Good morning, everyone. Thanks for joining us. For those of you listening on the webcast, I'm Liam McGee from The Hartford, and I'm with Christopher Swift, the Chief Financial Officer of The Hartford. With that, I'll just open it up to questions. Are we taking questions also through the web?
Yes.
Okay. Thank you.
Can you just talk a little more about, in the presentation, you spoke on the expense targets.
Yes.
I was confused about what your actual target was for 2012 and then 2013, and then what
Yeah. What we've said pretty consistently is that we would reduce the run rate of expenses, ex DAC, of course. By the end of 2012, the run rate will be reduced by $200 million in the company. What I attempted to demonstrate beyond that statement, and I believe the slide showed you the categories that we're looking at, I said there were three areas that are the highest potential for us, which is finance, IT, and customer service operations. If you recall, I broke down Chris's area, the finance area, which is going through a fundamental process redesign. That will get $30 million run rate reduction by 2013 and ultimately $50 million. Chris can give you more flavor on that if you like. Then in our operations area, we'll get $50 million in 2012 and ultimately $100 million from that alone.
What we're defining right now is we'll get at least $200 million reduction in run rate by the fourth quarter of 2012. We'll be running the company at $200 million less. I would tell you, and I won't get any more detail here, that is not the end of our efforts around efficiency and process optimization. It's all I'm willing to define at this moment or quantify at this moment beyond that. Chris, anything you'd add?
No, there is more to come beyond 2012.
Yes. Yeah, hi.
Hi. Just a question on the exposure growth in the business.
Yes.
Given what we're seeing with the economy slowing down, has that been pretty historic for the P&C company? How big an impact do you think current economics will have on the continuing progress of that exposure?
Well, in the commercial property and casualty business, we have had probably among the highest top-line growth at 8% or 9% in the last two quarters. As I mentioned in the Q&A in the general session, if you look at that business, there's really three primary drivers, but the first two are the most important, which is really retention rates and then pricing. Renewal pricing in particular. The third lever would be exposure growth, to your question. We have seen, we've been, I think, quite disciplined in pricing. As I mentioned earlier, one of the great things that Douglas Elliot has brought to us is enhanced discipline around pricing, very granular. We look at each business, each customer segment, weekly and monthly in terms of how we're doing in pricing relative to our targets.
Retention rates are steady and slightly improving, and those are really the big two levers. We will see on exposure. I think what remember about us is we're not really dependent on a few. We're not a big national player. There actually has been probably a little more growth, exposure growth in Small Commercial and the low end of Middle Market than you've seen in insured in general in commercial space. Now, we're just as anxious as everybody else to see what happens to the economy. I think the granular nature of our portfolio insulates us a little bit more from those that are more focused on the national accounts. Chris, anything you'd add?
No, I think you summarized it well. If you think of the commercial side, the consumer side, they all have different dynamics. The small to middle market is operating fundamentally different than lines or construction lines and things along those areas. Really, you got to look at the segmented activities pretty closely to get an overall feel.
I guess we just hear that the smaller size companies are the ones with the most pressure versus larger companies that have a lot of international operations or large expense items. The ability to put price on those, how much are we going to be able to put price on those companies in a sort of tough environment where you say, "I just want business?
Well, I think it's important to note about The Hartford that particularly in this environment, certainly under Chris' and my leadership and now with Douglas Elliot and Andy Napoli, who runs our Consumer Markets business, we're laser-focused on profitability. You're not going to find us as sensitive to the retention issue that you described. We're in this for profitability. In the Commercial Markets space, we think that's just fine because we have really market-leading capabilities in the Small Commercial space, and our strength is Middle Market. I would say the same thing very clearly about the Group Benefits business. There are some competitors who are continuing to use price as a lever. In our views, some of that may be under hurdle rate. We're not going to do that. This is the time to focus on profitability.
We have a lot of discipline under Doug's leadership in particular and Andy's leadership in our Commercial Markets and Consumer Markets businesses around that. Hi.
Hi. Can you talk about asbestos had a charge in the current quarter. Is this an annual review?
Expect more of those? Just some comments on that'd be helpful.
Chris, why don't you take that one?
Sure. The question was on asbestos in the second quarter charge. That is our annual review process. Again, our ground-up study that we do annually and refresh it. Obviously, the numbers speak for themselves as far as the charge that we took. Again, primarily coming out of severity and the severity of increased mesothelioma claims in certain states across the country. Primarily Maryland, New York, Chicago, a little bit in California. It's hard to predict exactly where it's going. We make our best estimates every quarter, but annually we refresh them. We think we've baked in the appropriate, I'll call it loss cost trends for the future. This is a long tail line of business, as you know, and sometimes different sensitivities and different tweaks of assumption can have a change on an overall reserve level.
As we sit here today, we think we've encompassed our best estimate of future losses. It is highly unpredictable on what's going to happen with court actions and settlements and overall numbers.
