-type products. Demand for life insurance for high-net-worth individuals will likely increase given the growing demand for estate planning. Where are we today? We remain focused on the mass affluent segment, have significantly diversified our suite of core products, and have added innovative riders, as Liam mentioned, as seen on slide 19. The Hartford is the only life insurance company in the industry with one product that addresses the three primary risks that customers face. With our Life Access and Longevity Access riders attached to our life insurance chassis, customers now have protection against dying prematurely, becoming chronically ill, or outliving their assets. The theme we have for this is Life is for the Living. Responsible pricing is critical, especially in today's environment. Importantly, we are not winning by being the low-cost carrier.
In fact, as just mentioned, we've increased prices on our GUL product twice in the last six months as interest rates have continued to decline. Instead, we are winning by offering unique products with a distinct value proposition while significantly expanding our distribution. Finally, we have a tremendous advantage in the marketplace with 188 sales professionals working with brokers at point of sale. This is a model that no one else in the industry has, and is a big reason why we have such a leading position in wirehouses and banks. Where are we going? We want to maintain our position in our core distribution, where we're number one in wirehouses and number two in banks. We will continue to expand significantly in the independent channel. This includes our Monarch program, which is about 20% of our total sales today.
The P&C channel, where we are working with Doug and Andy, is about 8% of our total sales. In addition, we recently signed distribution agreements with products at producer-owned groups like Lion Street and FFR, and we expect these firms to be a significant part of our sales volume in the future. Collectively, we expect Monarch, P&C, and producer-owned groups to comprise almost 40% of our 2012 sales, a big jump from less than 15% in 2010. We will continue to build out our rider strategy for two reasons. First, we believe that well-designed riders have significant appeal and value to our customers. Second, the riders are very profitable for The Hartford. Our Life Access rider alone will add roughly 50 basis points to pricing returns at the current take rates. We will also find solutions to improve capital efficiency, including the funding of redundant life insurance reserves.
The capital and reinsurance market for these solutions is beginning to open up. Developing the right approach with the right counterparts is a top priority for us. The last point I'd like to make about our individual life business is that we've invested considerable time and money in developing a Six Sigma straight-through process called IssueFirst. IssueFirst significantly enhances the ease of doing business by enabling customers to get their policies much faster than they do today, without compromising any of our underwriting or pricing rigor, while brokers and agents get their commissions faster as well. This patent-pending process also eliminates a number of touch points that will improve operational efficiency and help drive margin expansion. Turning next to retirement plans on slide 21. The small end of the market has $500 billion in plan assets, with roughly $40 billion expected to be in motion in 2012.
The small end of the market is the fastest growing segment and is dominated by insurance and payroll companies. As you all know, defined benefit plans continue to become less relevant given the significant cost imposed on plan sponsors. Let's talk about where we are. We are proud to be the number one insurance provider of 401 plans sold. Our core focus is on plans with less than $5 million in assets. We've also become an emerging player in the $5 million-$25 million segment, with sales in this segment expected to exceed $800 million this year. On our list of disappointments is the fact that we're only capturing 2%-3% of participant rollovers today. While a problem, this also presents us with an enormous opportunity as some of our top competitors capture as much as 20%.
As to potential impact, if we were able to achieve best-in-class retention, it would be worth close to $1 billion per year of assets saved. A major catalyst for growth in our retirement plan business is the recent introduction of our The Hartford Lifetime Income product. As shown on slide 23, what we've done is embed a deferred fixed annuity as an investment option for 401 plan participants. In essence, we are introducing a defined benefit-like structure for defined contribution participants without burdening plan sponsors with the regulatory and financial costs. While the illustration highlights how a transfer of $50,000 to our The Hartford Lifetime Income offering might work with income starting at age 65, participants can also allocate the appropriate portion of their deferral amounts to The Hartford Lifetime Income during each payroll cycle. We price this option every two weeks with the right to reprice daily.
This is also another patented solution for The Hartford. Since the rollout in October, we've received tremendous reviews from the media, our distribution partners, and our plan sponsors. The final area where we have a distinct advantage is in the scale and quality of our sales team. Today, we have over 90 external sales professionals supported by a team of 55 internals. This makes us one of the largest sales organizations in the 401 market. Where are we going? As mentioned, we want to maintain our strength in the under $5 million segment of the 401 market, while becoming a more significant player in the $5 million-$25 million segment. We want to expand into multiple distribution channels like P&C agencies.
Given the strength of Doug's small business segment, as you just heard, and a mutual commitment to work more closely between groups, we expect that P&C agencies will become the fastest growing distribution channel for our 401 business over the next three to five years. Beyond continuing our strong sales momentum, we need to drive greater participant retention, improve profitability by repricing lower margin business, and maintain our pricing risk and expense discipline. These actions, combined with increasing operating leverage as we add scale, are essential to improve our earnings and ROEs. Let's move to slide 25 and talk about our mutual funds business, where we are in the early stages of some exciting changes. Let's start with the market environment. While 2011 has been an extraordinarily challenging year, industry sales are still just south of $2 trillion.
Over the last several years, there's been a significant shift of flows into fixed income funds. Demand for alternative asset classes is increasing. While redemption rates, given the volatility of returns, have been much higher than historical averages. Where are we? Today, we have a sub-advisory model split between Wellington Management Company and HIMCO. Wellington is the sub-adviser of our equity funds, and HIMCO is the sub-adviser of our fixed income funds. Our fund family has a strong domestic equity bias with a relatively high beta. This challenges us in volatile markets like the one we're in today. As to where we're going, last night, we announced a significant expansion in our 28-year relationship with Wellington. Wellington will become the sole sub-adviser for our entire mutual fund complex, and we will become their preferred provider in the advisor-sold space.
As part of this expanded relationship, we will move all of our existing fixed income funds from HIMCO to Wellington, pending the approval of our mutual fund board of directors. Wellington is one of the top institutional fixed income managers in the country. The fixed income retail market is heavily concentrated with room for another viable player based on the feedback we received from the industry's largest distributors. We previewed these changes with Mark Casady, Chairman and Chief Executive Officer of LPL Financial, one of the largest mutual fund distributors in the country. Mark expressed tremendous optimism in our ability to become a much greater force in the advisor-sold market, especially given the move of our fixed income funds to Wellington. Importantly, HIMCO has been a very good partner for us through the years and will continue to focus on The Hartford's general account and on growing their third-party institutional business.
With Wellington managing our fixed income funds, we become a broader and better-balanced mutual fund complex. In addition, we will run our fund business similar to the way that other insurance companies run their fund businesses. We will continue to strategically expand our distribution footprint, both in retail and in institutional. We also expect to expand our return on assets as we add scale. These are the most dramatic changes we've made since starting the mutual fund business in 1996 and will help enable us to become a top 10 provider over the next several years. Clearly, our growth here will drive significant value for our shareholders. Let's jump to slide 29, the priorities for our runoff business. As I said earlier, the runoff business includes international annuities, primarily in Japan, institutional investment products, and the components of the COLI/BOLI business that we retained.
