Earnings Call: Q4 2016

Feb 2, 2017

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to The Hartford's Fourth Quarter twenty sixteen Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. Sabra Pratil, Head of Investor Relations, you may begin your conference. Good morning, and welcome to The Hartford's webcast for fourth quarter twenty sixteen financial results. The news release, investor financial supplement and slides for this quarter were all posted on our website yesterday. Please note that we will file our 10 K on February 24. Our speakers today include Chris Swift, Chairman and CEO of The Hartford Doug Elliott, President and Beth Bambara, CFO. Following their prepared remarks, we will have about thirty minutes for Q and A. Just a few comments before Chris begins. Today's call includes forward looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and actual results could be materially different. We do not assume any obligation to update information or forward looking statements provided on this call. Investors should consider the risks and uncertainties that could cause actual results to differ from these statements. A detailed description of those risks and uncertainties can be found in our SEC filings, which are available on our website. Our presentation today also includes non GAAP financial measures. Explanations and reconciliations of these measures to the comparable GAAP measure are included in our SEC filings as well as in the news release and financial supplement. Finally, please note that no portion of this conference call may be reproduced or rebroadcast in any form without The Hartford's prior written consent. Replays of this webcast and an official transcript will be available on The Hartford's website for at least one year. I'll now turn the call over to Chris. Thanks Sabra. Good morning everyone and thank you for joining us today. Hartford delivered strong results in commercial lines and group benefits despite sustained competition this quarter, while personal auto performance remains under pressure from loss cost trends. Doug will cover P and C and group benefit results in a few minutes, but I wanted to highlight notable twenty sixteen accomplishments that demonstrate The Hartford's underwriting discipline, effective execution and fundamental strengths of our platform. Commercial Lines delivered an exceptionally strong underlying combined ratio of 89.4 for the full year. The performance reflects The Hartford's best in class operating capabilities, strong market positions and disciplined underwriting. During the year, we also made progress on our strategy to broaden our risk appetite, including entry into the E and S space with the acquisition of Maxim, expanded multinational capabilities through our partnership with AXA and the launch of a dedicated energy practice. Group Benefits delivered very good results for the full year with a core earnings margin of 5.7%. We generated profitable growth in this segment, reflecting strong sales, persistency and an improved loss ratio. We continue to execute on our group benefits growth strategy, enhancing the product suite with the addition of dental and vision for the small case market and new voluntary offerings. At Telkot, we continue to effectively and efficiently manage the runoff of the annuity blocks. Over the past two years, Telkot has returned $1,750,000,000 of capital to the holding company, and we expect an additional $600,000,000 in 2017. During 2016, we also addressed our legacy P and C exposures, which over the past few years has generated substantial adverse development. In July, we agreed to sell the runoff UK subsidiaries to Catalina, which we expect to close in the next few months. And at year end, we reinsured the remaining legacy U. S. A And E liabilities to national indemnity. While these actions resulted in modest book value dilution, we believe that the economic trade off was well worth the near term cost. Turning to personal lines, we are encouraged about moderating frequency, but remain concerned about bodily injury liability severity trends. As a consequence, we have strengthened prior year reserves and current accident year loss picks. In setting year end calls for accident years 2015 and 'sixteen, we placed higher weight on the most recently emerged bodily injury severity experience. We are intently focused on improving the profitability of this business. During the year, we accelerated pricing, distribution and underwriting initiatives resulting in a sharp drop in new business. Doug will provide you with more background on these actions and the progress we have achieved over this past year, and I am confident that we will deliver improved results in 2017. Finally, before turning the call over to Doug, I'd like to briefly cover our 2017 goals and expectations. Given the significant progress The Hartford has made over the past several years, I am confident in our ability to continue to perform well in an environment that we expect to remain challenging in 2017. We expect competition to remain robust for the coming year with new entrants aggressively seeking inroads into our markets and peers fighting hard to retain their business. Technological innovation and its potential effect on business models is also adding to the competitive intensity. In addition to these trends, 2017 presents higher regulatory, fiscal and macroeconomic uncertainty. We are closely monitoring developments on Capitol Hill, including corporate tax reform, infrastructure spending, and the possible repeal or replacement of ACA and other changes in regulations, all of which could impact us. With that backdrop, our strategy and focus in 2017 remain consistent. Hartford will prioritize long term growth initiatives by investing in products, distribution, data and analytics, and digital capabilities to provide more value to our agents and customers. These investments are aimed at providing us with critical insights and creating seamless interaction for customers across each of our businesses. Specifically, in 2017, we intend to maintain strong margins in commercial lines and group benefits and to improve auto profitability. Our goal is to grow core earnings and