If you recall from our second quarter, if you looked at the traditional sources of asbestos claim, they were actually performing kind of as we modeled. It was really more of this peripheral pipe companies, et cetera. There's just a new way for plaintiffs' attorneys to go after this particular claim. To Chris's point, we think we took more than adequate reserves for those few cases that actually either had settlements that kind of changed our model going forward. You don't know if that line of legal attack expands or if maybe that was just a one or two year phenomena. We'll see. It's not unique to The Hartford. I think plaintiffs' lawyers are using this more broadly now. Go ahead, yeah.
You said you got P&C that longer tail that sort of we have a lower rate environment here, which means they could pass it at some point. Casualty pricing, particularly for some lines .
Sure.
A lot of it being pretty long tail casualty here for The Hartford. Keep your eye on that.
Yeah. Doug and Chris are pretty focused on that right now, whether that be workers' compensation and other businesses. I think one of the changes that Doug and Chris and I have brought is really looking at the Commercial P&C business in particular, on looking at the components in the portfolio with an eye towards concentrations as well as you put it, longer tail of business in this environment. No, we're very attuned to that. I think you'll see more from Doug in the quarters ahead about how he will consciously try to incorporate that and other variables into what the pie chart looks for Commercial P&C in the next couple of years. I think you're going to find us more diversified than we are today. One of the reasons for that diversification will be what you described.
I'm sorry, I keep forgetting to repeat the question.
Yeah, no. The low rate environment too, has always been part of our thinking over the last 12 months. Doug and the pricing actuaries, and even in some of the auto liability lines, we're proactive with updating our rate views and taking the necessary rate actions.
Did you have another question, sir? Yeah.
Just in the DB, in the variable annuity business, you got two guarantees, withdrawal benefits and death benefit. Can you just talk about which one is more riskier than the other? Which is easier to hedge, and whatever context you like on the guarantees.
Go ahead.
Yeah.
Just high level on that.
Yeah.
Which is the bigger risk?
Question on DBs versus WBs and which is the bigger risk and how you manage it. I would personally say my view that the WB is the larger risk type of category. It's a little bit more difficult, more policyholder optionality. The guarantee structures are a little different. DBs are relatively easy. The only option you have is upon death. I think how we've managed those historically has actually performed fairly well. If you look at the WB program, it's been managed as designed with hedging, and you had fair values of assets, fair values of liabilities, and you knew the daily positions. We're adapting the same methodology to the Japan VA block. On the DBs, if you look at the history, it started through a series of reinsurance, co-insurance events.
When that stopped, we retained some of the risk, since 2008, part of the macro program in the U.S. has been designed to cover the remaining residual, I'll call it death benefit risk in the U.S. that has been unhedged or unmanaged with other hedging instruments.
Can you, if you had to go back, how you're hedged today on death benefit compared to 2008? Can you just give us a brief word?
I can't from a precise side. We'll update sort of overall stress so that you could see our stress scenarios in October 6th, which I think will really give you a more integrated time period. I would say really with the macro program, that's where we get a lot of coverage on I'll call it the unhedged or the un-reinsured death benefit risk that we continue to maintain. We've extended portions of that program through 2013 already.
It'd be fair to say, Chris, that we're more hedged today on DB than, to his question, certainly than the company was pre-2008.
With the macro program, for sure.
Yes. For sure, that was one of the, in our view, weaknesses pre-2008, and the macro program has taken some, not all, but a big chunk of that risk off. Certainly one of the learnings of that timeframe. Anything else? Yeah, go ahead.
Just an update on what your excess capital in the P&C business, and how much of it you can access, I guess?
Go ahead, Chris.
I think that the question was excess capital in the P&C business and how much can you access at the holding company. That changes every day, obviously, by their patterns and wins and activities. I think first in context, the $500 million share repurchase program was really designed with holding company resources only in mind. As Liam said in his prepared remarks, we're still committed to executing that over the next six months here. We want to be prudent. This isn't an all-in strategy. Obviously, you have stock price volatility, market volatility, hurricane season. We want to be prudent and timely in when we buy, I'll call it, equity-like instruments back. As far as what is deployable on the P&C side, we still tend to think that we're capitalized to a double A level, and we have excess capital compared to the double A level.
That changes from time to time, but we still think we're well capitalized above double A levels. That really is our source of dividend activity and potential future cash flows coming out of there.
The ongoing generation of capital then.
Yeah, correct. Our ongoing plans for 2012, we'll outline more particularly when we do Investor Day. We will plan to take out roughly $800 million of dividends in 2012. If there's opportunities to take any above that, we'll always consider it. Remember, there are statutory limits. In fact, the limit for 2011 of the maximum we could take out on an ordinary dividend basis is about $1.1 billion.