We have six priorities for the runoff business. We will name a new leader within the next few weeks and then begin to staff the business with some of the best minds across The Hartford to manage the complexity and opportunities associated with runoff. We want to reduce the size of our liabilities. While we have done many things already, we have many initiatives in flight, and once the new team is in place, we will execute aggressively on those that hold the most promise. We will also continue to look for ways to maximize profitability. For example, when we stopped writing new business in Japan, we were able to do things that we simply couldn't do as an ongoing business. Over the last 18 months, we unilaterally reduced trail commissions from 11 basis points to one basis point, which resulted in $30 million of annual pre-tax earnings.
This was not the most popular thing to do with our distributors, but it was the right thing to do for our company. We believe that there are additional opportunities to enhance the economics of our runoff business. Next, we will be working closely with Hugh Whelan and HIMCO to develop investment strategies to maximize investment returns while assuming appropriate levels of investment risk. A prudent and timely investment strategy will enable us to mitigate our economic liability post-annuitization. We will also continue to work closely with our enterprise risk management team to constantly evaluate the most effective and efficient ways to hedge our liabilities. With Bob Rupp bringing a fresh perspective in his new role as our Chief Risk Officer, combined with Graham Burr's continued active involvement, I'm confident that there are many opportunities here.
Finally, again, as Liam mentioned, we will be evaluating strategic options for each business in runoff on a regular basis. Let me conclude with the following key points. First, we have clear priorities for the organization with an appropriate balance between profitability, growth, and risk. Second, we will allocate capital to those businesses that create the greatest value for our shareholders. Third, we are focused on innovation, product diversification, and multi-channel distribution across our ongoing businesses. Fourth, we are dedicating top talent to manage the complexity and opportunities of the runoff business. Thank you for your time, and now I'd like to turn it over to our Chief Financial Officer, Chris Swift.
Thank you, Dave. Good morning, everyone. Thanks so much for joining us today. As you heard from each of our speakers, we are focused on driving profitable growth and ROE expansion across the enterprise. I will connect the dots from the prior presentations and walk through what this means for our 2012 bottom line. I'll discuss the balance sheet and our capital position. First, let's discuss a few fourth quarter items. Turning to slide three, based on what we know today, we expect fourth quarter core earnings to be between $250 million-$280 million, or about $0.51-$0.57 a share. This assumes a share count of 491 million shares and does not include a DAC unlock, which would be favorable if markets stay at current levels.
Fourth quarter results include an estimate for prior year and current year reserve strengthening related to increased loss trends in our workers' compensation book. As Doug mentioned, the proactive reserve action we took this fourth quarter is being driven by higher observed frequency and less favorable than expected severity trends, primarily related to accident years 2010 and 2011. We have been watching and monitoring these years closely and have been increasing our loss picks over the past few quarters. The prior year reserve strengthening is estimated at $60 million-$65 million, which relates primarily to 2010 accident year. In addition, we're adding another $75 million-$80 million for accident year 2011. $15 million-$20 million is the fourth quarter impact alone on the increase in the current accident year loss ratio. Let me just stop a moment here. We use the word proactive in both our conversations consciously.
We had been watching this closely. We are trying to get our arms around it and get ahead of the curve and put it behind us. That was the fundamental philosophy in dealing with it holistically this year, and we will talk more about that in the Q&A. I am sure you will have some questions. We also expect to complete our annual goodwill review this quarter. Based upon this review, we expect to write off about $20 million after tax associated with Hartford Financial Products. HFP is the business within specialty that writes professional liability insurance. Adjusting for these items, we view the fourth quarter run rate core earnings roughly to be about $0.80-$0.85 a share. This includes our best estimate for alternative returns, which are trending lower from prior quarters.
So far, this current outlook includes about a $50 million pre-tax estimate for CATs, which is in line with our budget for the quarter. This reflects our best thinking on Winter Storm Alfred and early estimates for the Santa Ana winds. Actual fourth quarter CATs could be higher than this estimate, however. This outlook also excludes a DAC unlock estimate. Through the end of November, account values in the U.S. increased about 7%. However, in Japan, account values declined about 1%. Based on those aggregate levels, our estimated DAC unlock benefit would be between $30 million and $80 million after tax using the sensitivities on the slide. The actual DAC unlock for the quarter will always depend on year-end account values. Turning to slide four, beginning with the fourth quarter, we intend to create a new division for our runoff operations.
It will include two segments, P&C other operations, which currently reside in the corporate and other segment, and a new wealth management runoff segment that Dave just mentioned earlier. The wealth management businesses included in this segment are international VAs, institutional investment products, and COLI and BOLI. The international VAs and institutional investment products were previously reported in global annuities, and COLI/BOLI was in life insurance. Going forward, only U.S. annuity results will be included in the individual annuity segment. These reporting changes allow a better view into our ongoing operations, and they align with our intention to shrink the runoff business over time. To help you with your modeling, we have provided more details in the appendix. Wanted to update you on our estimate for the new DAC accounting change also. As you can see on slide five, for 2012, the impact is approximately $1.5 billion after tax.
This will reduce beginning 2012 book value by approximately $3.05 a share. Based on our 2012 sales plan, we estimate the accounting change reduces core earnings after tax, $40 million, or about $0.08 per share. Prior period results will be restated for this change and communicated in early February. Turn to slide six for a discussion of our 2012 plan assumptions. In general, we expect the economic environment to look a lot like 2011 here, although we are optimistic about gradually improving the trends in the economy and capital markets. Our plan assumptions include a continued fragile economic recovery with only modest GDP growth. Unemployment will remain elevated, but our forecast calls for a slight improvement in the second half of the year. We expect interest rates to remain low, and our plan uses the forward interest rate curve, which implies an average 10-year Treasury yield of about 2.2%.
Our plan projects that the S&P 500 ends 2011 at 1,270 and has a total return of 9% in 2012. 7.2% of this return is market appreciation, and 1.8% represents dividends. New money investment yields are projected at 3.5%, and annualized returns on alternative investments are at 9%. Our plan also assumes two points of catastrophe losses in P&C commercial and seven points in consumer markets. This is higher than 2011 budgeted CATs, reflecting the increase in weather-related catastrophe cost over the past few years, as Andy mentioned. Finally, our plan does not include any prior year reserve development, DAC unlocks, or reductions in the DRD tax benefit. As part of our focus on increasing profitability, we are now targeting a $450 million reduction in run rate expenses by the end of 2013, as you can see on slide seven.