book value per share, supported by continued capital management, including $1,300,000,000 of share repurchases in efficient debt management. We will continue to relentlessly scrutinize our expense structure, recognizing the importance of operating efficiency to competitive strength. In closing, I am proud of what The Hartford accomplished in 2016. We delivered strong financial results excluding auto. We returned $1,700,000,000 of equity to shareholders through repurchases and common dividends and continue to reduce debt outstanding. And we significantly improved our operating capabilities and expanded our risk appetite. As we enter 2017, I am confident we are taking the right steps in our competitive markets as we continue to invest for long term growth and shareholder value creation. Now, I will turn the call over to Doug. Thank you, Chris, and good morning, everyone. We had an excellent 2016 in Commercial Lines and Group Benefits, particularly in light of the growing competitive dynamics we've seen in these markets. Before I share details on our Commercial businesses, let me get right into Personal Lines, where I only can describe 2016 auto loss trends as challenging and our financial performance as disappointing. For the fourth quarter, we posted a personal lines core loss of $17,000,000 CAD losses for the quarter were $28,000,000.7000000 dollars higher than in 2015. The underlying combined ratio, which excludes catastrophes and prior year development, was 101.8, deteriorating 8.3 points from last year. This is primarily due to higher auto loss costs, partially offset by lower expenses. In homeowners, the underlying combined ratio for the fourth quarter of 74.7% deteriorated 2.3 points versus last year. The fourth quarter of twenty fifteen experienced very favorable results compared to our longer term average. Overall, our homeowners performance remains very solid and we continue to effectively manage rate needs and underwriting execution. In first lines auto, we continue to see higher than expected overall loss cost trends. On the positive side, our current estimate of the change in frequency for the second and third quarters of twenty sixteen has moderated versus our estimates ninety days ago. The change in bodily injury severity on the other hand has increased and continues to be an area of intense focus affecting both current and prior accident years. We recorded $20,000,000 of prior year development in auto liability primarily related to accident year 2015. We also increased the accident year 2016 loss ratio by approximately 2.5 points. Throughout the year, we've been executing on substantial rate underwriting, agency management and new business actions. We have provided a new exhibit in our slide package that depicts our progress within segments of our auto book. We're measuring and managing our actions by state and customer cohort very closely. Let me provide commentary on three examples of the actions we're taking. First, written pricing in the fourth quarter was 9%, increasing three points from prior year and two points sequentially. I expect this number to increase an additional one to two points over the next few quarters. The earned premium impact at this rate is ultimately based on the customers we renew, but the combination of rate increases and mix change in the book of business will drive auto margin improvement in 2017 and 2018. Second, we reduced our new business marketing efforts in many jurisdictions until more adequate rates are in effect. Auto new business for the fourth quarter was down 58% with other agency off 64%. We're confident that we can return to new business growth once adequate rate levels are in place to deliver our target returns. And third, lower new business also results in reduced marketing expense and lower operational costs, which contributed to a 3.5 improvement in the expense ratio for the fourth quarter. These actions and others will have a favorable effect on our loss ratio as higher average premium per policy and improved book of business mix are reflected in our earned premium. In commercial lines, we delivered $277,000,000 of core earnings for the fourth quarter on a combined ratio of 91.3, three point two points higher than 2015. Catastrophe losses for the quarter were $20,000,000 higher than in 'fifteen, driven mainly by Hurricane Matthew and hail events in the Southwest. The fourth quarter also included 1.2 of unfavorable prior year development versus one point of favorable development in the fourth quarter of twenty fifteen. The unfavorable prior year development was related to commercial auto and package business, partially offset by prior year development in workers' compensation being favorable. Commercial auto continues to be under pressure in our book of business and across the industry. We recorded $38,000,000 pretax of prior year development to address severity trends, primarily in small commercial related to accident year 2015. We continue to achieve high single digit written price increases in this line and have taken aggressive underwriting actions, including enhanced referral criteria, resulting in lower retention and lower new business. We also recorded $15,000,000 pretax of prior year development in the package business to address general liability severity trends in small commercial. The underlying combined ratio for commercial lines was 88.2 for the fourth quarter, flat compared to 2015. This reflects improved current accident year results in workers' compensation, offset by weaker results in commercial auto. Renewal written pricing in standard commercial lines was 2% for both the full year and the fourth quarter, holding steady throughout the year. I'm very pleased with this outcome which reflects the underwriting rigor and discipline of our team in a competitive marketplace. Written premium of $1,700,000,000 for the quarter was up 3% from 2015, driven primarily by growth in small commercial, including the acquisition of Maxim. Let me provide some detail on each of our commercial business units. Small commercial had a solid fourth quarter to cap off an outstanding year. The underlying combined ratio for the quarter was 86, up 0.9 from 2015. Written