The Hartford Insurance Group, Inc. · NYSE:HIG
The Hartford Insurance — Hartford Financial Services Group — Investor Day (October 2011)
74 slides from The Hartford Insurance's investor day presentation, Oct 7, 2011
Slide 1: Investor Meeting Hartford, Connecticut October 6, 2011
Investor Meeting Hartford, Connecticut October 6, 2011
Slide 2: Safe Harbor Statement and note on scenarios
Safe Harbor Statement and note on scenarios Certain statements made in this presentation should be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These include statements about The Hartford's future results of operations. We caution investor
Slide 3: Welcome
Welcome Christopher Swift Chief Financial Officer October 6, 2011
Slide 4: Agenda
4 % Agenda 10:00am - 10:05am Chris Swift Welcome 10:05am - 10:15am Liam McGee Opening Comments 10:15am - 10:40am Greg McGreevey Investments 10:40am - 10:50am Liz Zlatkus Enterprise Risk Management 10:50am - 11:25am Graham Bird Variable Annuity Risk Management 11:25am - 11:40am Break 11:40am - 12:00p
Slide 5: Opening Comments
Opening Comments Liam E. McGee Chairman, President and Chief Executive Officer October 6, 2011
Slide 6: Overview
Overview The Hartford's balance sheet is strong While challenges exist, our risks are significantly reduced and manageableThe Hartford's risk management capabilities are meaningfully enhancedThe Hartford has the strength to maintain sufficient capital levels, consistent with current ratings, even un
Slide 7: Investments
Investments Greg McGreevey Chief Investment Officer October 6, 2011
Slide 8: Investment portfolio is well positioned for the future
8 Investment portfolio is well positioned for the future Strengthened our ability to manage the portfolio for strong shareholder returns over timeImproved the people, process and platformEstablished a long-term model portfolio (LTMP) Since 2008, we have substantially reduced the risk in the portfoli
Slide 9: Investments: Portfolio construction, Prepared for the future, Performance is strong
9 % Investments Portfolio construction Prepared for the future Performance is strong
Slide 10: Long-Term Model Portfolio provides investment portfolio guidelines and targets
10 Long-Term Model Portfolio provides investment portfolio guidelines and targets Repositioning actions were taken opportunistically and in consideration of our view of economic formation Portfolio repositioning focused on balancing income, returns and capital to maximize shareholder valueEnterprise
Slide 11: People, process, and platform significantly improved
Platform t People 11 People, process, and platform significantly improved New portfolio management teamDedicated higher-risk asset portfolio management teamExpanded Risk Management team Enhanced macro decision makingClarified roles and accountabilityIntegrated the Risk Management team into the inves
Slide 12: Since 2010, we projected economic growth below consensus
Since 2010, we projected economic growth below consensus Domestic and global growth will remain challengedGDP growth below consensus due to a slowdown in government spending and a challenged consumer Europe to have significant headwinds, resulting in volatility due to their debt problems August 2010
Slide 13: Reduced total real estate exposure by $10.4 billion
Reduced total real estate exposure by $10.4 billion1 Total Book Value of Real Estate Assets1($ in billions) 13 ($ in billions) Dec. 31,2008 Dec. 31,2009 Dec. 31,2010 Aug. 31,2011 GAAP Book Value2 $25.8 $21.2 $15.8 $15.4 Credit Quality3 AA- A A A- Market/BV 71% 81% 92% 93% $6.8 billion or about 50% r
Slide 14: Increased high quality corporates by $8.9 billion
14 Increased high quality corporates by $8.9 billion Corporate Holdings by SectorChange From Dec. 31, 2008 to Aug. 31, 2011 ($ in billions) Dec. 31,2008 Dec. 31,2009 Dec. 31,2010 Aug. 31,2011 GAAP BV $32.6 $36.7 $39.5 $41.5 Credit Quality A- A- A- A- Market/BV 88% 99% 103% 106% Repositioned higher b
Slide 15: Proactively repositioned municipals to improve quality
15 Proactively repositioned municipals to improve quality ($ in billions) Dec. 31,2008 Dec. 31,2009 Dec. 31,2010 Aug. 31,2011 GAAP BV $11.4 $12.1 $12.5 $12.6 Credit Quality AA- AA- AA AA Market/BV 93% 100% 97% 103% Began repositioning prior to market repricing in late 2010 Improved portfolio quality
Slide 16: Rebalanced European exposures in the general account