This is an increase of $250 million on top of the original $200 million target. As we've said, we have a continuous improvement mindset, and we are constantly driving the organization to become more efficient. We are streamlining operations, rationalizing the number of management layers, and investing in technology to improve speed and efficiency. We are well on our way to achieving these goals. We have taken out $140 million of run rate expenses so far this year, and we expect to achieve another $160 million reduction by the end of 2012. Not all of these savings will fall to the bottom line because of the required investments to achieve the operating efficiency targets. We are targeting a three-to-one revenue expense growth rate in future periods. Earlier this morning, Doug, Andy, and Dave shared their strategies to grow and improve profitability.
I'm going to translate their plans into the outlook by business. Let's start with commercial markets on slide eight. We expect core earnings to grow in the high teens over 2011 after adjusting for prior year development and CATs over budget. Margin expansion is a primary driver. We expect earned pricing increases to outpace loss costs for P&C commercial, and we will continue to take action to improve group benefits profitability. In P&C commercial, we expect written premium to grow 1%-4%. As Doug mentioned, we are working to improve our profitability in middle market. This will likely result in a decline in middle market written premiums. We expect written premium growth in small commercial and specialty to offset these declines. Our combined ratio outlook ex CAT and ex prior year is 95%-98%. This reflects recent trends in our workers' compensation book.
These projections translate into high teens growth rate for core earnings in P&C commercial. In 2012, we project that group benefits ongoing premium will decline, reflecting pricing actions to improve profitability. Our outlook for ongoing premiums is $3.7 billion-$3.9 billion. Given our expectations of persistent elevated unemployment, we expect loss ratios to remain high in the 77%-80% range. Our outlook is for high teens increase in core earnings based on these assumptions. Turning to slide nine, in consumer markets, we expect 2012 core earnings to decline in the high single digits compared to 2011, excluding CATs above budget and prior year development. The decline in 2012 is driven by a one-point increase in budgeted catastrophes as well as lower net investment income. The combined ratio outlook is 90%-93% ex CAT and ex prior year.
Our actions to improve profitability and reposition the agency book are expected to reduce written premium by 3%-5%. The outlook for wealth management is on slide 10. We expect 2012 core earnings to decline in the low teens. This decline largely reflects the $40 million after-tax impact of the new DAC accounting guidance. Without this accounting change, normalized earnings would be down only slightly from 2011. I'm not going to review all the detailed assumptions here included on slide 10, but I want to highlight a few important items. First, the new DAC accounting guidance primarily impacts retirement plans and individual life. In addition, spread compression will reduce retirement plans' core earnings. In mutual funds, we expect to invest in a new platform which will reduce core earnings. Second, we anticipate sales across wealth management to continue to grow in 2012.
Our targeted sales level for individual annuities is $3 billion-$5 billion. This outlook reflects the increasing sales momentum of our new VAs and the expansion of our annuity product suite. While this won't offset VA outflows, these sales will incrementally improve returns on the business after hedging costs. The new business we are writing today is priced higher than the returns of our older U.S. VA block. Third, while 2012 core earnings are projected to be lower, successful execution of the sales and growth strategy Dave outlined earlier today should position wealth management to improve core earnings in 2013. Slide 11 has our 2012 outlook. Based on the business and market assumptions, 2012 core earnings are projected to be between $1.58 billion and $1.7 billion, compared to our estimate of 2011 core earnings of about $900 million.
Adjusting for the prior year development, catastrophes in excess of budget, and other infrequent items in 2011, the midpoint of our 2012 core earnings outlook is up slightly compared to projected full year 2011. Please note that our outlook does not include any prior year development or DAC unlocks. On a per diluted share basis, we expect core earnings of $3.30-$3.60 in 2012. This is based on 474 million shares, which reflects the completion of the share repurchase program by early second quarter 2012. This results in a core earnings ROE of approximately 8%, which is essentially flat with 2011 after adjustments. 2012 ROE has been reduced by about a half a % due to low interest rates and the impact of the new DAC accounting.
Turning to slide 12, I thought it would be helpful to highlight the ROE of the ongoing businesses, which is higher than the enterprise ROE. Ongoing businesses comprise almost 90% of core earnings and currently produce ROEs in excess of 10%. This reflects the strength of the commercial and consumer franchises and the ongoing contribution from wealth management. As Liam described, our better performing businesses will drive ROE expansion. In addition, efforts to improve the profitability in lower return businesses should provide an incremental lift over time. The enterprise ROE is impacted by our run-off businesses, which have about 30% of our capital and generate limited returns. When you include the impact of hedging in the net income ROE for the run-off businesses, the return is close to zero. We will continue to explore all options to improve returns and reduce the risk associated with these run-off businesses.
As capital markets improve, additional alternatives may emerge. That said, this won't happen overnight, and we'll keep you updated on our progress. Let's go to slide 13. For our 2012 plan, we expect GAAP hedging and credit impairments to negatively impact net income ROE by approximately 225 basis points. This estimate will vary based on actual market returns and impairment levels. Net realized gains or losses related to the hedging program are not linear with respect to other changes in market conditions. To give you a better idea of the longer-term cost of the hedging program, we have provided the expected cost over time for the U.S. and the Japan hedging programs. We evaluate these assumptions annually as part of our third quarter DAC study. As a reminder, hedging, net realized gains and losses, and impairments are included in net income and not core earnings.
As we enter 2012, we are confident in the strength of our balance sheet. As discussed during our October presentation, we have substantially increased the level of hedging. In 2012, we will manage the hedging program consistent with the objectives we discussed. We have significantly reduced the risk profile of our investment portfolio over the past few years. The de-risking actions we took and the prudent investment of new money flows have resulted in a portfolio that is well-positioned for strong risk-adjusted returns in the current economic environment. 2011 credit impairments have been modest, and the impact of lower interest rates remains manageable. In the first two months of the fourth quarter, the new money yield was around 4.3%. This reflects $500 million of selected high yield purchases at an average yield of about 8%.
Our general account has about $700 million of investments in corporate and utilities in peripheral European countries. We have no sovereign exposure and less than $20 million of financials in these regions. We continue to follow the events in Europe closely, but the majority of our investments are dollar-denominated and in global companies with strong balance sheets. Our financial leverage has improved over the past two years, and we are comfortable at our current levels. We will continue to look for opportunities to improve our capital structure and reduce our cost of capital. We intend to complete the $500 million share repurchase program by early second quarter 2012. As Liam said, with this completion of Investor Day, we expect to begin the repurchase activity in the near term. Statutory capital resources remain strong.
At the end of September, we had over $16 billion of capital in the U.S. and Japan legal entities, including our captives. Looking towards year-end, while domestic market conditions are improving, we continue to see weakness in Japan. Any capital contributions to the operating companies, including our captives, will depend on year-end market levels, account values, hedge results, and the results of our cash flow testing. I also want to remind you that we repaid $400 million of senior debt that matured in October from our holding company resources. As we've shared with you before, we are committed to prudently managing our resources to ensure adequate capitalization of our operating companies in stress scenarios. Turning to slide 15. As you know, surplus changes are influenced by many factors such as business profitability, market performance, interest rate, VA CARVM reserves, and prior year P&C reserve development.