On the P&C book, on investment portfolios, are you doing more equity securities, something else companies, is it hard with the lack of yields, looking at dividend strategies, increasing equity holdings, maybe lower credit quality? Where are you trying to position the portfolio if return profiles today, if you have to do this, you might not have to do it six months ago?
That is one of the challenges.
Just repeat the question.
The question was, for those of you on the line, I haven't been very good at doing that, I was just reminded. I guess not so much P&C, but the general account portfolio overall with low interest rates, there's a sense that some companies are becoming more aggressive in playing equities or dividend strategies, and with the likely protracted low interest rate environment, what alternatives are we looking at? Is that a correct interpretation of the question? First of all, we're not going to ever again repeat the sins of the past. I think there will be some tempted in this low rate environment to go into asset classes that maybe they will regret. We won't be among those companies. Having said that, the challenge remains. I think Greg and his team have a target model portfolio that they're very disciplined in terms of their asset allocation.
One of the elements that we are beginning to build out capabilities and we'll explore around this notion of getting higher returns is more of an alpha strategy, where it will be small at the beginning because we want to learn, we want to see if we build internally, do we do it with a third party, et cetera. We found that the correlations, particularly in a stressed market environment, are quite favorable in some of those hedge fund assets. I think rather than equities and some of the things you described, I would think if we're going to deviate from our kind of normal type of assets, it would be more of an alpha strategy.
I want to also emphasize we'll do it slowly and with the same kind of discipline that Greg has brought, as you've seen in the improvement in our investment portfolio that hopefully I outlined in my formal remarks.
There certainly seems to be that sum of the parts of The Hartford is worth more than stock price indicates today. The outlook for life businesses is perceived by market as not being very good. I'm just going to ask you, are there structural constraints that prevent you from splitting the businesses up into separate?
Well, first of all, we think that today the way we're running the company is really our best strategy to maximize shareholder value. We are frustrated, to your point, about where the stock is trading. I'm sure I'm not the only financial services company CEO that feels that way. In particular us, I think we are trading at a bit more of a discount than others. I think that is really, in some sense, is what we'll attack, and we hopefully have been doing consistently over the last quarters, is giving greater transparency to what we think is a dramatically improved risk profile of this company. If another double dip, or whatever you want to call it, occurs, we can manage through it very constructively. I think some of the discount is just scars from the past that haven't healed.
I would also say this management team, as I said in my formal remarks today, we are laser focused on improving the ROE and improving shareholder returns. We're managing our businesses as a portfolio of businesses. I'm not sure I think the Life P&C construct is necessarily the right construct. We're managing our businesses as a portfolio of businesses. As I said, over time, if some of those businesses don't perform at the level that we are targeting, we'll consider options, which is to add product enhancements or capabilities, potential divestitures, and also potential bulking up in places that we think will give us better ROEs over time. I've said that from day one. We have divested some businesses already since I've been here, four or five of them. We'll continue to do that. I don't see it as necessarily a Life P&C construct.
I see it as a portfolio of business construct. I want to be clear that Chris and I, and the rest of the leadership team, with our board, have evaluated our portfolio with great candor, particularly around ROE, and where it is, where we want it to be, and what the plan to get it there is.
Just to follow up on that, sorry. I was on that presentation page there.
Is there any update on the mutual fund sale, or is there any potential?
Yeah. The question is there an update on the mutual fund sale? What I said in my remarks, and it was a follow-up question to that. In my remarks, I indicated that we just rolled out three new fixed income funds, number one. Number two, we like the business. Number three, we'll continue to invest in growing the business. Number four, obviously, I don't comment on market rumors.
When you think about your ROE targets, the denominator of the equity, do you think of statutory capital or GAAP equity?
I'll let the CFO take that.
From a measurement side, our current targets have been based on GAAP, obviously, cash capital at the operating companies is a primary constraint and driver. They go hand in hand. From a measurement side, it's GAAP capital.
The question, by the way, was in terms of our ROE calculation, do we use statutory or GAAP capital calculation?
I just want to go back to the structural comment. Again, there are no structural limitations, at least from my perspective in reviewing all the companies. There are a number of agreements intra-company-wise, whether it be claim guarantees, claim payment obligations from P&C back to Life that are just out there that are intercompany guarantees that we'd have to manage and consider appropriately.
Any other question? Any questions on the phone/webcast? Anybody else?
Give us a timeframe on your 11% ROE goal, how you guys plan on achieving that given the current environment.
Well, as you know, our original goal, which we had great conviction about, we understood that there was some skepticism about that, in April of 2010, we said that we expected to be at, by the year-end 2012, an 11% ROE. That was based on a number of assumptions, a couple of things changed. Interest rates fundamentally changed to the earlier conversations. Second of all, the economy just did not recover at the pace that we had expected. Third, quite candidly, we did not consume anywhere close to the amount of capital that we expect in our investment portfolio. That's a good news thing, we didn't. What we said last quarter, as you know, is that 11% is still our first preliminary target, I want to be clear about that.