premium for the fourth quarter grew by 7%, driven by strong retentions and $145,000,000 of new business, including Maxim. In middle market, we demonstrated strong underwriting and pricing discipline delivering an underlying combined ratio of 88.9 for the fourth quarter, improving 0.1 from 2015. Written premium increased 1% based on solid retentions and new business production of $133,000,000 up 17% versus prior year. We are encouraged by these results which we attribute to growing momentum on a number of strategic initiatives, including our recently launched energy practice and our expanded multinational capability. We've received very positive feedback from our agents and customers that we're delivering a well integrated and comprehensive solution for their international needs. As a result, we're finding opportunities to win new accounts based in The U. S. With international exposures that we might not have quoted in years prior. In Specialty Commercial, the underlying combined ratio of 94.8 for the fourth quarter improved from 98.1 in 2015. This was driven by strong performance in national accounts workers' compensation, bond and financial products. Now let me turn to group benefits. Core earnings for the fourth quarter increased to $59,000,000 up from $40,000,000 in 2015 with a core earnings margin of 6.5%. The group disability loss ratio for the quarter deteriorated by 1.1 points compared to prior year due to higher severity, partially offset by pricing as well as favorable incidents and recovery trends. The volatility we experienced in prior quarters in group life abated this quarter. The group life loss ratio improved 5.4 points versus 2015, largely due to favorable changes in reserve estimates. Looking at the top line, fourth quarter fully insured ongoing premium increased 2%. Overall book persistency on our employer group block of business held in the high 80s for the year and fully insured ongoing sales were $43,000,000 Looking back on 'sixteen, we're pleased with the performance of our commercial lines and group benefit businesses, particularly as we navigate these competitive markets. In personal lines, we're addressing our challenges with clear actions and a commitment to sustainable financial progress in 2017. Before I turn over to Beth, let me offer a few comments on 2017. We expect that the market will be as competitive or more than the market we faced in 2016. We remain committed to underwriting discipline and delivering strong margins, only seeking growth when it meets our profit targets. In commercial lines, we're focused on leveraging our expertise and tools to aggressively compete at the front line. We'll continue to improve our capabilities to better meet the changing demands of both customers and distributors who are seeking new product capabilities, increased access to our expertise and greater convenience in their service transactions. Due to competitive markets in the marketplace, we expect that for lines of business with strong returns, long term loss cost trends will continue to outpace written pricing increases. As a result, we expect an overall twenty seventeen commercial lines combined ratio between ninety two point five percent and ninety four point five percent including 2.3 points of catastrophes. At the midpoint, this is slightly higher than our results in 2016, yet still performing at attractive return levels. We will remain vigilant in addressing long term loss cost trends, as well as taking immediate action in areas that are under pressure. In personal lines, we will continue our disciplined actions to restore profitability in auto by continuing to execute on our pricing, underwriting and agency management actions. We're investing in capabilities to better harness data and thereby refine our underwriting and pricing analytics. We remain deeply committed to our long term partnership with ARP with initiatives to deliver greater customer value and achieve higher levels of customer satisfaction. We expect to achieve a personal lines combined ratio of 99 to 101, including 5.8 points of catastrophes. This implies an auto combined ratio of 101 to 103 with approximately one point of catastrophes. Although clearly not at our target performance levels, this represents substantial progress toward that goal. In group benefits, we're looking to drive growth in our core employer group offerings as well as our voluntary product suite. January 2017 renewal retention is tracking consistent with prior year and January sales include a number of solid wins, but will be down from a year ago. We will add hospital indemnity in April of this year to our current voluntary lineup of disability flex, critical illness and accident. We expect group benefits performance to be relatively consistent with 2016, excluding a guarantee fund assessment for Penn Treaty. Our current estimate of this assessment is approximately $13,000,000 after tax. For property and casualty and group benefits overall, we will continue to compete in an aggressive and disciplined manner in 2017. Competition from not only traditional names, but newer entrants as well continues to intensify versus a year ago. Our core priorities remain unchanged, profitable product and underwriting expansion, deep partnerships with our distributors and outstanding value to our customers. In summary, twenty sixteen was a very strong year in so many respects, yet very challenging in others. As always, there's work in front of us for 2017 and we're fully committed to the journey ahead. Let me now turn the call over to Beth. Thank you, Doug. I'm going to cover the other segments, our investment performance and update you on our capital management plans. Mutual Funds core earnings totaled $17,000,000 this quarter, down from $20,000,000 in the fourth quarter of twenty fifteen, principally due to transaction expenses for the acquisition of Lattice and the adoption of Schroeder's U. S. Mutual funds. Asset management fees rose about 3% from the prior year due to higher average daily AUM, although the growth in fees continues to be impacted in part by the shift to lower fee mutual funds. Total AUM increased 6% including the impact of both market appreciation and