Our plan assumes the P&C companies will dividend $800 million in 2012. This is consistent with prior years and will fund the approximate $700 million of annual interest in dividends of the holding company. We expect surplus at our life companies to be flat or slightly lower in 2012. Based on our planning assumptions and the current in-the-moneyness of the VA book, we would expect the mark-to-market losses on the VA hedges to exceed the expected decline in the VA stat reserves. As a result, we expect the VA book to consume surplus in 2012. We expect statutory earnings in other life businesses to remain pressured as a result of the economic environment, lower interest rates, and loss cost trends in group benefits. We will continue to look for opportunities to more effectively finance our operations. As Dave provided one example related to redundant life insurance reserves.
In this case, a solution will allow us to grow faster in a mortality business we like. Beginning in 2013, we believe statutory surplus generation will improve. This will be driven by margin expansion and top-line growth in the P&C companies, a shrinking run-off book in the life companies, improved group benefit margins, and growth in businesses that are not as capital intense, like retirement and mutual funds. As you've heard from Liam, Doug, Andy, and Dave, the strategic alignment of the business strategies around customers is going well. We feel good about the work we have done over the past two years. We have solid plans and strategies in place to build upon The Hartford's foundational strengths enjoyed in the marketplace. Across the organization, we are focused on and determined to create value for our shareholders. I hope that our commitment has come through in our presentations today.
As we look forward, we have more to do to achieve The Hartford's optimal growth and profitability balance. We will grow our most profitable businesses, like small commercial, specialty lines, and mutual funds. We will continue to expand our product offerings and distribution in individual annuity, retirement plans, and individual life. We will focus on margin improvement for the businesses where we have a solid foundation but are not currently generating acceptable returns, like middle market, group benefits, and consumer markets. We will allocate capital to our businesses in a disciplined fashion, and we evaluate opportunities to free up capital from businesses not meeting our current return targets, such as the run-off segment. In short, we are keenly focused in on ROE expansion. We are managing all our operating and financial levers to drive shareholder value creation at The Hartford.
Thank you for joining us today, and I now will turn the presentation over to Sabra to begin the Q&A. Careful.
Thank you. While Liam, Andy, Doug, and Dave join us up on the stage here, I'd like to point out we're going to have three members of The Hartford team out in the audience with microphones, spearheaded by Ryan Greenier from our IR team. If you have a question, I'd like you to raise your hand, and we'll get a mic to you in order. As always, please introduce yourself for the benefit of those reading the transcript or the webcast will understand who's talking. Finally, we just want to note that we know there's a lot of questions. I already see the hands out there. We want to try to get everybody's questions covered. We have about 45 minutes, so if you could please limit yourself on the first pass to one question and one follow-up, then give the mic back so we can get around the room.
Ryan, if you want to start.
Hi. Thomas Gallagher from Credit Suisse. I guess the first question I wanted to ask would be for Chris on the lack of life insurance statutory capital generation in 2012. Can you frame a little bit on how much you expect the delta to be into 2013? Are we talking about it going from zero to $100 million, or is it going to be a more meaningful increase as you think about it? Just a question of why is it that the annuity business isn't generating any statutory profits even though you're assuming an up seven percent equity market? Is it the structure of the hedge? Have you sold calls to finance buying puts? Or maybe just talk a little bit about the structure.
Sure. I would say the first thing on 2013 surplus generation, I would say it could be up meaningfully right now as we look out and project the different factors. It could be up several hundred million dollars compared to, I'll call it flat to slightly negative that we're approaching today. I think that's a meaningful turnaround. I think on the hedging, we've talked about this quite a bit. It's complex, so I'll try to simplify it the best way we can, is that the amount of hedging that we've done in essence at the current market levels when we sort of locked in the moneyness type guarantees just has the effect of the hedge losses will be greater than the VA CARVM reserve releases in 2012.
That will eventually change the dynamics once you get beyond that, and that's one of the reasons I believe we could generate capital in 2013 in the VA book. Where we are right now and sort of the point, we need to get an inflection point before we get surplus generation in 2013.
If I could, Chris, just will the dynamic in the annuity earnings trend change in 2013, or is it that the other businesses overtake that? What's-
I'm sorry if I wasn't clear, Tom. Yeah, both. I think the other businesses, as we said, group benefits contributing more, mutual funds contributing more, life insurance when we find our solution. VA does also start to change the dynamics in 2013.
John?
Yeah. Thank you. John Nadel from Sterne Agee. Two maybe bigger picture questions. One is just to think about historically, you had talked about, I think mid to high single-digit core earnings growth was the target. If I look at the midpoint to midpoint, and I give you back the $40 million of DAC earnings drag, it's about 2% core earnings growth. I was wondering if you could square that circle for us.
John, when we came out with that in April of 2010, and a couple of other guidances, as you recall, we were looking at our forecast for both interest rates and some reasonable growth, but really pretty much about the forward curve rates, and obviously, that has changed significantly. I think that explains the fact that we'll have growth, but it won't be as high as we would have ideally liked.
It's a rate situation.
It's more of a macroeconomic issue.
Got it. Okay.
Liam, if I can add, John, if we think about we gave you the sensitivities on the low side of rates if they stay low, I think the dynamic would be fairly symmetrical on the upside, too. If rates got back to 3%, let's say, we're using 220 as you just saw, that could be worth $40 million after tax next year alone.
Yeah. Recall, John, that we said, to Chris' point, that's an excellent clarification. We said if rates stayed down at the 2% 10-year for 2012, it was a $50 million-$75 million impact. Of course, in 2013, twice that amount. Chris' point, the upside leverage with rates is pretty significant for us and gets us closer to that high single-digit growth that you're describing.
Terrific. Then relate that to just thinking about the ROE, the 2012 guidance implies at about an 8% return, recognizing interest rates are a pressure point. As you look out the next couple of years, I'm sure you had a multi-year planning process, where does that 8% go toward over the next few years? Thank you.
Well, we kind of learned our lessons from April of 2010, to be honest with you, John, because the environment is so unpredictable. I think our intentional focus this year is on execution, the granularity we gave you and what we told you we think we can accomplish in 2012. Chris highlighted the impact of the DAC change and rates at 50 basis points plus or minus as well. It's clearly going to go up, but learning the lessons of the past and the unpredictability of the macro environment, I think I'll leave it at that.
Thank you.
Randy?