I think some have interpreted that as that is our terminal target. That's our first preliminary target to kind of take the company to the next level. We'll define the timeline for that in our Investor Day, we understand that's a question out there. I think with this volatility and the uncertainty of where the economy is, we want to give you a couple of scenarios around that so that we can be quite granular. I want to reiterate, 11% is not where we intend to end up. It's really kind of our first proof point.
I think also, too, on December, why Liam, we're waiting to that point in time. There's a number of things that'll affect our GAAP equity base. Some new accounting pronouncements, new impacts of third and fourth quarter activity on normal hedging, on normal DAC unlocks. We wanted to be more complete and understand all the impacts on the balance sheet, set the appropriate path towards our ROE improvement over the foreseeable future.
Yeah. Good add. Thank you very much.
Thanks.
It's unusual for the IR person to ask the question, but given the activity in Europe today, would you like to comment on our exposure to Italy and Spain ?
Well, as I said, a couple of things in Europe. We think in aggregate, our European exposure is an appropriate percentage of our total general account. We have no sovereign debt exposure in the PIIGS countries. We only have a $20 million Spanish bank exposure. That's the only bank we have in the PIIGS countries. I think our overall non-PIIGS bank exposure is $200 million primarily in France and Germany, and I think some of that is hedged already. We have a very manageable piece of remaining German and French bank exposure. Virtually all of our investments in Europe are highly rated commercial, industrial, multinational type debt. Thank you very much.
Thank you again for joining us. I'm Jay Gelb from Barclays Capital. Very pleased to have with us The Hartford Financial Services Group today. The Hartford is a leading provider of property casualty insurance, life insurance, and retirement products in the U.S. Here to tell us about The Hartford's prospects is Liam McGee, who's the Chairman and Chief Executive Officer. Liam joined The Hartford two years ago and has led a turnaround in The Hartford's financial strength and operational performance. With that, it's my pleasure to turn it over to Liam.
Thank you, Jay, for the introduction. Good morning, everyone. It is great to be with all of you on this Monday morning. First, I'd like to introduce our chief financial officer, Chris Swift, and Sabra Purtill, who's head of investor relations at The Hartford, who are both here with us today. Of course, I may make some forward-looking statements during my remarks. You can go to thehartford.com for additional information. Before I get started today, I want to comment briefly on the economy and how we think about the macro environment in the context of The Hartford. The U.S. economy is growing very slowly and any recovery is fragile. I don't see a repeat of the 2008 financial crisis. We do have real challenges and are expecting slow economic growth for the balance of 2011, at least through the first half of 2012.
As you know, consumer confidence is at an all-time low. The European economic situation is having an effect here in the United States. The Fed has fewer options available to stimulate short-term economic improvement. In Washington, especially in the legislature, there remains much to be done. In our view, to get the economy back on track, we need three basic things. First, a more positive tone about business from government officials so companies can invest with confidence in the future. Second, incentives for small businesses to add jobs and invest in property, plant, and equipment. Third, a thoughtful long-term deficit reduction plan that will bring spending ultimately as a percentage of GDP to more normal historic levels.
In light of the uncertain economy and the volatile markets, I'll spend my time today talking about the aggressive steps we've taken to strengthen The Hartford, why you should share my confidence in our company. I am confident in The Hartford's ability to effectively manage through this challenging environment. Over the last two years, we have significantly improved The Hartford's financial position, including balance sheet, capital strength, investment portfolio, and risk management capabilities, as well as the company's fundamental business operations. I will also provide updated capital and earnings sensitivities today, which I hope you find helpful. Let's start first with a conversation about capital. The Hartford's capital position is strong and improving. On slide five, you can see a 6% growth in U.S. Life and P&C statutory surplus over year-end 2009.
At the end of June 2011, U.S. statutory surplus was $15.6 billion, up almost $900 million from year-end 2009. At the holding company, we had $2.3 billion of cash and short-term investments at the end of the second quarter, providing ample flexibility to cover future interest and dividend payments and near-term commitments. Book value per share is up 20% over the same period as the investment portfolio has rebounded and earnings have improved. With confidence in the business moving forward, we have taken two significant capital management steps this year. In February, we doubled the dividend. In early August, we announced a $500 million equity repurchase program that we expect to complete by early 2012. This is an important action toward increasing return on equity and generating earnings per share growth.
Of course, we will be prudent in executing the program, taking into account such factors as market volatility, storm activity, stock price, and other matters. We do expect to complete the repurchase by early 2012. Turning to investments, I am confident that the portfolio is in good shape. Since the end of 2008, we have reduced our exposure to higher-risk investments, namely CMBS, as well as subordinated financials and real estate by $13.6 billion. On October 6th, we will provide a review by asset class of the remaining holdings. We've said that we expected credit impairments to decline to $50 million-$100 million each quarter. Actual losses for the first half of 2011 have been falling on the low side or below that range, a significant improvement from 2009 and 2010. Especially this morning, in particular, European sovereign debt issues are weighing on capital markets.