($ in millions) Utilities & Industrials Financials Sovereigns Total Europe excl. Higher Risk $4,517 $1,431 $862 $6,810 Higher Risk Countries 684 20 - 704 Total GAAP BV $5,201 $1,451 $862 $7,514 Market/BV 108% 96% 109% 106% ($ in millions) Utilities & Industrials Financials Sovereigns Total Italy $31
Slide 17: Actions taken strengthened the General Account portfolio
Actions taken strengthened the General Account portfolio for current economic environment Closer to LTMPWill continue to balance income, total return and capital preservation influenced by market conditions and our economic viewSignificantly reduced correlated risksWell positioned for strong risk- a
Slide 18: Investments: Portfolio construction, Prepared for the future, Performance is strong
18 % Investments Portfolio construction Prepared for the future Performance is strong
Slide 19: Net investment income remains strong
2006 2007 2008 2009 2010 Annualized 2011 Total Net Investment Income 4691 5214 4335 4031 4392 3900 Annualized Yield Before Tax 0.057 0.059 0.046 0.041 0.045 0.045 10 Year Treasury Rate 0.0364 0.0324 0.032 0.0302 5 Year Treasury Rate 0.0279 0.0218 0.0192 0.017 Annualized Yield Before Tax Excluding Pa
Slide 20: Derisking has significantly lowered credit losses
1 20 Derisking has significantly lowered credit losses Credit Losses ($ in billions) YTD 20111 credit losses of $116 million are a fraction of 2009 losses of almost $2 billion Reflects derisking actions and movement towards the LTMP3Q11 credit loss estimated at $61 millionPrimarily on structured sec
Slide 21: Reduction in gross unrealized losses
$2.6 $14.6 ($12.0) $12.0 billion reduction in gross unrealized losses Gross unrealized losses improved as a result of lower interest rates, spread tightening, sales and impairments $900 million gross unrealized loss1 on non-structured securities Long dated variable rate corporates and financials $1.
Slide 22: Strong portfolio performance generates shareholder value
22 Strong portfolio performance generates shareholder value Total return outperformance reflects:Investment process enhancements Improved relative value process and decision makingFocused derisking effortsLonger duration driven by liability targets Achieved top decile General Account performance sin
Slide 23: Investments: Portfolio construction, Prepared for the future, Performance is strong
23 % Investments Portfolio construction Prepared for the future Performance is strong
Slide 24: Portfolio is well positioned today to handle economic downturns
24 Portfolio is well positioned today to handle economic downturns General Account portfolio has a net unrealized gain of $2.1 billion pre-tax as of August 31, 2011 Portfolio is well diversified, with strong liquidity, and of high quality 8% in Treasuries and cash as of August 31, 2011 High risk pos
Slide 25: Portfolio tested against economic scenarios
Portfolio tested against economic scenarios Residential Home Prices Flat 5% decline 20% decline Commercial Property Values Stabilize at current levels and then improve Flat 10% decline GDP 2011: >1.5%2012-2013: Increasing 2011: 1.0% to 1.5%2012-2013: ~1% 2011: Slightly negative2012-2013: Negative Un
Slide 26: Even in our modeled stress scenario, potential investment losses expected to be modest
26 Even in our modeled stress scenario, potential investment losses expected to be modest (Pre-tax and pre-DAC1, $ in millions) Bull Scenario (S&P 1500) Base Scenario (S&P 1200) Stress Scenario (S&P 800) 2011 $75 $100 $300 2012 100 150 550 2013 125 200 400 Total Expected Credit Losses in Selected Sc
Slide 27: Impact of lower interest rates on net investment income
27 Impact of lower interest rates on net investment income Portfolio is largely duration matched to liabilities, reducing the impact of lower reinvestment rates Reinvesting about $7.5 billion annually at current new money yield would reduce after-tax core earnings by:$50 to $75 million in 20122Up to
Slide 28: Active management and ALM positioning
28 t Alpha/Beta Active Management ALM Selectively adjust portfolio positioning to take advantage of strong relative value opportunities in areas of expertisePrevious derisking efforts have provided the opportunity to prudently add exposure to high yield / bank loan and emerging market sectors Increa
Slide 29: Investment portfolio is well positioned for the future
29 Investment portfolio is well positioned for the future Strengthened our ability to manage the portfolio for strong shareholder returns over timeImproved the people, process and platformEstablished LTMP Since 2008, we have substantially reduced the risk in the portfolio while balancing net investm