Thanks. It's Randy Binner from FBR Capital Markets. A couple, if I can, on workers' compensation. On the first piece, it seems the message here is that you're being proactive and getting ahead of reserve issues. Can you describe to us the classes of business and maybe the states where you're having issues? Otherwise, explain to us how such an uncertain line historically, being that the case with that line, that you can kind of have the confidence to say that you're getting ahead of the losses there, and then I'll have a quick follow-up.
Okay. Excuse me. Let me try to box this issue and hopefully attack some of the dynamics inside your question. If you look across the industry in our book, somewhere around the end of 2009 into 2010, the dynamics with frequency
Started changing. The NCCI has reported that, our indication is reflected in our book, but we're not the only one. That's on the end of 10 to 12 years of extended periods of negative frequency. We've been watchful of that. We've looked at it by state, we've looked at it by territory, we've looked at it by class. First thing I would say to you is it's primarily an issue in our guaranteed cost businesses. I think we're well reserved and really in very good shape in our national account excess book, it's primarily down in our guaranteed cost section. As you know, moving on 2011 as aggressively as we have, it's a fairly early time period in 2011, we think we have jumped on this early. We actually, two weeks ago, brought an outside consultant in. They spent three days with us.
They went through the same data points that we're looking at day in, day out, we had very thoughtful conversations with them. It's been more than just our own team here at this table with our own actuaries. I think we've got some data points outside The Hartford as well. We look across this line. We've not seen extended periods of unemployment across this sector for a long time. As such, we feel the stress inside this line is something that we needed to respond to. I believe we're on top of the issue. We're looking at it by state. There are different tactics and pricing strategies across both our middle and small books of business. I'm rather pleased that this is a significant step forward to address this issue.
Maybe to help quantify it a little, can you share with us where your accident and your loss ratio for 2010 and 2011 started or more importantly, where it's ended up now
Yeah
in the comp line for The Hartford overall?
Right. In those comp lines relative to small and middle, this adjustment will move our picks in the current accident year up about four and a half points into the mid-60s. That middle is different than small, but just think about an aggregate change here of four to five points in the quarter.
From low 60 to mid 60.
In the middle, yes.
Thank you.
Jay?
Jay Gelb from Barclays Capital. For Doug, you gave us previously the workers' compensation rate changes. Can you talk about the overall rate environment in terms of the ability for underwriters to push through rate on the commercial book?
Absolutely. Jay, the overall book has improved as well, almost on the same pace as comp, with a slightly less aggressive series of numbers. Across our middle market book for 2011, in Q1, we saw essentially two points of renewal pricing. That moved to three in Q2, and up to four in quarter three. Like what we've seen in the fourth quarter with comp, our rate change in the middle moved over five in October and slightly over six in November. We are seeing a stepped-up pace that I've been talking to, not as much as comp. Comp has clearly been the price leader, but we're also seeing it across other lines.
That's inclusive of comp?
That's inclusive. Yes, that would be all in comp.
Okay. Separate issue, Liam or Chris, it's readily apparent you're going to finish this $500 million buyback by around mid-year. What's the plan after that? Should we just expect that's it for 2011, or should we pencil in something else for the rest of the year?
Jay, I think I'll give you the same answer that I've given on all the strategic steps that we've taken, whether it was to repay TARP, increase the dividend, buy back shares, is that we will evaluate and consult with all of our constituencies, and we'll do what we think is prudent. I don't think I'd want to comment any more than that. I think as 2012 plays out, we'll evaluate the possibility of capital actions then. If we do something, it'll be done in an approved fashion.
Andrew? Andrew first, and then
Go ahead. Hi, Andrew.
Yeah. Hey. Andrew Kligerman, UBS. Just trying to get back to that ROE, which was originally 11% targeted for end of 2012. I want to get a sense of some building blocks. In slide seven, Chris, you show some real improvements in expense savings. Initially, the expense ratio was supposed to improve by 100 basis points, you mentioned here that it doesn't all fall to the bottom line. What would that expense ratio improvement be in 2012 and 2013?
Thank you for the question, Andrew. I'm glad you're picking out on things that we're working very hard on. You've seen that we've increased the overall goal through 2013. I think the building block that you're really referring to is that our revenue line is a little lighter than we really planned. The overall core earnings is obviously a little lighter. You could say interest rates, you could say other things that are affecting profitability. We are, I'll call it increasing our efficiency target and ratios to try to make up for that in sort of this low interest rate environment. A lot of the numbers that we talked about before, I would say, had a more of a levered impact with, I'll call it revenues increasing. As we see revenues sort of flat through 2012, the efficiency ratio isn't increasing at the pace we expected.
Just one other follow-up on-
Andrew, just if I can add one perspective to that. If you go back to our elaboration on our desire to make The Hartford more efficient
You recall Chris' remarks, the expense efficiency ratio improvements were really based upon a $200 million reduction, which we'll easily achieve in 2012. As Chris said, the revenue line is certainly just as big a part of the efficiency ratio calculation as the expenses. That in combination with the fact, I think we are getting much better at being a continuous improvement company, has taken the 200 to 300 in 2012 and then to that ultimate $450 million in 2013. I think that is direct evidence of management's commitment, notwithstanding what happened to interest rates, revenue, et cetera, to drive the kind of efficiencies that we committed to you. Obviously, as some of the macro environments become more normal, if you will, you'll see a levered response to that because of the more than doubling of expenses we're taking out in the company.
I would tell you that this really is an example of how we're looking across the enterprise. These are not just kind of stovepipe expense exercises. These are really leveraging things we can do across the enterprise and a lot of process improvement.
Just another follow-up on the ROE. The new runoff segments, I think in one of the slides, Chris, you've got a 2% to 3% return on this business. Could you highlight any bold moves you could make to turn that around? Are there any particular businesses you could sell, i.e., the runoff variable annuity block? Anything. What's something bold that-
Yeah, those are bold ideas. Thank you for them. I think as Liam said, we're trying to be prudent. I was going to have a management team focused on it. It's really premature, Andrew, to sort of speculate, but I hope you felt the passion and commitment from Dave, Liam, and myself on tackling some of these runoff blocks and doing what's in the best interest for the shareholders long term.
Andrew, Chris and I will just tag team on these questions. Hugh reminded me this morning, Hugh Whelan, that we had similar questions about the investment portfolio three or four years ago. Why don't you just write it off, get it over with? I think the company demonstrated that by balancing risk, capital, and profitability, clearly, we made the right decisions to manage through that portfolio at the appropriate time, I think the results are gone from a fairly challenged and troubled investment portfolio to one we think is quite solid today. As you saw on balance sheet day, will perform very well in a very stressed environment. When we look at the runoff businesses, I want to assure you, we have the same mindset. As Dave said, we're going to maximize all the opportunities we have to increase profitability.
