Hartford Financial Services Group Earnings Call Nuggets: Expense Saves and Capital Deployment

Hartford Financial Services Group Inc (NYSE:HIG) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Expense Saves

Tom Gallagher – Credit Suisse: My first question is just on the earnings guidance. I guess for Chris, can you just remind us how much of a backend-loading we should expect to get from the expense savings here? Maybe if you can frame it in the way of how we’re going to start out in 1Q, where we’re going to be by 4Q in terms of the bottom line benefit of cost saves?

Christopher J. Swift – EVP and CFO: Sure; happy to, Tom. I think just to remind everyone, we had $850 million total plan and we think about $500 million is already out with the transactions plus the cuts we made at the end of 2012. We have $285 million to take out this year. I would say that it is more back-ended because there is a little bit of an expense drag in the first couple quarters primarily. So, it’s hard to slope precisely, but I would (weight) more the expense saves; it will start to come out in the second half of the year.

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Tom Gallagher – Credit Suisse: So, Chris, the $285 million, is that from now to the end of year; that’s going to be the bottom line pre-tax benefit that we would expect to see by the end of 4Q?

Christopher J. Swift – EVP and CFO: Tom, those are the gross saves that we need to achieve that we set for ourselves in essence to make up for the lost revenues. So, I don’t think of it is all dropping to the bottom line, a very little dropping to the bottom line in fact, because those revenues and expenses have gone away and that is the corporate overhead we need to cut in essence to maintain our existing revenue streams. Now, there is an incremental goal. In there you have about (indiscernible) $80 million that will improve margins overall, but the vast majority was to cut our overhead expenses in relation to revenues that are going away.

Tom Gallagher – Credit Suisse: Understood Chris. I just wanted to make sure because I know you’re going to lose the associated revenues in 1Q, but that you would expect to essentially get that back by the end of 2013. Is that the way we should be thinking about it?

Christopher J. Swift – EVP and CFO: Liam addressed it…

Liam E. McGee – Chairman, President and CEO: Yeah, about 90% of the stranded costs, Tom that were not transferred to the buyers will be out by the end of this calendar year. The other 10% will come out early in the first quarter. And I want to be very clear on this. We have this down to the dollar, to the head. We know exactly where it’s coming from. We have a very disciplined (indiscernible) this will occur.

Tom Gallagher – Credit Suisse: So, just moving on to the net amount of risk improvement in Japan and I just want to understand from your standpoint what does this practically mean for you, because obviously when you a reduction in net amount of risk of that magnitude from 3Q to now, it’s been cut more than half? You would sort of assume that an associated liability would be going down pretty meaningfully and potential capital left or capital getting freed up but then you have the complexity of money being tied up in captives here. So, anyway, just I guess broad question, what does this mean for you in terms of the yen weakening and the reduction in net amount of risk in the liability from a practical standpoint?

Liam E. McGee – Chairman, President and CEO: Well, clearly at a high level, and I’m sure Chris and Beth may have some their own perspectives, Tom. At a high level, prima fascia, the economics of the book have improved very significantly, and as I commented, I think the general market consensus is that yen as it relates to dollar and euro is likely, worst case, to stay where it is and perhaps even weaken further, so the economics are better. You are well aware that our hedging program is very dynamic, and so as the yen weakens, it enables us to take more risk, if you will, which gives us a greater upside. Clearly, as I commented and Chris reiterated in his remarks, the improving economics should give us a greater ability to consider potential de-risking transactions either to reduce the risk or permanently move the risk. So, I think from all those perspectives and ultimately as these things annuitize and if they annuitize these kind of values over the next four years, that’s also attractive to us from an economic and cash flow perspective. So, I think we are quite encouraged by this. I think that the magnitude of the reduction in the net amount of risk, I think, does give shareholders a view of the – with more normal yen-dollar, yen-euro, the economics are much more manageable for us.

Christopher J. Swift – EVP and CFO: I think you’re right on, Liam, and I think, Tom, also, I think the April Investor Day, the real intent is to dive deeper with Beth and her team into exactly some of those questions how we see these blocks running off, policyholder behaviors, sensitivities, more economic value, so stay tuned. But we’ll try to be much more clear on why we think the net economics of these blocks are improving significantly, as Liam said.

Tom Gallagher – Credit Suisse: Then just my last follow-up on that is, Chris, you’d mentioned the annual cash spend on hedging has gone from $200 million to $250 million to $75 million to $100 million. Is that mainly the currency hedge getting being able to hedge less or it’s cheaper or is that not related to the currency?

Christopher J. Swift – EVP and CFO: Not related to the currency. That reference – I thought the words that I used were macro hedge; so, the macro equity protection with Bob Rupp and team we just made much more economic virtually for the same amount of coverage. So, we’ve cheapened up that program, and the risk management techniques of managing Japan is still our dynamic program where we manage interest rates, currency, and equity dynamically.