almost $3,000,000,000 from the Schroeders funds. Telkot continues to perform well. Core earnings were $111,000,000 up strongly from $83,000,000 in the fourth quarter of twenty fifteen due to higher returns, unlimited partnerships and a $14,000,000 tax benefit from a prior year federal tax audit. Aside from these items, Telkot's core earnings declined due to lower variable annuity fee income driven by the runoff of the book. During 2016, VA contract counts decreased by 10%, which we expect will drive a similar rate of decrease in Telkot's twenty seventeen core earnings excluding the favorable items in 2016. In the slides posted to our website last night, we also provided our annual update of Telkot statutory capital allocation by product. The capital allocation has not changed materially since last year. Consistent with prior years, a significant portion of Talcott Capital supports our institutional and individual fixed annuity blocks. At year end, statutory surplus totaled $4,400,000,000 and the capital allocation shows expected 2017 dividends of $600,000,000 3 hundred million dollars of which we received in January. We also provided an update on capital margins in base, stress and favorable scenarios. Our analysis of Telkut's capital adequacy remains focused on the stress scenario not based on current capital or market conditions. Our goal is to maintain at least 200% company action level risk based capital in the stress scenario and also considers liquidity, intangible assets and other factors. The assumptions used for these scenarios, which we also provided, are generally consistent with prior years. The stress scenario has a 40% drop in equity markets from current levels or roughly thirteen fifty on the S and P 500, lower interest rates and significant credit losses. As summarized in the slides, in the stress scenario, we estimate the capital margin to be about $1,400,000,000 at year end twenty eighteen compared with $2,900,000,000 in the base case. Both scenarios include $600,000,000 of dividends in 2017. Consistent with prior years, the primary impacts in the stress scenario come from interest rates and credit losses, primarily in the individual fixed and institutional annuity blocks and decreased fee income on the VA block. This amount of capital margin demonstrates that Talcott is adequately capitalized for adverse capital market environments. Turning to investments, all in results were strong this quarter and included high returns on real estate and private equity LPs. Total LP investment income was $73,000,000 before tax compared to $12,000,000 in the fourth quarter of twenty fifteen for an annualized return of 12% this quarter and 8.5% for full year 2016. Excluding LPs, the total before tax annualized portfolio yield was 4.2% this quarter, slightly better than 4.1% last year, largely due to non routine investment income such as prepayment penalties on mortgage loans and make whole payments on fixed maturities. These items are episodic and were especially high this quarter totaling $32,000,000 before tax, about 2.5 times higher than the fourth quarter of last year. Excluding LPs and non routines, the annualized portfolio yield was essentially flat. For the P and C portfolio, the annualized yield excluding LPs was 3.9%, up from 3.7% in fourth quarter twenty fifteen, but relatively flat adjusted for the non routine items. Full year P and C net investment income was about $1,200,000,000 including $101,000,000 for LPs. Looking at 2017, based on current interest rates, we expect P and C net investment income excluding limited partnerships to decline about 7% to 1,000,000,000 before tax for two principal reasons. The first driver of lower P and C investment income is that we expect a slightly lower P and C portfolio yield excluding LPs. The full year portfolio yield was 3.8%, but 2016 reinvestment yields were about 60 basis points lower than sales and maturities resulting in a sequential decline in the portfolio yield during 2016. Although higher reinvestment rates could offset some of this pressure, credit spreads have also tightened and we would expect a lower level of non routine items in a higher rate would increase by about $20,000,000 before tax. Would increase by about $20,000,000 before tax. The second factor driving P and C net investment income lower in 2017 is that P and C investment portfolio will decrease by about $1,000,000,000 or 3% early in the year due to the net impact of the $650,000,000 we paid in January for the national indemnity cover and the pending sale of The UK P And C Runoff subsidiaries. Turning to credit performance, our experience remains very good with total impairments and mortgage loan valuation reserve charges of $12,000,000 before tax, down from $42,000,000 in the fourth quarter of twenty fifteen, which included losses on some energy, mineral and mining related exposures. To conclude on earnings, fourth quarter core earnings per diluted share were $1.08 essentially flat with $1.07 in fourth quarter twenty fifteen as the impact of our share repurchase program offset the 7% decrease in core earnings. For the full year, core earnings ROE was down due to personal lines results and the second quarter charge for adverse development for A and E. 2016 core earnings ROE excluding Talcott was 8.9% and the P and C core earnings ROE was 9.9%. Excluding the A and E charge, the twelve month core earnings ROE excluding Talcott was 10.3% and P and C was 12%. Turning to shareholders equity, book value per diluted share excluding AOCI at December 3136 was up 3% compared to a year ago. Before turning to your questions, I wanted to provide an update on our capital management plans. During the quarter, we repurchased $280,000,000 of stock, which completed the $4,375,000,000 equity repurchase plan that expired on December 31. In January of this year, we repurchased about 2,300,000.0 shares for $110,000,000 which leaves approximately $1,200,000,000 available under the 2017 equity repurchase authorization. With respect to debt management plans, in October, we repaid $275,000,000 of maturing debt. As we previously announced, we will repay $416,000,000 of senior notes at maturity in March, which is our