As he talked about the trail commissions, there are a number of efforts to reduce the actual expense of running those businesses. Second of all, there are a number of other things that we're working on, and as they come to fruition, we'll share them with you. Second of all is Ram and his team have done an outstanding job in Japan putting the dynamic hedge in place. You saw the downside scenarios and the sensitivities on balance sheet day. We're not satisfied with just it's in place. We're going to constantly be reviewing both can we de-risk further and more economically. Lastly, back to the concept of the analogy of the investment portfolio. A big part of our desire is to be ready to act when the economics, the capital issues, and the risk issues coincide.
There is a potential trade that makes sense for us. All I'll say is we've done some of that already. We're going to do much more of it. Those three dimensions are very much a part of why we think it's important to run it in this fashion. In addition to that, and I hope the message was not lost on our guests here, we also thought by separating those runoff businesses from the ongoing businesses, it would give you a greater sense to your ROE question that the ongoing businesses from a core ROE perspective actually have acceptable returns. It highlights clearly The Hartford's unique challenge, but it also highlights that we're starting from, on average, a pretty good place from a core ROE perspective, and the actions that we've demonstrated to you should, over time, improve the ROE of the ongoing businesses as well.
Jay?
Hope that's helpful.
Yeah. Jay Cohen, Bank of America Merrill Lynch. Question, I guess, first for Doug. Doug, you talked about the workers' comp business. It sounds like you did a fairly deep dive into that business. You also mentioned the D&O business for public entities. Did you do a similar deep dive? That's a long-tail business, and when it has reserve issues, it can look pretty bad sometimes.
The answer is yes, we absolutely have been diving deep into D&O for an extended period. As 2011 has played out, we've become more disappointed in the aggregate performance of that line and therefore have shifted our tactics more aggressively, either searching for rate or moving ourselves away from certain of those risks that we just didn't feel like we were close to price adequacy. The answer is yes, deep dive on D&O.
Similar confidence level in those reserves?
Correct.
Okay. Question for Andy. Andy, I wonder if you could just talk about the frequency of auto claims, what that trend looks like, and what your expectations might be for 2012.
Jay, thanks. What we've observed at the industry level in the second quarter and third quarter of 2011, we've observed almost a decrease of 2% from 2010. We believe that as we go into 2012, frequency will remain flat. There's frequency for you. Now, that's industry for Hartford. For us, because we are still manifesting a shift towards more preferred business, we actually believe our frequency will be slightly negative. Shifting the conversation to severity, we're seeing fairly benign severity trends kind of returning to historical trends. Medical trends are around 3% and so forth. You put that all together into loss costs and it's looking like it's just slightly positive going into 2012.
Got it.
Mark Finkelstein, Evercore. Chris, just a clarification. When you're talking about the hedging costs and the long-term economic impact, am I interpreting this correctly to say that if markets go up according to what you expect them to go up, it's a 225 basis points long-term impact on ROEs? Is that the right way to interpret that?
I would interpret that for our 2012 plan alone.
Okay.
Market levels and assumptions. I think that's an important point, Mark, that as markets heal, we can rebalance hedging strategies, risk-taking strategies, lower cost instruments and the like. There are opportunities to rebalance and restructure the hedging program over a long term.
Chris, to your point, I think a different way of saying it is that's hedging as it is currently constructed. As markets change, we'll rebalance so that 225, to your point, is not a long-duration reduction. It's for our assumptions at 2012 as hedging is currently constructed.
2012 only, yeah.
Okay. Then just on the retirement plans, the ROA outlook of 3 to 6 basis points, that's meaningfully lower than what some of us are used to seeing. Can you just talk about that a little bit, and what is the path, and what is the longer-term ROA outlook that you strive to get to?
Yeah, I could comment because I think the main driver of that is the DAC accounting change. We are deferring less, so more is just being expensed up front, and we do sell quite a bit of business there. That's just purely the dynamics of our new DAC accounting methodology. I would say the economics are relatively unchanged except for low interest rates right now on the in-force block.
Just to add to that, there's spread compression within the general account for where some of the assets are. The fact that this business is growing so fast, I do think Chris is absolutely right. That does hit our ROA quite a bit.
Remember, Mark, we said that the $40 million, the $0.08, hits disproportionately retirement and life insurance.
Okay.
Expenses that would otherwise have been deferred under the old methodology.
Glass.
Bob Glasspiegel, Blaylock & Partners. Chris, I was wondering if you could give us 2011 statutory earnings outlook.
I don't have that right with me, Bob. I think we could talk through it on our earnings call. I can tell you when we look through year-end and sort of project statutory surplus in general, we see it basically at the same levels we are today, where we closed the third quarter. We're taking dividends out of The P&C Company. We've obviously put up some incremental reserves. We will move some capital around various life company subsidiaries, including our captives, and we'll complete year-end cash flow testing, which is still subject to change right now at this point.
Well, that's what I was really driving at.
We don't know.
At this point, you're comfortable that you don't see a big shock coming from that, given you're doing buyback and your body language suggests that you don't see a big interest rate hit on the cash flow testing.
Well, we've been managing it during the year, I think, pretty proactively. I would tell you that we're not done yet for our final adjustments this year.
Thank you.
Go ahead, Ed.
You got it.
Jeff Schuman, KBW. A couple questions related to life insurance. I think it was Chris, you mentioned a couple times redundant life reserves as an opportunity. Is that a new business issue, or is that an in-force business issue as well, and how big is that issue?
Maybe Jeff and I could tag team this. I would define it, Dave, as coming into 2010, we did not have a solution to finance redundant reserves. Those 2010 and 2011 issue years, we then financed it with our own balance sheet. There could be an opportunity to go back into 2010 and 2011 and recapture some of that redundant reserves we put up. There might be opportunities to restructure the existing structure we have in place to make it even more effective and efficient going forward.
Just to add on that, we did have a letter of credit, I think as you know, that expired right in early 2010. The market had essentially dried up for the funding of this. As we look forward, frankly, there's a lot of interest right now in banks as well as reinsurance companies. We're in active discussions with both parties.
Okay, the other life question. I was wondering if you could talk a little bit about the recent private placement transaction. It looked fairly creative. It looked like you kind of carved out the servicing and kind of monetized the income stream around the servicing. I'm wondering what the P&L impact is to you and why this was a better structure than maybe co-insuring the whole income stream.
Dave and I worked closely on this transaction. Thank you. It was creative. Opportunity to use a trusted firm from a TPA perspective. In essence, we sold that revenue stream. As Dave and I talked, we like the mortality margins in the revenue stream. Actually, we wanted to keep the mortality in business. If you look at it going forward, we have a deferred gain up on the balance sheet, or will have a deferred gain once it closes of about $110 million. We still expect a core earnings revenue stream in runoff of about $20 million annually.
The GAAP revenue stream that we or earnings stream that we see won't really change that much, essentially. Is that right?
I would say it's probably reduced by $12 million-$15 million in total.