Tom Gallagher – Credit Suisse: And I believe you had said you were spending $200 million on a currency hedge or so annually. Is that still up the same?

Christopher J. Swift – EVP and CFO: No, never talked in those terms, Tom.

Tom Gallagher – Credit Suisse: And any guidance you can give us on what you’re spending on currency hedges for Japan?

Christopher J. Swift – EVP and CFO: Again, I think we could give you general views, but we’d like to spend a little bit more time with you in April. So, we save for that April and we could be more scenario-specific and then you could see the effects of the hedging programs and the economics that emerge.

Liam E. McGee – Chairman, President and CEO: Tom, this is Liam. Just one final comment I’d make. I think the ability to purchase effectively the same protection in our macro hedge at half or less of our historic cost, I hope it is an indication to investors of how far along our risk management has come in the last year.

Capital Deployment

Jay Gelb – Barclays Capital: Liam, I’m very glad to hear you’re feeling better as I’m sure everyone else is.

Liam E. McGee – Chairman, President and CEO: Thank you, Jay, very kind of you. I actually feel great and very blessed.

Jay Gelb – Barclays Capital: Glad to hear it. With regard to the capital deployment, the proceeds from the sale of the units was around $2.2 billion, and it appears currently around $1.5 billion of that is being deployed into debt repurchase and share buybacks. So, I think what a lot of people are wondering is why hold back the $700 million?

Liam E. McGee – Chairman, President and CEO: Well, you’re correct, Jay, that, first of all, we presented management and the Board’s capital management plan and worked collaboratively with our regulators and were gratified that they approved the plan that we presented to them. I’ll just go back to the concept which I think I’ve been very consistent about over the last three quarters; is, first of all, we are going to do share repurchases, $0.5 billion that we have outlined, which clearly will be accretive for shareholders. Second of all, we will reduce the holding company debt by $1 billion. A couple of additional perspectives I make on that; first of all, as you recall, The Hartford during the financial crisis significantly levered up; number one. Second of all, the foregone earnings from the sold businesses require us to delever a little bit. And third, we do want – we’ve said all along, that we want to be more of a P&C-centric, a leading P&C-oriented company, and we want to get our leverage down, as Chris and I both said, in the low (20s) and our debt service coverage up in that 5 to 6 range; also accretive for shareholders; $55 million reduction in our interest cost as well. I have always been clear that it was likely that we were going to preserve capital in our Life subsidiaries, which I think is even more important now with the improving markets that we just discussed with Tom when transactions, whether it be customer offers either in the U.S. or Japan, potential permanent transactions or other risk reduction transactions, maybe more available and we want to be ready to react as soon as those things present themselves. So, I think this is a very thoughtful balanced plan. It is very friendly to shareholders. And that third element of being able to either reduce or permanently eliminate VA liabilities is also very good for shareholders. I think you would agree. So, I think it’s thoughtful, it’s balanced. We feel very good about it. I’ll remind you, as I’ve said and I think Chris alluded to it, our attention, particularly with the historic capital generating ability of our go-forward businesses as well as what we expect will be some success reducing or permanently eliminating VA liabilities of these market values, our intention is to continue to have a consistent capital management approach, returning excess capital as appropriate to our shareholders. But this is our plan now for ’13 and ’14 and we feel good about it.

Jay Gelb – Barclays Capital: On the variable annuity guarantee exposure, last night, as I’m sure you saw, Berkshire Hathaway announced a deal with Cigna to reinsure the remainder of those guaranteed minimum benefits. Would something like that have an attraction to Hartford as well knowing that already a good portion of it is – of that exposure is reinsured?

Liam E. McGee – Chairman, President and CEO: Well, at a high level, Beth may have some comments. I would say, first of all, obviously, I can’t comment on conversations we may or may not be having for obvious reasons. What I can assure you of, particularly with the capital flexibility, and I think more normal market scenario we have today. Beth and her team are leaving no stone unturned in terms of ways to move the risk off or reduce the risk, which very well could include transactions. Beth, anything you’d like to add?

Beth Bombara – President, Life Runoff: Yeah, I think Liam has said it very well. He said from the beginning that we are open to looking at transactions where they make sense, so our view of the underlying economics are there and we can maximize the use of our resources and our capital to reduce our risk. So, we continue to work with our advisors and we’ll continue to evaluate opportunities in that space. I think seeing transactions getting done, seeing different players that are interested in these exposures, I think, is all positive for us.

Jay Gelb – Barclays Capital: Then, just a quick one for Chris or Sabra. The corporate expense in 2013, that’s going to – I believe you said $40 million less, is that $40 million less than the $315 million that was the full year 2012 core corporate impact?

Christopher J. Swift – EVP and CFO: Yes.