only debt maturity in 2017. In addition to these two actions, we also intend to call our eight oneeight five hundred million dollars junior subordinated bond when it becomes redeemable at par in June 2018. To fund this call, this month, we will exercise our put option on the Glen Meadow contingent capital facility, which will result in the issuance of $500,000,000 of junior subordinated debt. This debt will have a floating rate coupon of three month LIBOR plus 212.5 basis points or about 3.18 at current rates. The impact of these actions on our debt to total capital ratios will be modest as the Glen Meadow issuance will be largely offset by the senior note maturity in the first quarter and our 2018 ratio will decrease from the repayment of the junior subordinated bonds. In addition, coverage ratios will improve in 2017 and 2018 due to lower interest expense resulting from debt repayment. To conclude, fourth quarter results were very strong for commercial lines and group benefits and the performance of our investment portfolio and other businesses was very good. In 2017, we are focused on achieving core earnings per share growth driven by better personal lines results, continued strong margins and investment performance in our other businesses and the impact of our capital management plans. In addition, the new reinsurance agreement covering U. S. A and E exposures should eliminate the economic impact of any adverse development. I will now turn the call over to Sabra, so we can begin the Q and A session. Thank you, Beth. Lisa, I'll ask you to give the instructions for Q and A in just a second. But for in the meantime, I just wanted to note that for those of you who are interested in catching up with us in person, Beth will be attending the Credit Suisse conference in Miami on Tuesday next week and Chris will be in Boston at a luncheon hosted by Deutsche Bank on Wednesday, February 8. In addition, Chris, Doug and Beth will be at the Bank of America Merrill Lynch Conference in New York on February 15, holding a fireside chat as well as some small group meetings. And then finally, I would note that Doug will be on the Commercial Lines panel at AIFA in early March this year. We hope to see all of you at one or more of those events. Alisa, could you give the directions again? Our first question comes from the line of Ryan Tunis from Credit Suisse. Your line is open. Hey, thanks. Good morning. I had one question and then John Nadel had a follow-up. But I guess just looking at the guidance in P and C commercial, I guess this year an underlying basis, combined ratio is 89.4% and the midpoint of the guide you're giving implies a decent amount of deterioration off of that. And I realize that this year, you had some favorable items with property workers' comp, but it also seems like rate worked against you. You've also talked about commercial auto. So it seemed like there were some headwinds as well. So just trying to square the type of scenarios that would potentially get you up toward that midpoint or above that because I guess that just seems like a decent amount of volatility off of this year's results? Thanks. Ryan, it's Chris. Thanks. I'll have or ask Doug to add his color too. But I would just ask you to consider just macro trends in general. The pricing environment has been soft and our views are it's going to continue to soften into 'seventeen. So rates are coming down, pricing is not keeping up in aggregate what we believe are long term loss cost trends. Capital is abundant in the industry and there's many competitors, both in the traditional markets and those that are coming from offshore to compete in our markets. So you put it all together and that's our view of the environment. We're going to work our tail off to maintain those margins. But at this point, and knowing our customer base so well, we want to retain as much of our business as we can. And if there is some give that we need to give on price to retain that, we will consider that. So we want to retain our best customers and we know that the price environment is very dynamic. So Doug, what would you add from a color perspective? Sure. Brian, I guess the first thing I would say is that, very pleased about 2016, pleased about the trends that we've been able to work on with our client department and our pricing actions, very pleased about middle market. As I lean into 2017, don't expect all those trends to continue. So as I think about what's in front of us with workers' compensation, we're still thinking that our medical trends long term are in the 6% range and indemnity 3% to 4%. As I look at that line, which matters a great deal for our company because we're slightly overweight in comp with our expertise, it's a line right now that is feeling some degree of pressure on the pricing side in the marketplace. So that is one of the things I think about. Clearly, we're at work on commercial auto and expect progress there and expect improved results. But we're feeling a little bit of pressure in the general liability area across the book. And so as we planned into 2017, we tried to be prudent with our loss assumptions, fair and thoughtful about what we're doing with pricing. I just feel a bit of pressure that yes, we were able to withstand in 2016 and hope to do that again. We'd love to repeat that performance in 'seventeen and know that's a goal, but also want to be reasonable in our expectation. So this is John. Chris, there's increasing chatter about a potential sale of Talcott over the you know that chatter has been increasing over the past several months. And I'm not asking I wouldn't ask you to comment on that, but I am interested in what your preference is for use of proceeds if you assume the transaction were to occur. Should we expect you to focus on trying to replace those lost earnings contribution via acquisitions? Or should we expect that you'll continue to focus more on returning freed up capital to shareholders via incremental buybacks and debt management? Thanks for not asking about Talcott directly. I think the point in time where we're at right now, John, is we've done a lot, particularly you saw with the legacy P and C liabilities this year. So, Talcott