Earnings Call: Q4 2014

Feb 2, 2015

Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to The Hartford's Fourth Quarter twenty fourteen Financial 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 Patel, Head of Investor Relations, you may begin your conference. Thank you, Tiffany. Good morning, everyone, and welcome to The Hartford's full year twenty fourteen financial results and twenty fifteen outlook webcast and conference call. Our news release, the investor financial supplement and the fourth quarter financial results presentation, which includes our 2015 outlook, were all filed yesterday afternoon and are available on our website. At about 08:30 this morning, we posted the slides for today's webcast, which are also available on the Investor Relations section of the website and which will also accompany the webcast today. Our speakers today include Chris Swift, 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. As described on page two of the presentation, 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 forward looking statements and 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 Web site. Our presentation today also includes several 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 earnings release and financial supplement. I'll now turn the call over to Chris. Thank you, Sabra. Good morning, everyone, and thanks for joining us today. 2014 was an outstanding year for The Hartford. We continued the execution of our strategy and created value for shareholders. We accelerated the transformation of the company by expanding profit margins and increasing ROEs and P and C and group benefits and mutual funds, by selling the Japan annuity business and reducing risk in Talcott, returning over $2,000,000,000 of capital to the Hartford Shareholders and executing a seamless leadership transition. I want to thank Liam, the Board, the management team and all our employees for contributing to a great year. Last night, we reported outstanding fourth quarter and full year 2014 results. Full year core earnings increased 9% to $1,550,000,000 On a fully diluted per share basis, core earnings grew 16%, reflecting profitable growth and effective capital management. The core ROE increased to 8.4% in 2014, a full one point increase over prior year. Core earnings growth was driven by margin expansion in P and C, group benefits and mutual funds and solid top line growth in P and C. We achieved an almost three point year over year improvement in the underlying combined ratio in P and C. The Hartford's pricing discipline and investments in new products and capabilities are producing strong results. Strong profitability recovery continued in Group Benefits with the core earnings margin rising almost a point in 2014 to 5.2%. I'm very pleased with how our businesses are balancing margins and top line growth in this market environment. The Japan sale was another critical accomplishment in 2014. The transaction significantly improved the company's risk profile and enabled us to increase our capital management program. During the year, we returned more than $2,000,000,000 of capital to shareholders in the form of equity repurchases and dividends. We also reduced holding company debt by $200,000,000 Before we move into twenty fifteen's outlook, I want to touch upon an important event that we originally expected in 2014, the passage of TRIA. The TRIA legislation has been and continues to be critically important to policyholders that rely on the availability of terrorism insurance. We appreciate the efforts of Congress and the administration to enable its passage. Now let's turn to 2015. We expect to generate core earnings between $1,550,000,000 and $1,650,000,000 As Beth will cover in more detail, adjusting for twenty fourteen's low catastrophe losses, strong limited partnership returns and prior year development, earnings growth from P and C group benefits and mutual funds is expected to more than offset the anticipated decline in Telkot's earnings. As Doug will detail, we are striving to expand our margins in 2015 recognizing the pricing and interest rate environment has become more challenging. In P and C, we are optimistic that targeted pricing actions and enhanced capabilities will allow us to drive modest improvements in the underlying combined ratio. In Group Benefits, the core margin is expected to be relatively stable. We foresee continued improvement in disability loss trends, but expect that to be offset by a reversion to a more typical life mortality. We expect the key story in group benefits to be a top line growth recovery. Recent sales activity suggests The Hartford's strengths in claim handling and service are making a difference with customers. We are committed to improving The Hartford's ROE and growing book value per share to drive top quartile shareholder returns. As I discussed last quarter, we will focus our activities in four major areas: expanding product and underwriting capabilities increasing distribution effectiveness improving the customer experience and operating efficiency and effectively managing capital including the ongoing runoff of Talcott. We continue to add new product and underwriting capabilities to meet the needs of a broader range of policyholders. In 2015, we intend to introduce new industry verticals in middle market and to strengthen our underwriting presence in geographies where we have been underrepresented. In group benefits, we have expanded our voluntary product suite to include disability flex, critical illness and accident coverages. These product and underwriting initiatives strengthen our relationship with brokers and agents by helping them better serve their clients. In addition, we seek to extend our distribution in 2015. The micro segment of small commercial is best served by a multi channel distribution strategy. We are aggressively moving in that direction with an ARP endorsed offering and other initiatives that will bring increased simplicity and speed to small business owners and our distribution partners. We are also investing in technologies that will improve the customer experience and create operating efficiencies. The early feedback from the rollout of our new P and C claims systems has been very positive. The system promises to improve claims handling, efficiency and consistency as well as the entire claims experience for the policyholder and the agent. Finally, effective capital management will continue to be a will be continue to be