The Hartford does not have a material allocation to higher-risk European assets in the general account. We are largely invested in high-quality corporate bonds, mostly in the utility and industrial sectors, which make up more than two-thirds of the European investments. We have no exposures to the government of Greece, Portugal, Spain, Italy, or Ireland in the general account, and less than $20 million of exposure to a large financial institution in Spain. Overall, we feel very good about The Hartford's European holdings and the actions we've taken over the past year. The Hartford's overall approach to managing its portfolio is much more sophisticated and disciplined than it was two years ago.
We have an ongoing ability to review the portfolio under various stress scenarios, a rigorous re-underwriting process to examine all of our securities, and the capability to understand trends in the global economy that we use to take targeted actions as necessary. We believe investment losses, even under any future market turmoil or severe stress, will be well within our capital resources, given the work we have done. We are in a fundamentally stronger credit position compared to 2008. The Hartford has made significant progress in creating a stronger enterprise risk management function, which ultimately, we believe, will help us maximize long-term shareholder value. Risk management has been a critical priority for this organization in the two years that I have been with it. When I first joined the company, it was my assessment that we had reasonable risk management processes within each of the business units.
What we were lacking, however, was a good understanding of the correlations and aggregations of risk across the enterprise. The Hartford's variable annuity or investment portfolio exposures independently would likely have been manageable. It was the aggregate effect of both events happening at the same time that caused the capital stress. That's why an enterprise-wide risk approach is so important. A good example of how we are managing risk differently today is Japan. The team has completed the build-out of the processes and tools to dynamically manage market risk exposures from the Japan VA business. Our objective is to preserve some upside from potential future market improvement while mitigating the downside risk. We have 90% of the required hedges in place for the program today, and the program will be completed by year-end. The hedges, as you know, cover foreign exchange, equity markets, and interest rates.
As a reminder, the Japan hedging program will be managed dynamically, similar to the U.S. GMWB program, which worked as designed over the past several years. We subject the program to a broad range of stress tests. The hedge program and its risk tolerance limits are evaluated daily to ensure that even the most remote of these scenarios can be managed. For example, at current equity levels, a further 20% strengthening in the value of the yen would have a minimal effect on the overall level of U.S. statutory surplus. We will provide much more detail on our tolerance levels and the overall hedging program on October 6th. This is good progress by the risk management team and their business partners. We have significantly reduced the negative impact of severe stress scenarios on The Hartford and on its balance sheet.
Moving to a discussion of the businesses, I'll start with the company's efficiency efforts. We will reduce The Hartford's operating expense run rate pre-tax, pre-DAC by at least $200 million by year-end 2012. To help achieve this target, we are transforming finance, IT, and enterprise service operations as examples. We are reexamining processes and systems from the bottom up in order to first streamline operations, improve the quality and speed of decision-making, and create a more flexible operating model. For example, under Chris's leadership in finance, we are building a leaner, stronger organization. We are consolidating similar functions, investing in technology to improve speed and efficiency, and leveraging an appropriate labor model that reduces cost and improves effectiveness. This is a multi-year project that will achieve run rate annualized savings in excess of $30 million pre-tax by 2013, and ultimately $50 million.
With The Hartford's enterprise customer service operations now consolidated, we are capturing savings from optimizing processes, deploying self-service and electronic document management, and applying Six Sigma methodologies. We'll capture more than $50 million of cost reductions by year-end 2012 on a run-rate basis, and ultimately about $100 million from this function alone. We are determined to fundamentally transform the way The Hartford operates, making this company a more efficient, contemporary, and process-driven organization. The Hartford operates with three customer-centered businesses: Commercial Markets, Consumer Markets, and Wealth Management. In Commercial Markets, P&C Commercial's second quarter written premiums were up 8% over the prior year, continuing the strong growth trend from the first quarter. Small Commercial and Middle Market written premiums were both up more than 9% over the prior year, reflecting disciplined rate action, exposure growth, and strong retention levels, which I think is noteworthy in this challenging environment.
We're also seeing good early success selling other Hartford products through our P&C agent channel, an important initiative for us. In this economy, agents are looking for ways to increase revenues, and selling more product lines to existing customers is a highly effective way for agents to grow their business. As examples, The Hartford's retirement plans and life insurance sales through P&C agents were both up more than 30% in the second quarter of 2011 over the prior year. We're seeing promising results from the integration of Group Benefits and the P&C Commercial sales teams. Through June, their joint sales efforts have generated more than $70 million in incremental premium. In the second quarter, we saw some signs of progress in the Group Benefits business because it remains competitive, and we are focused in that business on profitability.