contributes as it does today. We talk about managing the risk effectively and returning capital and we're perfectly comfortable doing that. But hypothetically, how we think about any capital that would be freed up, first we would focus on rightsizing debt to equity ratios. And then we would think in terms of how do we replace those earnings via growth strategies, both those that we can control from an organic side and then acquisition side. So that would be a high priority. I think we've been talking about that for at least the last nine to twelve months as far as a priority of our capital. So, yes, I would prioritize growth in earnings over just share buybacks at that point. Appreciate that. Thank you. Our next question comes from the line of Jay Gelb from Barclays. Your line is open. Thank you and good morning. I just wanted to level set for talcad. I believe you said earnings will be down for talc at 10% in 2017, adjusting for normalized items or adjusting for unusual items in 2016. So what's the baseline you're using for 2016? Yes. So if you look at our results over the last twelve months, we have benefited from partnership returns sort of in excess of our plan and some of these one time items. So if you adjust for that and take think about a 10% reduction in sort of run rate of Talcott, I think you'll see that you'll kind of get in that $300,000,000 range for 2017. That's helpful. Thanks, Beth. And basically in line with what we were expecting. The other question I had, a little more broadly on the return on equity profile, based on all the puts and takes you're expecting for 2017 and we've already known about the pace of share buybacks $1,300,000,000 Where do you think that roughly puts you for return on equity in 2017? Jay, it's Chris. Well, I appreciate the call or the question on the call here. So if I look at and we've been trying to talk to our key ROE metric is ex Talcott, because I think everyone knows there is a number of trapped capital in Talcott. So if I look at where we ended 'sixteen at 8.9 on a trailing twelve month basis, I think if we perform to the plan that we outlined in the metrics that we gave you, that could be up 200 basis points, especially without an A and E charge in 'seventeen. That's great. Thank you. Our next question comes from the line of Thomas Gallagher from Evercore ISI. Chris, I will ask a direct question on Talcott. Just from an M and A standpoint, can you comment on where you would see kind of bid ask spreads right now? I think from what I've heard from you guys before, there were some challenges related to the VA part, considering regulatory developments and some tax questions. But as you guys show, majority of capital is not backing the VA part, it's backing the general account part. So I assume the environment has gotten a lot better from an M and A standpoint, but just curious what you're thinking there? I appreciate the direct question. Look, we're not going to speculate on what we may or may not do. I think Beth and I have been consistent in talking in terms of risk is managed well. We have been taking excess capital out and plan to as you saw in 'seventeen. And if there are counterparties out there, we'll continue to work hard to find parties that are interested in buying two legal entities that have both variable and fixed annuities, both deferred and payout in them. And you can't just point to one block of business and exclude the other because just given the legal entity nature. And we're at the point in our cycle right now where simple reinsurance transactions really don't accomplish our mission, Tom. So you put all that together and I'll let you conclude. Rising rates help, robust equity markets, growth prospects for the future. So I'm actually bullish on our general, which I think bodes well for these types of liability structures going forward. Okay. Appreciate that. And then just a question on the Neko deal, the $650,000,000 dollars of premium, I just want to understand with that, did you transfer long term bonds or was that cash? And can you comment on roughly what the lost yield would have been for you on that transaction? Yes. So, Tom, we transferred cash, but obviously when you think about taking $650,000,000 of cash out of the system that comes with thinking about liquidating other assets. So we provided I believe in our press release when we announced the transaction that we'd expect some decrease in net investment income coming from that modest and that's all contemplated in the guidance that we've given relative to P and C net investment income for next year. But Beth, I guess my question was, I assume there was a long duration portfolio backing that line. And were those associated bonds the ones that were sold? So was there a disproportionate loss of yield or was it not that big of a yield? Yes. I wouldn't think about it that way. Again, to some extent, yes, there was there's assets backing in that portfolio. But when we look to manage the portfolio on a P and C side, it's a little bit probably more fungible than you probably think of on a life side. And so net net, we took all that into consideration and looking at what we're anticipating for the net investment income for P and C next year, including some of the modest declines that we see in overall yield. But I wouldn't point to that as a significant driver of a decrease in P and C yield. Okay. Thanks. Our next question comes from the line of Brian Meredith from UBS. Your line is open. Yes, thanks. A couple of questions here. First, Doug, I just want to dive back into the commercial lines guidance a little bit here. And the question I guess I have is, how different is your kind of trend assumption that you're thinking about for 'seventeen today versus when you were going into 'sixteen and providing guidance? Are you still kind of thinking long term trend or things kind of deteriorated or you're seeing that deterioration happening, which makes you more concerned about what's happening in 'seventeen from a trend perspective? Fair question, Brian. I would say in the comp area, pretty consistent. Our view of go forward versus what we're experiencing, very consistent. Auto, the severity in our