That's right. The other thing that we are retaining in addition to the mortality, which by the way is also experience rated, which we like, is that we are retaining the assets at HIMCO, which is about $18 billion or so, which also results in a meaningful profit for us.
Ed?
Ed Spehar from BofA Merrill. I have a question. It was mentioned a few times that there could be more opportunities to de-risk as markets improve. I'm looking specifically at Japan, I know you don't consider a long-term, more complete hedge for Japan as an economic option today, could you give us some sense of what it would cost just so that we have an idea about how the market is viewing the risk of that business today from a more complete hedge standpoint?
Ed, you're nothing if not persistent on that point. I think my answer would be, we believe it's appropriately hedged. We haven't really gone down that path because we don't think it's economic, we think that the yen, in particular, with its current strength, the way we have it hedged today is appropriate. If that and other variables change, that's one of the spirits of the runoff business, we'll certainly reconsider any alternative if we believe it balances economics, the risk, and the capital perspectives.
I'll try to be slightly less predictable here and add on with are we talking about hundreds of millions? Billions?
I'm not sure I understand the question, Ed.
If you were to put in this complete hedge that you don't want to give a specific number.
I don't know, Chris.
Can you give us ballpark ranges?
Do we know?
The way we've tried to describe it, hopefully you understand that the hedging is to a level that is not 100% right now, it's pretty substantial. We would say 65%-70% of, I'll call it, the risk is being managed with the hedging program. Incrementally, you're talking 30%. I don't have a number for that I could share with you that is sort of reliable given today's market conditions of what that long-term piece would be. We just haven't priced anything like that lately.
The 65%-70% is not a hedge over the life, right? It's a hedge for a period of time that you have to roll, correct?
It's a dynamic program and a dynamic-
Ed, I think we answered this the last time. We're just not looking at a permanent solution now, we really don't have an answer for you.
Eric?
Sabra. Eric Berg from RBC Capital Markets. My question, Dave, relates to HIMCO, Wellington, and the decision to move the entire mutual fund operation to Wellington. Two questions. First, if you have enough confidence in HIMCO to run your entire general account, including, as Chris said, the COLI assets, why did you take them out of the fixed income mutual fund business? My second question is related. Now that you've made that decision, what is the nature of and why are you making significant investment in the mutual fund business if it's essentially going to be Wellington's business? Thank you.
You're welcome.
Eric, thanks for the question. I would say that this really has nothing to do with performance. If I look at especially the three-year performance record of HIMCO, it's exceptional. What it really has to do with is the brand and reputation of Wellington in the retail space. Wellington is very well known. You look at a variety of institutional studies, they are ranked from a reputation perspective always toward the top. In fact, in fixed income, they are considered a top decile player. The fact that we are going to be doing this broadening of our suite with Wellington, we think will resonate significantly in the retail channel because the retail channel knows Wellington, just does not know HIMCO as well.
Now that we've got that, just to answer your second question, makes all the sense in the world to us to double down on this business given the fact that, again, very low capital required and very significant ROEs, as you saw on the bubble chart.
Are you changing the name of the funds? Will they be marketed as Wellington Funds or as Hartford Funds?
No. They're our fund family, so we would never call them the Wellington Funds.
Okay. Thank you.
Gary?
I have a question for Andy Napoli. Andy, one of your projects that you have to execute on for the future of personal lines of business is the direct channel. Two years ago, your neighbor down the road spent almost an entire portion of their analyst day talking about their entry into direct channel, and we haven't heard one word from that company since then on the direct business.
What are some of the tricks that you have up your sleeve that is going to enable you to execute? Do you have any idea why your neighbors have failed so far, or at least seemingly have failed so far?
Well, I'm not going to go there. I will speak to what we're doing. You heard me in the presentation talk about really, it's a profoundly strong and powerful direct marketing engine. This is the core of the AARP franchise, 27 plus years, started direct. We've really honed our skills there. It starts with new affinity. It's really taking that direct model and pivoting it to groups that have good density of business that we know pretty well, mature preferred. It's just a question of how quickly can our direct marketing engine adapt to the different, and they'll all be different to a certain degree, different attitudes, behaviors, channel preferences, and that sort of thing.
What we've been able to do with AKC, American Kennel Club, which is the one that we've had for the longest, is drive response rates and response efficiency and conversion efficiency to very acceptable levels. We'll continue to replicate that. We've got 10 million names in our marketing universe, we know of larger targets that are out in our pipeline, and we will pursue those aggressively when they become available. The other piece is around what we're calling more broadly Targeted Direct. This is also an example of taking our direct marketing engine and pivoting it to other categories, non-affinity. Maybe using targeted lists that we could acquire a list of names and direct market there. We're also, this is very much incubation, is looking at can we extend that model to the work site and working closely with Doug and group benefits.
That's really our strategy around there.
Anyone else has a question if they can raise their hand so we can pass the mics. Chris?
Yes. Thanks.
Yes.
Chris Giovanni, Goldman Sachs. Obviously, you've done a lot the past couple of years in terms of changing product features, pricing, taking expenses out, starting capital management, hedging, we're still sitting here sort of at an 8% ROE. I guess the question is it purely macro-driven in terms of needing to get ROE expansion? Or kind of what else can be done to move closer to that targeted 10% return for your ongoing business?
Well, clearly, there's some macro effects, Chris, it's not unique to The Hartford. ROEs in the industry overall are not robust. Secondly, I think one of our purposes was to kind of clarify what you already know, which is that the ongoing businesses are performing at that plus 10%, that clearly our challenge, which does directly relate to macro events is to manage so that we can ultimately liberate capital from that 30% or those runoff businesses. It's a tale of two cities for us. We are, as you say, thank you for recognizing, we have been very focused on the last two years. We describe our journey as the first step is creating strength and stability and a clear direction forward. I think for the most part, we've accomplished that. Balance sheet day, I hope helped reinforce that point.
To drive improved ROEs for the firm is going to require us to increase them in the ongoing businesses. I hope we gave you the granularity that we are managing the company business by business and have a clear sense of what we need to get done. Opportunistically manage the runoff portfolio. I think that adds up to a better ROE over time. As I said at least twice in my formal remarks, management is managing the businesses with, I think, great discipline, transparency to you, I hope. Second of all, we are going to regularly review our portfolio and our strategy, and management is pragmatic about how value will be realized.
Thanks. Just as a follow-up to that, I mean, I guess one or two other companies have a big runoff block that absorbs similar amounts of capital, and the ROEs they're targeting on new business are closer to 13% or so.
Is that the area you should be shooting for, or is the products that you're currently selling and the distribution, is it just not feasible to try and generate those types of returns in this market?
I think in the Wealth Management business, which I believe is what you're mostly alluding to, I think Dave did talk pretty directly about the fact that we are not going to sell business that doesn't get acceptable returns. Beyond that, Dave, if you want to give a more granular perspective, I think that'd be helpful.