We're achieving rate increases where appropriate and are optimistic on national account renewals for January 2012. Group Benefits loss ratio improved slightly to 78%, largely due to better disability incidents and termination rates. While still above historic norms, this is a 30-basis point improvement in the loss ratio from second quarter 2010. Before moving to Consumer Markets, I'd like to provide you an update on catastrophes. As you know, the industry has seen significant weather-related losses this year. 2011 started with severe winter storms, which were followed by record tornado and hailstorm losses in the second quarter. A few weeks ago, Irene proved to be a powerful reminder of the potential destructive impact of a Northeast hurricane. The Hartford is well-positioned to manage these catastrophe losses, and the exposure to Northeast hurricanes is well within the scenarios we use to manage cat risk at The Hartford.
I must stress, while it is early, preliminary indications for The Hartford's cat losses from Irene are in the range of $75 million-$175 million pre-tax. These are very early indications based on the view of claims activity over the past few weeks, and the range appears consistent with an industry insured loss range of $2 billion-$6 billion. Including Irene, estimates for July and August catastrophe losses are in the range of $150 million-$250 million pre-tax. Of course, our thoughts go out to all those who were in Irene's path, and I want to thank The Hartford claims teams for their efforts in this challenging period.
In Consumer Markets, we continue to make progress on repositioning our agency book of business to a more profitable customer segment. We're gaining momentum in executing our strategy to position The Hartford as a leading carrier for affinity relationships. This includes the longstanding AARP partnership and others more recently announced, such as the Sierra Club, the American Kennel Club, and the National Wildlife Federation, which we will announce formally this morning. Over the last nine months, we have generated a marketing base that now exceeds 10 million new affinity households, which is added, of course, to our large AARP base. Consumer Markets is also delivering improved profitability. The combined ratio for the first half of 2011, excluding catastrophes and prior year development, was 90.1%, a 2.1 point improvement over the first half of 2010. Consumers, of course, remain very price sensitive, and the industry is highly competitive.
In this environment, the rate actions we're taking affected both retention and new business, driving written premiums down 6% compared with the prior year or about what we anticipated. In Wealth Management, we're focused on developing additional distribution channels as well as innovative products that meet the needs of the aging baby boomer generation. The Hartford is well positioned to capitalize on this trend. For The Hartford, innovation in this area is not only about developing new products, but also rethinking and redesigning products to provide customers with more choice and customization. Let's consider life insurance. Historically, financial advisors, insurance agents, and consumers have viewed life insurance purely as a product that pays a death benefit. In contrast and in addition, we also build life insurance for the living.
Life insurance can and should be used in most planning strategies to provide income for life's unpredictable outcomes and to work in conjunction with other components of a client's financial plan. That is why, for example, we added the industry's first longevity rider, which allows customers to begin receiving policy benefits at age 90. In combination with our LifeAccess Rider, we can give consumers now the choice to add protection against many important financial concerns, whether that be dying prematurely, becoming ill, or outliving their assets. This customer's choice strategy has momentum. In the second quarter, individual life insurance sales grew 14% over the prior year, with good success in distribution channels beyond our traditional wire house focus. Sales in The Hartford's Monarch program, which has signed up more than 700 of the top-performing independent life insurance agents, more than doubled in the second quarter.
As you know, in June, we launched an enhanced suite of variable annuity solutions and are excited about the new offerings. Sales are slowly gaining traction, and as we said before, fourth quarter results should be an indicator of future sales volume. Retirement plan deposits were up 5% in the second quarter of 2011 over the prior year, with record assets under management of $56 billion. We also continue to bring new products to market in mutual funds and introduced three funds last quarter, a Hartford World Bond Fund and two funds focused on emerging markets. We like this business and are making investments for future growth. Finally, in Wealth Management, The Hartford has very minimal interest rate sensitivities in its life products. The percentage of fixed life insurance sales, for example, is a small percentage of the overall business.
In summary, The Hartford's core businesses continue to build and strengthen their franchises, and I look forward to reporting to you on their future progress and success. Now, the recent market volatility has generated some questions about The Hartford's earnings and capital sensitivities. In general, the sensitivities have not changed materially, but we want to provide an update, particularly given the historically low level of interest rates. For every one percentage difference in actual S&P 500 performance against an annual return assumption of 7.2%, we estimate that core earnings, excluding a DAC unlock, will fluctuate by about $6 million after tax, which primarily reflects the impact of fee income generated on assets under management. If interest rates remain low through the end of 2012, we estimate the after-tax core earnings impact would be modest.
In addition, we don't expect any material impact on DAC and similar balance sheet items in the near term due to the low interest rate environment. Now, however, as many of you know, there are changes coming on the DAC accounting model, which will be implemented in the first quarter of 2012. We'll provide a more detailed update on October 6th, but as a reminder, the model change has no impact on statutory capital, since the costs are already expensed and not deferred. We also do an annual update in the third quarter of other assumptions, such as policyholder behavior, hedging impacts, and interest rates, which will affect the DAC unlock. The annual assumption update, excluding the effect of the Japan hedge, should not have a significant effect on earnings for the third quarter.