Slide 30: Enterprise Risk Management
Enterprise Risk Management Lizabeth Zlatkus Chief Risk Officer October 6, 2011
Slide 31: The Hartford has strengthened Enterprise Risk Management
The Hartford has strengthened Enterprise Risk Management 31 Investment Risk ManagementDerisked the investment portfolioEnhanced capabilities around variable annuities (VA)Added significantly more hedge protection Strengthened Enterprise Risk Management (ERM) Strong independent ERM organizationEnhanc
Slide 32: We built a strong, independent Enterprise Risk Management organization
We built a strong, independent Enterprise Risk Management organization Reporting structure ensures independence and a holistic view of our major risksAppointed dedicated chief risk officers for each of our primary risk categoriesOver 50 net additions to staff with expertise in capital markets, inves
Slide 33: Risk management capabilities and governance have been upgraded
Risk management capabilities and governance have been upgraded Established robust risk metrics and dynamic stress testing Evaluating risks through three lenses: Economic, Statutory, and GAAPEnhanced stress testing, aggregation and correlation analysis Advanced our economic capital framework Enterpri
Slide 34: Variable Annuity Risk Management
Variable Annuity Risk Management Graham Bird Chief Market Risk Officer October 6, 2011
Slide 35: Overview
Overview We have a comprehensive approach to manage global VA riskPrimarily manage to economics, subject to statutory considerationsExtensive risk management expertise, resources and capabilities We now have a robust dynamic hedging program for the closed block in JapanJapan hedging is designed to l
Slide 36: Variable Annuity Risk Management sections
Variable Annuity Risk Management 36 Overview and Risk Management ApproachJapan VA Products and RisksJapan VA Hedge Program
Slide 37: Maintain total risk exposure within risk capacity and appetite
Maintain total risk exposure within risk capacity and appetite The Hartford has a comprehensive approach to managing Global VA risks Global Variable Annuity Overview($ in billions) 37 Economic Statutory GAAP Product designReinsuranceCapital markets hedging 1As of August 31, 2011 Core Objective Risk
Slide 38: VA risk management has evolved over time
VA risk management has evolved over time 38 Objective Stress Testing Scope PrimarilyGAAP Economics subject to Statutory Considerations Targeted Comprehensive U.S. Centric Global
Slide 39: Our risk management actions in the U.S. reflect this evolution
Our risk management actions in the U.S. reflect this evolution Initially, we reinsured guaranteed minimum death benefits (GMDB) and some guaranteed minimum withdrawal benefits (GMWB)Instituted GMWB dynamic hedging in 2003 targeting FAS133/157 liabilities GMWB accounting largely reflects economicsHed
Slide 40: Variable annuities in Japan have a unique product and risk profile
Variable annuities in Japan have a unique product and risk profile Initial risk mitigation in Japan focused on limiting guarantees and options Income and death benefit guarantees are only a return of premiumMost contracts have a 10 year deferral period and 15 year payout periodThe primary market ris
Slide 41: Japan VA Products and Risks
Variable Annuity Risk Management Overview and Risk Management ApproachJapan VA Products and Risks 41 Japan VA Hedge Program
Slide 42: Japan VA customers have only a return of premium guarantee
¥1,200,000 Japan VA customers have only a return of premium guarantee 42 ¥1,500,000 Separate Account Value Net Amount at Risk Year Pre-annuitization, the customer receives: The account value less surrender charges if they lapse; orA return of premium guarantee on death Post-annuitization, GMIB guara
Slide 43: Net amount at risk is not a good measure of economic risk
Net amount at risk is not a good measure of economic risk Net amount at risk (NAR) is the difference between the guarantee and the account value for all "in-the-money" accountsRetained NAR reflects reinsurance benefitsRetained NAR is not reflective of true economic risk GMDB NAR assumes all customer
Slide 44: We believe many customers will choose to collect guaranteed income benefits