critical in meeting the company's strategic goals. We plan to take $1,500,000,000 in dividends from the Talcott legal entities by early twenty sixteen, '5 hundred million dollars of which was completed in January as we begin to appropriately reduce the amount of excess capital in Talcott to reflect its runoff status. This excess capital will provide the company with significant financial flexibility for future capital actions and investments in new capabilities. As I reflect on the past twelve months, it is clear that this has been a pivotal year for The Hartford. With the sale of Japan and the significant improvements in P and C and group benefits, the company's strategic transformation and restructuring is essentially complete. The Hartford enters 2015 as a strong competitor in each of our markets. We have supplemented existing strengths in underwriting and claims with enhanced capabilities in product, distribution and service. The company is positioned to create shareholder value going forward on a consistent and sustainable basis. Now, I'll turn the call over to Doug. Thank you, Chris, and good morning. Today, I'll cover the 2014 highlights for Commercial Lines, Personal Lines and Group Benefits and then share some thoughts for 2015. First, let me quickly remind you that I'll be discussing our results under the new commercial lines business alignment we disclosed several weeks ago. 2014 was another year of strong financial performance across the board. Our results were achieved through sound risk selection decisions, outstanding execution across our product and field organizations and our relentless focus on getting right all the small things that go into a market leading franchise. Before I cover our results, I want to touch on a few broad themes affecting our businesses, both in 2014 and as we look forward to 2015. First, while 2014 accident year catastrophes and P and C were slightly higher than 2013, losses were below our expectations for a second year. We'll take the good news, but we won't plan for it to continue. We still follow a rigorous process to manage our cat exposures over the long term. Second is net investment income, which trended down for the year and recent movement in treasury yields suggest that we aren't likely to see a reversal anytime soon. This demands that we stay vigilant on our pricing and actively monitor competitive forces in 2015. Beth will have some additional perspective on our investment portfolio in her comments. Turning to our financial results. In Commercial Lines, we delivered $996,000,000 of core earnings for the full year on an all in combined ratio of 93.4. This was an earnings increase of $169,000,000 from 2013, largely driven by 4.7 points of improvement in the combined ratio. The underlying combined ratio, excluding catastrophes and prior year development, was 91.5 for the year, representing 3.6 points of fundamental margin improvement. On the top line, our written premium of $6,400,000,000 was up 3% from 2013. Excluding the written premium declines in our programs business due to non renewal actions taken in 2013, growth was 5%. New business momentum was building in the back half of '20 '13, particularly in small commercial and middle market, and that momentum carried into our 2014 results. On balance, we're extremely pleased with our competitive positioning in the market and our prospects for profitable growth. Let me offer some details on that by looking at each of our commercial business units starting with small commercial. Our small commercial business continues to excel with its unique skills in product, distribution and service. Our focus on customers and distributors has propelled us to a very strong market position. Written premium for the year grew 5% aided by strong retentions and the underlying combined ratio of 87 was 2.5 points better than 2013. New business was up 7% for the full year. We finished 2014 with three consecutive quarters of double digit new business growth driven by the full implementation of our quoting application, ICON, and other agency engagement initiatives. We continue to make investments in this business to drive competitive advantage. We're adding new online features for services and we launched a partnership with AARP to extend our small business services to their members. Moving to middle market, I'm pleased with our progress. The underlying combined ratio of 94.5 for the full year improved 4.5 points, much of this resulting from margin improvement in workers' compensation, the culmination of years of underwriting and pricing actions. Written premium growth was 1%, but this now includes our programs business, which was still shedding business in 2013 and 2014. Excluding programs, middle market written premium growth was 4%, largely driven by our strategy to expand non workers' compensation lines and deliver a more balanced book of business. Retentions were solid throughout the year and new business production of $458,000,000 was up for a second year. Much of our success in middle market links directly to improved performance in the field. We have upped our game in underwriting, process effectiveness and agency engagement with new tools, better data and deeper analytics on the front line. We are strengthening our risk capabilities to be a top partner for our distributors and customers, effectively underwriting and servicing an expanded array of new accounts. Within Specialty Commercial, results held steady with an underlying combined ratio of 100.2 for the full year, up slightly from 99.6 in 2013. National accounts posted another solid year with strong performance on both the top and bottom line. New business tapered off from 2013, which was a particularly active year. Nonetheless, written premiums were up 11% and account retention was in the low 90s. Our Financial Products business also had a strong year. The team has successfully repositioned this business and I'm confident that by more closely aligning with our middle market operation, we can build a competitive advantage across commercial lines. Shifting over to personal lines, we delivered $210,000,000 in core earnings, up 2% from prior year. Adjusting for Catalyst three sixty, which we sold in 2013, core earnings actually grew 12%. The all in combined ratio was 95.5 for the full year, improving 1.4 points versus 2013. Excluding catastrophes and prior year development, the underlying combined ratio was 90.6, improving 1.7 points from last year. The improvement