Sure. I think we've got, again, Liam talks about the tale of two cities. I'll talk about it in a different context. With respect to everything that we're writing today, we are writing business at some pretty significant ROE levels. That's our expectation. We've got the in-force and the new, but everything that we're putting on the books, we're really not compromising our ROE standards at all.
Thank you.
John?
Thanks, Sabra. John Nadel again from Sterne Agee. It's been a while since we've gotten an update from you on the Allianz relationship. Listening to their third quarter call Maybe I'm reading too much into this, but it sounded like they might have been signaling that they were a little bit more open to a negotiation, given the level of the warrants, how far out of the money they are, et cetera. I was just wondering if you could give us an update on the relationship there.
I don't know what the term negotiation means, John. Can you be more specific?
Well, I'm not sure what it means either. I would hope that it means you could buy them out of those warrants at a steep discount.
Well, I'll let Chris comment to the degree he wants on that aspect. I think in terms of our relationship with Allianz, it's unchanged in the two years I've been with the company. They're an investor, and that's the status of the relationship. They're a passive investor. I talk to Michael Diekmann, who's the CEO of Allianz, probably two to three times a year, and it is in that context. In terms of Allianz's decisions, I think we'd be reluctant to comment for them, but Chris may have more to share than I do.
Well, I wouldn't expect you to comment for them. How about this way? Have you approached them with an offer to try to get out from under some of these securities at a discount?
John, I think it would be fair to say we have dialogues from time to time. The $500 million share repurchase program is designed to cover all equity-like instruments.
Okay. I thought I'd try. The second question I just have is on the variable annuity business. The comment was that the $3 billion-$5 billion of sales expectation for 2012 was somewhat reflective of the gaining momentum recently. Can you give us some sense of what that means? Are we looking at a, now with the rollout now four, five, six months in, are you seeing the type of monthly production that gives you a lot of confidence in that $3 billion-$5 billion?
John, I feel more comfortable certainly talking about that on the fourth quarter call-
Okay
where I can give you certainly more transparency into that. Some things to recognize is that for all intents and purposes, as you guys all know, we were out of the business because we weren't in the living benefit part of the business. Getting back in June, it just takes a long time to kind of get back to our distribution partners.
That's point 1. Point 2 is we improved the product already in October. Point 3 is that a lot of our distribution and states weren't on board exactly when we launched in June. For example, our biggest distributor wasn't on board. They just got on board a month ago. We're seeing some nice uptick from that. The FIA, which I'm really excited about, that's not going to be an immediate thing. Over time, I really do think the market is ripe for an additional player there. I think the $3 billion-$5 billion is quite reasonable.
Thank you.
Mm-hmm. Tom?
Thomas Gallagher, Credit Suisse. Liam, just a question on the strategy in terms of what was decided to be put in runoff versus what you want to maintain. My biggest question is why didn't you put the U.S. VA business into runoff? When I think about even in a 2012 timeframe, you have about $4 billion of capital that's earning a 0 ROE when I factor in the cost of hedging. Granted, the cost of hedging may change, but it may not change. It may actually grow. I just think that's kind of inappropriately sized relative to the size of your capital and the returns. Just curious what you think of that.
That's a very fair question, Tom, and one we've talked quite a bit about. Let's go back and look at what the runoff business is. Basically, we're splitting off the P&L, if you will, of the institutional businesses in the largely Japan book for transparency for you, so that you can, as I said a couple of times, you can compare those businesses to the "ongoing business," which do include the P&L for the in-force U.S. book. We thought, and we may get there, to what you described. Let's be really clear. It is just a laser-like focus on doing the things we've described on those two books, particularly the Japanese book, which is very capital consumptive, as you know better than anyone. That does not preclude, Tom, the things that we do and learn in that "runoff business" will be immediately applied to the U.S. book.
I wouldn't get too hung up on whether it is or it isn't in there. I think the point is that we're starting with, I think, an appropriately sized business, putting some of our very best people, and I can assure you the talent we're talking about is among the best of The Hartford, and we're going to have just a maniacal focus on the levers that we described. Anything that we learn that applies to the U.S. book will be immediately applied there. Don't get too hung up on the organizational construct. I think it's just laser focus immediately. We may choose to do that subsequently as we learn. Anything that's going to move the dial is going to be done in that U.S. in-force immediately. Hope that helps.
Okay. We're coming up on 12:25 P.M., I'll have the last question from Josh.
Josh Smith, TIAA-CREF. I just wanted to put a finer point on Mark's earlier question on the ROAs and retirement. Principal came out and said their range is 24 to 26 basis points. They put about two basis points from the accounting change and probably three to four from competition. Where do you think, you're at three to six, where has that been historically? Where can it get to at a steady state once you're past the growth? I think that would be helpful.
Look, I can't comment on any other competitors and what their ROAs look like. I can just tell you where we are. Given some of the challenges we have, for example, on things like the retention of the book. When you look at that chart that I showed, you saw the gross deposits and sales, and then you see the net. There's a pretty big delta between those two things. We've got to do a much better job. Short term, there's a lot of things that we are doing.
This is really just guidance for 2012. We still believe that there's a lot of room for this business to grow, and as you all know, this is a scale business.
Can you remind me how high you've gotten ROE in the past?
Well, in a much higher interest rate environment where we were getting more than what we priced for in terms of spread, we were doing much better. Let's just say that our targeted spread is what we're seeing is below what we've targeted right now. Interest rates come up, we'll be doing a lot better.
Thank you. This concludes our Q&A portion of the presentation, and I'll now turn the mic back over to Liam for some closing comments.
Thanks a lot for coming, and I appreciate the directness of the Q&A as well. I just want to reiterate what I said earlier and our expectations as a leadership team for what we hope you walk away with. First, that The Hartford has a solid foundation and strong ongoing businesses. I hope we demonstrated that we're operating these businesses with the appropriate discipline and a strategy to increase value. With the Japan hedging program in place, the investment portfolio, as we said in a number of different ways, dramatically improved, and the enhancements we've made to enterprise risk management, including our addition of Robert Rupp, our risks are greatly reduced and much more tightly managed. Balance sheet strength and the diversity of our businesses give us the ability to withstand market and economic stress.
With our strategic and efficiency actions, we're positioning the company to accelerate superior performance as the macro environment improves. As we just chatted with Tom, we're dedicating some of our best resources to more effectively manage the runoff businesses and over time, release capital. Finally, this is a management team that's operating with a sense of urgency on The Hartford's transformation and focused on creating shareholder value by aggressively managing all the levers under our control. We're working to increase the value of each of our ongoing businesses that are in that business portfolio that we've described today. Management will continuously evaluate the business portfolio, our strategy, and the management team is pragmatic about how value will be realized. Thank you very much for coming. We greatly appreciate your interest in The Hartford, and in advance, happy holidays.