We believe many customers will choose to collect guaranteed income benefits We expect many customers with "in-the-money" guarantees will elect to annuitize once they are eligible Markets may recover before many are eligible to annuitize 55% of accounts do not become eligible for income benefits unti
Slide 45: Income benefits will be paid over many years
Income benefits will be paid over many years On annuitization, account values move to the General Account Net investment income on General Account assets helps fund future payoutsThe risk profile changes when income beginsSeparate account equity and currency risk exposures ceaseAll death benefit gua
Slide 46: Japan Hedge Program
Variable Annuity Risk Management Overview and Risk Management ApproachJapan VA Products and RisksJapan VA Hedge ProgramJapan Hedge Program 46
Slide 47: The Japan hedge is comprehensive and robust
The Japan hedge is comprehensive and robust Comprehensive Market Risk Coverage Covers major market risks including equities, currencies, and interest rates Wide Range of Hedge Instruments Swaps, options, forwards, futures, etc. Dynamic Rebalancing Dynamic rebalancing against hedge targets and pre-se
Slide 48: Cash Flow Projections
Cash Flow Projections Cash Flow Projections Include fees, claims, expenses, plus the benefits and costs of the hedging program over 15 years We subject our Japan VA block to cash flow run-off stress tests 48 Run-OffStress Testing Conducted against a wide range of adverse market scenarios Hedge Progr
Slide 49: Our economic analysis projects cumulative cash flows
Our economic analysis projects cumulative cash flows 49 Illustration of Cumulative Cash Flows Stylized downside scenario Cash flows are cumulative over 15 years, independent of any accounting regime, pre-tax, and not discounted Total Cash Flow Fees net of expenses Claims Investment income Net hedge
Slide 50: The Japan hedge is designed to limit net unfunded cash flow
The Japan hedge is designed to limit net unfunded cash flow in very adverse scenarios 50 Illustration of Net Cash Flow Stylized downside scenario Net cash flow is difference between cumulative cash flows and the on-balance-sheet financial resources supporting the block Net Cash Flow Defined Cumulati
Slide 51: Benign Market Scenario Net Cash Flow
Benign Market ScenarioNet Cash Flow In a benign market scenario, net cash flow is positive 1 Equity scenario defined on a total return basis; equity index levels include a dividend yield assumption of 1.7%2 Cumulative cash flows include net hedge payoff and fees from July 1, 2011-August 31, 2011 Ass
Slide 52: Even in modeled adverse scenarios, net unfunded cash flow is manageable
Even in modeled adverse scenarios, net unfunded cash flow is manageable Assumptions Assumptions Interest Rate Parallel shift of 100 basis points down over 1 year, flat thereafterFloor at 50 basis pointsJPY 10 year rate to 0.5% FX 20% Yen strengthening over 1 year, flat thereafterUSD/JPY = 61.2 Equit
Slide 53: We have an effective dynamic hedge for the Japan VA business
We have an effective dynamic hedge for the Japan VA business Robust, effective methodology designed to limit net unfunded cash loss to within risk toleranceOngoing program of scenario and stress testing, including cash flow runoffs Program implementation to be completed by year endOver 90% of the Ja
Slide 54: Conclusion
Conclusion We have a comprehensive approach to manage global VA riskPrimarily manage to economics, subject to statutory considerationsWe now have a robust dynamic hedging program for the closed block in JapanJapan VA hedging is designed to limit runoff costs, even in highly adverse market conditions
Slide 55: Capital Overview and Other Updates
Capital Overview and Other Updates Christopher Swift Chief Financial Officer October 6, 2011
Slide 56: Capital overview and other updates
Capital overview and other updates 56 Impact of Japan VA hedge 3Q11 and other updates Capital resources and outlook
Slide 57: Japan VA hedge impact on 3Q11
Japan VA hedge impact on 3Q11 Japan VA assumptions were updated as part of the 3Q11 DAC unlock$110 million after-tax charge to net income for Japan VA comprised of:$245 million after-tax charge to net income reflecting hedge costs of 70 bps per year$135 million after-tax benefit to core earnings pri
Slide 58: Capital Markets Factors
Capital Markets Factors Projected for the three months from: Projected for the three months from: Capital Markets Factors December 31, 2010 September 30, 2011 Equity markets +/^ by 1% $(15) / $15 $(47) / $47 Volatility +/^ 1% $0 / $(0) $5 / $(5) Interest rates +/^1 basis point $(2) / $2 $(6) / $6 Ye