commercial auto book, we've got higher expectations of loss trend in 'seventeen than we did in 'sixteen, absolutely. And in GL, slightly higher as well. So nothing radically different, but we're feeling a little bit of taut pressure across the liability book. We're on it, we're pricing for it, but we also see the market and the competitive dynamics around us. And I think we just wanted to pick a prudent path. Got you. Appreciate that. And then my second question is, looking at the benefits business, I know that you all were had some initiatives to develop products and stuff basically to kind of cater to the ACA, I believe it was, supplemental products. Has your thoughts on that changed now that there could potentially be repeal that or changes to that? And kind of where you're thinking on that? Brian, it's Chris. Generally, no, I mean those supplemental products as you said had some strict definitions around of it given ACA. So if ACA gets repealed a little bit, we'll have to watch to see the impact on the supplementary market. But we would not be interested in getting into any, I'll call it, mini med medical plans or things along those lines. We think the nature of these products, the more we market them, the more we educate our customer base on them, will fit the needs with or without major ACA refinement. Great. Brian, the only thing I would add is that clearly the last three years major focus on getting our voluntary suite up to par and where it needs to be. Secondly, and Chris I think has talked about this in the past, we are leaning into A and H over the next year or so. We've had an A and H product out there. We've looked at it. We think it needs some retooling. We're working on that now. And I think more to talk about as we move through 2017. Our next question comes from the line of Meyer Shields from KBW. Your line is open. Great, thanks. If I can just jump off of Brian's question. Do your 2017 auto trend expectations, are those in line with what you saw in the fourth quarter of twenty sixteen? They are, Meyer. Okay. So that means you're not expecting further acceleration going forward? No, but we are similar to personal lines. We do see this world in terms of a new norm. So we're expecting some of the pressure that we're feeling and have felt in 2016 to continue into 'seventeen and we're making those types of choices in our trend assumptions both on personal lines and also on commercial. The difference in personal lines is that as you know, we've talked about a number of initiatives. We think we can bend the loss trend curve based on the initiatives that we've enumerated and we're working hard to do that. That's how we're going to make progress against this data goal because we've got some work to do to get our auto loss ratio, auto combined ratios into those 96%, ninety six point five % category. Okay. That's helpful. Two quick questions on the commercial side. One, it looks like small commercial pricing improved a little bit from the third quarter to the fourth quarter. So I was hoping you could talk about that. And also maybe some more detail on the new entrants. I guess I'm a little more surprised that there's there are new entrants into the standard commercial lines rather than specialty. Yes. We take them one by one. We are clearly leaning into auto and our package liability business and you're seeing that in the marketplace. So we are looking for more rate in Q4 and we're looking for a little bit more rate in Q1 of twenty seventeen. So there's an escalation based on the pressures we're feeling with loss trend that's driving what's happening in small commercial. And relative to new entrants, fourth quarter was pretty much a normal quarter for us. So yes, there are new names. They're coming at small from different directions. I don't think there's anything different in our results that was impacted by any of those names and we'll continue to respect and watch and think about our strategy going forward. But I feel very good about where our small commercial business is operating and pleased that we're leaning in relative to building new product and some of the tools that we're rolling out for customers in the coming quarters. Our next question comes from the line of Jay Cohen from Bank of America Merrill Lynch. Your line is open. Yes. Thanks. I guess a couple of questions for Doug. First on the commercial side, specifically in the small and mid, the fourth quarter accident year loss ratio was kind of the best you saw all year. That was a very good trend as the year progressed, the fourth quarter being very good. Was there anything helpful there, a low level of non cat weather or were you adjusting kind of the full year loss ratios in the fourth quarter? Yes, there isn't anything that sticks out in my mind, Jay. Obviously, when we get to year end, we want to make sure and do our best job at making sure the accident year full year is where it needs to be. In general, fourth quarter weather is slightly better non cat. So there's a little bit of a positive bias on our property side, both small and middle. And we experienced some of that in the fourth quarter. Obviously, December is the month that triggers whether you have a good property quarter or not in fourth quarter. But there isn't anything to speak about that I think I would raise to that level. Okay, great. Second question on the auto side, I guess it could be argued that size and scale are increasingly important in auto insurance and likely will be going forward. You're shrinking this business obviously due to profitability issues. Do you get concerned that by shrinking the business, you're losing out on the scale that you might need in the future to compete very effectively? Jay, it's Chris. I would say, yes, we are taking the corrective actions necessary to improve our profitability and that will obviously require some top line shrinkage. I think we focus primarily on the older age market. We think we have a niche that we've understood for a number of years. Our relationship with ARP is deep and very strategic for us and trusted. So I don't think scale in and of itself in that market is required. If we were ever think in terms of more of a mass market