We'll provide more detail on the results of this study, including the impact of the Japan hedging and capital market sensitivities on statutory capital at the October 6th meeting. In summary, we feel good about our accomplishments over the past two years, especially in light of the turbulent market and economic environment. I have confidence in the future of this country. America has tremendous underlying strength and resilience, and there is no doubt in my mind that over time the economy will grow more robustly again. In the meantime, we are very focused on what is in The Hartford's control. The company's return on equity is not where we want it to be, and we are determined to take the steps necessary to improve ROE over time to the point where it eventually exceeds cost of capital.
We have taken a number of steps to achieve this goal, which we've discussed today, let me outline them again. First, doubling the dividend, the $500 million share repurchase, the de-risking of the investment portfolio, the Japan tail hedge program, a focus on operational efficiency, and improving the performance of the businesses. We are actively managing the business portfolio to achieve a mix that delivers more predictable earnings, and we are constantly evaluating ROE and new business profitability performance at the line of business and product levels, identifying sources of underperformance, and taking corrective action as necessary. I think two good examples of that are our consumer business and our group benefits business, where we're laser-focused on profitability and ROE. Such actions could range from product enhancements to divestiture of underperforming businesses and acquisition of better-aligned businesses. I want to reiterate management's focus on three items.
First, achieving high single-digit core earnings growth in the operating businesses. Second, driving The Hartford's ROE to exceed our cost of capital. Third, operating the company with both a focus on improved efficiency and strengthened risk management to ensure aggregate risks and exposures are understood and appropriately managed. We are unsatisfied with The Hartford stock price and volatility, given the financial strength of the company. We are trading at 40% of book value, which does not, in our view, properly reflect the strong foundation or fundamental value of the organization. The Hartford's management team is extremely focused on improving all of the business fundamentals. We are committed to investor transparency and providing you with a much deeper understanding of The Hartford, how we run the businesses, manage our risks, and work to improve earnings growth and ROE.
In addition to the balance sheet review in October, we will also hold our 2011 Investor Day in New York City on December 8th and hope to see you there. More details about both events will be forthcoming. Many thanks to Jay and Barclays for inviting us, now I'm happy to take your questions.
Thanks, Liam. Let's start opening up for questions while the microphones are getting passed around. Liam, given the weak macro environment and choppy equity markets in the third quarter, as well as low interest rates, can you give us your level of conviction about achieving the high single-digit core earnings growth? Is that something that still stands in place for this year in 2012? Is that more of a long-term focus?
Jay, our target was to, on a 2010 base, by 2012, to have a high single-digit earnings growth comparing '12 to '10. We have, as I noted in my formal remarks, a conviction and focus on that target.
Questions from the audience?
Can you just give a little more detail on the assumptions behind the low interest rate scenario that you laid out? Just how low and for how long was that, the numbers you put up good for?
Chris may want to give you more detail, but if you recall the slide, it said the range of impact of the lower earnings rate was for full year 2012, and I believe it's the forward curve going out over that period of time. Chris, anything else you'd like to add?
No, I would just say it's flat. The interest rates flatten at today's level through 2012.
While we're queuing up here for the next question, what's the potential impact on DAC in the third quarter as a result of lower equity markets?
Well, that's a work in progress, Jay, and so I think it's premature for us to comment on that, which is why we didn't here. Markets could go back up, and they could go down further. I think we'll wait till October 6th to give you a little bit more insight on that.
Could you give us an update on how you're thinking about your mutual fund division right now and the potential sale of it?
Well, we like the business very much. As I said in my formal remarks, we've rolled out three new primarily fixed income funds, where we've historically been strong in the equity classes. We like to be a little stronger in the fixed income, particularly in environments like this. We're making those kind of investments in others. Obviously, I don't comment on market rumors. Yeah, right back there.
You spoke a little bit about the sort of enterprise value, enterprise-wide de-risking in the portfolio. Can you talk about the cost of doing that on an annual basis in terms of what it costs you to hedge that and what the tenors are for?
Are you specifically referring to Japan?
Japan or the portfolio as a whole.
Yeah. What I specifically alluded to in my remarks was Japan, Chris may want to give you a more all-encompassing answer on hedging. In Japan, as I said, we built out the capabilities. It is a dynamic hedging program. We will give you sensitivities, including potential costs on that on October 6th. I want to get into great detail on that with you. Chris, anything you'd want to add to that question?
The only thing I would add is that, again, we do have macro equity protection in the U.S. to protect statutory surplus. I mean, if you look at the cost of all the activities, I think we describe in our 10-Q and 10-K the sensitivity and the related cost associated with those sensitivities. We think in terms of macro protection, the specific tail hedge protection we're putting in Japan, the WB protection that we balance in the U.S. program. From time to time, we will put on specific protection in our investment portfolio.