Slide 59: Capital overview and other updates
Capital overview and other updates 59 Impact of Japan VA hedge 3Q11 and other updates Capital resources and outlook
Slide 60: Estimated 3Q11 DAC unlock
Estimated 3Q11 DAC unlock1 Annual assumptions update conducted in the third quarter DAC unlock each quarter based on actual market levels versus assumptionsOur estimated quarterly DAC unlock sensitivity for a 1 percent change in actual returns vs. assumptions is: $10-$15 million in the U.S.$5-$15 mi
Slide 61: Additional 3Q11 updates
Additional 3Q11 updates On a preliminary basis, we expect our 3Q11 results to include:Items estimated on the table to the leftNet unrealized gain of approximately $2.6 billion as of September 30Statutory surplus expected to decline in the quarter reflecting implementation of Japan VA hedge, quarterl
Slide 62: New accounting effective January 1, 2012 estimated to reduce DAC balance
New accounting effective January 1, 2012 estimated to reduce DAC balance by 22-26% Future net income not expected to be materially impacted but will depend upon sales levels:Higher non-deferrable expenses Lower amortization of DAC 62 January 1, 2012 retrospective adoptionReduces GAAP shareholders' e
Slide 63: Capital overview and other updates
Capital overview and other updates 63 Impact of Japan VA hedge 3Q11 and other updates Capital resources and outlook
Slide 64: What has occurred over the last years
64 What has occurred over the last 2 years Challenging economic environmentSlow GDP growthRecord low interest ratesTurbulent equity marketsStrong YenHigher capital adequacy expectations across financial services Recalibration of insurance industry ratingsElevated catastrophe experienceCompetitive pr
Slide 65: Capital resources
Capital resources 65 U.S. Life insurance subsidiaries $8.0P&C insurance subsidiaries 7.6Japan (HLIKK) 1.3Total $16.9 Significant holding company liquidity$2.1 billion cash and short-term investments as of August 31, 2011$400 million October 2011 debt maturityIn current environment, prudently focused
Slide 66: Capital management priorities
Capital management priorities The Hartford manages capital and financial resources to balance a number of factors including:Regulatory requirementsRating agency considerationsRisk management strategiesInsurance company needsHolding company funding obligations, andShareholder considerations 66 We are
Slide 67: Assumptions for alternative scenarios
Assumptions for alternative scenarios 67 Bull Scenario (S&P 1500) Base Scenario (S&P 1200) Stress Scenario (S&P 800) Equity Markets Equity Markets 2011: S&P 500 increases to 15002012: S&P 500 at 1608 (up 7.2%) 2011: S&P 500 increases to 1240 2012: S&P 500 at 1330 (up 7.2%) 2011: S&P 500 declines to
Slide 68: In the S&P scenario, The Hartford has a $1.3 billion capital margin
68 In the S&P 800 scenario, The Hartford has a $1.3 billion capital margin Bull Scenario (S&P 1500) Base Scenario (S&P 1200) Stress Scenario (S&P 800) December 2012 $4.4 $3.9 $1.3 Capital margins in alternative scenarios Projected Capital Margins1 from Scenarios ($ in billions) 1Capital margins meas
Slide 69: Changes in 2012 capital margin from base scenario
($ in billions) Bull Scenario (S&P 1500) Bull Scenario (S&P 1500) Stress Scenario (S&P 800) Stress Scenario (S&P 800) Stress Scenario (S&P 800) December 2012 Capital Margin in Base Scenario $3.9 $3.9 $3.9 VA Operating Income Incl. Change in Reserves $2.6 $(8.5) VA Hedge Impact (2.1) 6.8 Change in Re
Slide 70: Capital resources outlook
Capital resources outlook We are committed to ensuring adequate capital and financial flexibility to support strong capitalization of the insurance operations and sufficient flexibility to meet holding company obligationsWe believe The Hartford has sufficient resources in a deteriorating economic en
Slide 71: The Hartford
THE HARTFORD
Slide 72: Closing Message
Closing Message Liam E. McGee Chairman, President and Chief Executive Officer October 6, 2011
Slide 73: Summary
Summary 73 The Hartford's balance sheet is strong While challenges exist, our risks are significantly reduced and manageableThe Hartford's risk management capabilities are meaningfully enhancedThe Hartford has the strength to maintain sufficient capital levels, consistent with current ratings, even
Slide 74: The Hartford
THE HARTFORD
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