strategy, then I'd say scale and how we think about it differently, but we're not thinking about that. So I think we have the appropriate underwriting skills, the appropriate insights into that, call it, customer segment. And I think we have the appropriate claims skills embedded in the organization across the country to effectively manage it. We're in a rough spot now, no doubt, but we're not giving up and it continues to be a strategic niche for us going forward. Great. That actually makes sense. Thanks, Chris. Our next question comes from the line of Elyse Greenspan from Wells Fargo. Your line is open. Hi, good morning. Just a couple of questions on the personal auto side. When putting together some of your comments, it seems like when you came to your outlook, you're assuming we're going to maintain the high BI severity trend. So I'm assuming kind of to start 'seventeen, it's basically the trends that you ended 'sixteen with, just kind of confirming that. And then as you think about the components to get to your margin goal, are you assuming that there is some improvement both from the loss as well as earning through some of the expense initiatives, additional expense initiatives next year? And then as we think a little bit further out, do you think is 2018 when you see obviously you pointed to taking more rate that will return to profitability in the auto book as you think about going out a little bit further than 2017? Please let me try to tackle the pieces that all add up to obviously our overall performance. So on the pricing side, we've given you pretty clear insight into the progress we're making. And just a few moments ago, I also gave you a little bit of lens into 2017 and the fact that our written pricing will go up over the next couple of quarters. So as that earns its way into the book, we're getting a positive contributor to our progress against targets. At the core of your question relative to loss trends, we are expecting from a growth perspective our loss trends in 'seventeen to be about where they are in 'fifteen I'm sorry, 'sixteen. So as we think about our data, our expectation for the accident year 'sixteen is that our loss trend total frequency and severity put together is in that six range, five point five percent to six percent and that's essentially where we're planning for our growth trend in 'seventeen. What's different about 'seventeen is now the number of initiatives that we've been working and putting into market over the past four to five quarters, we expect some traction and we're beginning to see that traction. So we're expecting several points of improvement against that loss trend and the combination of earned rate working through and a bending of the loss trend curve drives our expectation of improvement in performance both in 'seventeen and candidly accelerating into 'eighteen as well. Okay. And then there is when you think about that though, do you think you also get some level of expense improvement in 'seventeen when you come to your guidance or it's more driven off of improvement on the loss ratio side of the auto book? Yes. The core of our change is in the loss arena. I think our expenses we've managed our expenses accordingly. I don't see a lot there. In fact, February quarters from now, I expect to be in a very different rate adequacy spot. And we've got places around the country where we're feeling much better today that we're pricing for the norms of the exposures and loss trend. And I think you'll see us begin to be more aggressive and thoughtful in our growth aspect. Our next question comes from the line of Mark Duvely from RBC Capital Markets. Your line is open. Yes, good morning. I wanted to ask a question related to the asbestos transaction. I mean, is there anything left there at all or maybe said differently when you do your ANU study next summer, is there anything that can produce a change to reserves that will impact results either positively or negatively? So I'll take it, it's Beth. So a couple of things. One, just to be clear and this will be in our 10 ks, we intend to do our A and E studies in the fourth quarter going forward just given the transaction that we did. We don't anticipate it to be as significant obviously. As it relates to our exposure that's left as it relates to A and E, again, this treaty covers substantially all of the A and E exposure that we have remained once we complete the sale of our UK subsidiary. The one thing though that we did retain as part of the transaction is to the extent that there's any uncollectible reinsurance that comes from our A and E exposures, we would still bear that risk. So that has not been a significant driver of our A and E reserve increases over the last couple of years, but that is one aspect of it that we did retain. Mark, it's Chris. The only thing I would add is, as you know, asbestos language and policy forms changed in 'eighty five for an absolute exclusion. There is some post 'eighty five reserves that we had that we also ceded. So think in terms of pre and post 'eighty five A and E reserves are part of this cover. Okay. That's helpful. Thank you. And then in your comments related to the group benefits, you mentioned a $13,000,000 charge related to Pentree. Maybe I missed it in the earlier remarks. Did you specify when that would be taken or any timing on that? So again, that's going to be based on facts and circumstances. The charge we will incur once the assessment is made and the liquidation again. We think that could be first quarter, but it's really outside of our control and we won't book the amount until there's been a declaration. Got it. Thank you. That's all my questions. We have no further questions in queue. I'll turn the call back to the presenters. Thank you, Lisa, and thank you all for joining us today and for your interest in The Hartford. If you have additional questions, please don't hesitate to follow-up with Investor Relations by email or phone, and we'll get back to you as quickly as possible. And as I mentioned, we hope to see you all soon at one of the events we'll be attending. Thank you and we wish you a good weekend. This concludes today's conference call. You may now disconnect.