Those would be really the four categories where we use hedging. I think what Chris has done is made great progress in simplifying into those four buckets when we do use hedging instruments. We'll give you a tremendous amount of granularity on that on October 6th. Yes, go ahead, please. Hi.
What would the earnings impact be on 2013 and 2014 results if interest rates were to remain at today's levels?
We modeled that, Chris?
What we would say is that we would double 2012's $50 million-$75 million impact. It has a doubling effect on each year you would go out.
It would double in 2013 and then double again in 2014.
In 2014, we haven't completely modeled that, so give us a little bit of time and we'll cover it at the 6th date. 2013 would be a doubling.
Okay, thank you.
You spoke a little bit about the growth in the Commercial P&C business. I'm just wondering whether you can give us a little bit more of the backdrop as to how that growth has been achieved, while you've also been achieving rate improvements, as you say, whether that's market share growth, whether that's better market environment.
The biggest levers in that business really are price and retention and exposure growth. I think the thing that gives us comfort going forward with what we think are kind of market-leading growth rates is that it has not really been a function of new business. It's really been a function of higher and improving retention rates and much more price discipline. Douglas Elliot, who runs that business, really has incredible granularity down to business by business, week by week, month by month, in terms of how we're doing actually versus our targeted pricing performance. We're really bringing a lot more pricing discipline to that business. They've broken the portfolio down into really 10 buckets, if you will, from the most profitable to those that candidly have never been profitable. We're really running the business with a lot more discipline around pricing.
I think the thing that will be interesting, obviously, for us, we feel really good about the pricing efforts and the improved retention, will be what does the economy do to exposures. The first two are really what's driving a big chunk of the really good results you're seeing there. Hi.
Hi. You mentioned in your presentation the sensitivity from low rates and that it would not have an impact on DAC in the near term. When does it become an impact on DAC and reserve timeframe?
I'm going to ask the CFO to handle that one.
Not in the near term. We define the near term as the next 2-3 years. It would have to be a persistent low interest rate environment for us to have any impacts. I think we've talked about statutory capital impacts, too, that we are putting away additional capital for lower interest rates on a statutory basis, C3 Phase I. Our goodwill, if you look at our goodwill balances, relatively modest, of a little less than $1 billion. There's not a great deal of sensitivity to goodwill in the near term, also.
Anything else? Still have a few minutes left.
Can you talk about the level of success you're having with the new variable annuity product in the U.S. in terms of sales?
Yeah. Jay, first of all, we really like the product construct. What's interesting is that the customers and the partners are choosing the new products as opposed to the kind of the one of the three is more of a traditional. The customers are really choosing the two products that have more of an innovative approach, where the asset allocation is more flexible. I would say that subjectively, one of the questions I got asked when I first got here was, "Boy, you've kind of been out of the market for a while. Have the partners moved on? The broker-dealers, et cetera, moved on? It will be hard even with good products." We've been really well-received. I've called with David Levenson, who runs our Wealth Management business on the heads of the four or five largest broker-dealers.
They want The Hartford back in the business, quite frankly, for a variety of reasons. They've received us warmly. Dave would tell you that our presentations to financial advisors is really, really high and robust. Clearly, it's going to take some time. When you've been out for a while, these products are a little bit different than the two companies that are really leading that business have relatively similar products. Ours are a little different than that. We think better over time. The market turmoil hasn't helped, just in investor sentiment. I think as we said from the day that we introduced those three, that the fourth quarter will be really where we can talk about how well we're doing. I would also remind everyone that there's more product in the pipeline.
Our strategy is very different than the old Hartford where it really rode one or two products. We're going to have a more diversified, as Dave would call it, all-weather portfolio to give consumers choice. There's several more products in the pipeline. This is not just kind of put these three out and see how it goes. There's more coming. We're really determined to build this. We like the appetite we've defined for you of that about a third of what The Hartford hit at its peak. We think that's the right aspiration, and we're pretty confident we're going to hit it.
What does that translate into?
About $5 billion. The peak of The Hartford was about $15 billion in annuity generations. We use the $5 billion just illustratively to say we don't want to have that kind of concentration ever again in that business or any other business. Second of all, about a third with an all-weather portfolio, we think is the right risk-reward and the right use of capital for The Hartford on a go-forward basis.
While we're queuing up for any final questions, the Allianz investment remains quite at a high cost.
Yes.
The Hartford, any thoughts in terms of how to address that going forward?
Well, I'll say a couple things. Allianz still is a passive financial investor in The Hartford, number one. Second of all, we are very mindful and aware of both the cost elements and the potential dilution elements of the various aspects of that investment, and you can assume that Chris and I are exploring all possible alternatives over time around the nature and structure of that investment, as is Allianz, quite frankly. It's a very constructive relationship.
Great. Well, with that, please join me in thanking Liam McGee from The Hartford.
Thank you, Jay.