--Hartford takes $600 million first-quarter charge as it hedges Japan risk

--Insurer declares Talcott run-off unit "self-sufficient"

--Hartford increases 2013 core earnings estimate to $1.45 billion-$1.55 billion

Hartford Financial Services Group Inc. (HIG) said it was taking a $600 million charge in the first quarter to ensure that a once-troubled book of annuities it sold in Japan was safely hedged against future volatility that could hurt results.

The insurer said it had expanded an already elaborate hedging program to lock in the benefits from the rapidly weakening yen and improving Japanese equity markets. The expanded hedging will "effectively eliminate" harm to Hartford from "stress-market scenarios" if the current favorable conditions reverse, the company said.

With the move, Hartford declared its Talcott Resolution operation--which contains the Japan annuity book and other obligations--to be "capital self-sufficient," meaning the company shouldn't have to shore up the unit with added capital, and may be able to draw some out in the future.

Japan's Nikkei 225 stock index has increased by about 60% in the past six months and the dollar this week hit a four-year high against the yen. Both trends drove Hartford's net amount at risk on its Japanese variable-annuity obligations from $6.1 billion last September to $1.3 billion at the end of March.

The news of the expanded hedging program was revealed in an investor presentation that Hartford executives gave Thursday about the future of Talcott, a recently created unit that contains operations that management is winding down as Hartford refocuses its operations. The unit also contains U.S. annuity obligations and life insurance policies.

Amid pressure from shareholders, Hartford last year said it was exiting those businesses to refocus on less capital-intensive operations. Hartford Chief Executive Liam McGee told investors Thursday that he expects the property-casualty, group-benefits and mutual-funds unit--the core of the refashioned company--to reach a return on equity of 10% to 10.5% next year, up from a projected 9.5% to 10% this year.

With Talcott "now self sufficient from a capital perspective," Hartford can use excess capital generated by the core businesses "for potential capital management actions," Mr. McGee said.

Hartford shares rose 2.3% to $27.63 in recent trading and hit its highest point in nearly two years earlier in the day. The stock is up 23% this year.

For many years, Hartford was one of the nation's biggest sellers of variable annuities, a tax-advantaged way to invest in stock and bond funds. Hartford and many other life insurers turned variable annuities into a growth engine by offering, for an additional fee, some type of income guarantee that buyers can tap into should their funds become depleted.

The collapse of markets in 2008-09 dramatized the value of those guarantees to consumers--and the risk to the companies.

Other insurers, including Cigna Corp. (CI) and Sun Life Financial Inc. (SLF, SLF.T), have announced plans to unload their annuity obligations. Beth Bombara, the president of Hartford's Talcott unit, said Thursday the company was continuing to work with investment bankers on potential transactions, but "our risks are manageable and we don't need to transact."

On Japan, the company said the expanded hedging will effectively eliminate any adverse effects from Japanese equity market declines or a strengthened yen. But the new hedges will also increase risk-management costs, resulting in the first-quarter charge of $600 million after taxes and eliminating the expected profit from the Japan annuity book.

Hartford "traded...the upside for improved protection in a stress scenario," said Ms. Bombara at the investor presentation. "We're preserving the economics we see today."

The company stopped selling variable annuities in Japan several years ago, but existing customers have accounts valued at about $27 billion. The policies were designed in part to protect against equity market declines, and for years, Hartford was on the hook to most of its customers.

In the U.S., meanwhile, Hartford is one of a handful of life insurers that have offered to buy back some of the most-generous benefits that were sold with variable annuities in years past as they seek to reduce its risk exposure. Ms. Bombara said its offers are being rolled out in stages as regulatory approvals are obtained.

The company's U.S. variable-annuity account value totaled about $65 billion as of March 31, she said. With the markets' rebound, almost 90% of the variable-annuity contracts in the U.S. are above their guaranteed values.

Customers' responses to the buyback offers have been "trending more favorably than I expected," she said. In the first phase of offers mailed to customers in February, the company had an acceptance rate to date of 22%. She said that was higher than the historical rate of 5% for customers closing out their contracts, called "surrendering." A second round of offers, dispatched in early March, is running at an acceptance rate of 12%, she said.

Among other changes the company is making to reduce the risk of the U.S. block, Hartford is moving to increase annual fees charged to many existing variable-annuity customers, including some increases that will hit contractual maximums, she said. The company also is moving to restrict asset-allocation options for some variable-annuity owners, subject to contract terms.

Such moves are in line with measures being taken by many rivals as they also try to improve the profitability and minimize their risk exposure from the older business.

Ms. Bombara told analysts on the call that Hartford's block of business contains "rather modest" guarantees, compared with those marketed by many of its rivals amid an arms' race in product development in the mid 2000s, just before stock markets collapsed with the bursting of the real-estate bubble.

In addition to the $600 million charge related to the hedging, the first quarter also will include a previously disclosed charge of $140 million, after tax, stemming from costs incurred from the company's $800 million debt tender offer completed in the first quarter. Neither charge is included in "core" earnings.

The company also announced an increase to its full-year adjusted earnings guidance. For 2013, the company now expects core earnings of $1.45 billion to $1.55 billion, up from its February view of $1.38 billion to $1.48 billion.

--Ben Fox Rubin contributed to this article

Write to Erik Holm at erik.holm@dowjones.com and Leslie Scism at leslie.scism@wsj.com.

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

Sun Life Financial (NYSE:SLF)
Historical Stock Chart
From Mar 2024 to Apr 2024 Click Here for more Sun Life Financial Charts.
Sun Life Financial (NYSE:SLF)
Historical Stock Chart
From Apr 2023 to Apr 2024 Click Here for more Sun Life Financial Charts.