was mainly driven by lower marketing and technology related expenses. Written premium grew 4% for the year with continued strong performance from our AARP through agents offering. AARP Direct also posted modest growth from favorable retention and written pricing actions. During 2014, we rolled out our new auto product OpenRoad in 32 states, increasing our pricing flexibility and improving our responsiveness to market trends. We also achieved greater efficiency in our ARP direct acquisition process, improving our cost conversion by 10%. Now let me pivot to Group Benefits. Core earnings for 2014 increased to $180,000,000 up 14% from 2013. That results in core earnings margin of 5.2%. We continue to see profit improvement driven by favorable group life and disability results. Excluding the effects from terminating an association financial institutions marketing arrangement, the 2014 group life loss ratio improved 3.4 points due to continued pricing discipline and favorable mortality. Disability trends also remain favorable compared to prior year with the loss ratio improving a 0.5. Long term disability incident rates improved, but at a slowing pace versus prior year and claim recovery rates continue to be strong. Looking at the top line, fully insured ongoing premium excluding association financial institutions declined 2% for the full year. Overall book persistency on our employer group block of business came in at 89% for the year and we've been very pleased with our renewal pricing adequacy. Fully insured ongoing sales excluding Association Financial Institution was $326,000,000 for the year, down 12%. However, as we sit here today with considerable insight on the first quarter of twenty fifteen activity, we're seeing a strong rebound in new sales. We're encouraged that our recent investments are enabling us to compete more effectively and close more cases. So as we wrap up 2014, we're pleased with our continued financial progress and by the growing market strength of each business. Across our enterprise, we're seeing strong and still improving levels of employee engagement and a deep commitment to achieving even greater levels of success as we look to the future. This is what defines The Hartford and why our customers and distribution partners trust us with their most important insurance needs. Before I turn things over to Beth, let me offer a few comments on 2015. We continue to invest heavily in our capabilities as an enterprise, focused on areas of competitive advantage for each business. We've been on this journey for several years making extensive progress in product development, business metrics and easy to use technology applications for distributors, customers and employees alike. A great example is our new P and C claims management platform that will be completely rolled out by end of this year. It is already delivering value through improved claim rep performance, better customer experience and process efficiency. And the data analytics supported through the platform will be a source of innovation for years to come. I'm also very encouraged by the initiatives for each of our business units. We're having a strong run-in small commercial and we have even greater aspirations. Our formula based on customer value and innovation continues to separate us from the pack. This year we will roll out enhancements to Spectrum, our business owner's package policy, introduce new online services and invest in capabilities to better support distribution partners as they pursue new marketing strategies and greater efficiencies for these small accounts. Our technology and service operations make us a go to carrier and our investments will keep us on the leading edge of this market. In middle market, we have a number of new initiatives in flight to compete more broadly in the market. First, we're introducing a new underwriting cockpit that improves speed, support and data driven insights for our team of professionals. Underwriters will be better equipped than ever to smartly compete for business. Second, we'll begin deploying additional underwriting resources in targeted regions where we see new business upside. Working closely with our agents and brokers is critical to success and this demands local presence. And a third example of our focus is the build out of additional risk management professionals, specifically in engineering and loss control. We see this skill set as crucial for enabling our progress in new market sectors. These types of investments give us the opportunity to grow our middle market business, not by competing solely on price, but by bringing our strong value proposition to a larger share of the marketplace. Within Specialty Commercial, a major initiative will be leveraging the expertise of our Financial Products business. We now have aligned the strategy and management of financial products more closely with our small commercial and middle market businesses. In addition, to continuing to compete in the public D and O market, these teams will partner on product development and automation to create differentiated offerings across commercial lines. We expect our overall commercial lines margin to remain generally stable with an underlying combined ratio between eighty nine point five and ninety one point five. We will continue to seek improvement from a few pockets of lagging results such as commercial auto, where we will be aggressive with price increases and underwriting actions. In other well performing lines, we will manage our pricing strategy to address long term loss cost trends and individual account performance. We believe that our leadership in small commercial and investments in middle market provide the opportunity for profitable growth as we better deploy the capabilities we've developed. In personal lines, we will bring even greater focus to our AARP direct business. With new product analytics and improved marketing, test and learn capabilities, we're systematically improving response and conversion. We're also continuing to refine our ARP through agents offering, resulting in somewhat slower top line growth. We continue to be very excited about the quality of this business and believe that we can develop deeper partnerships with high quality agents appointed for this program. Excluding catastrophes and prior year development, we expect the underlying combined ratio to be between eighty nine and ninety one, a modest improvement in margins as we continue to focus on rate adequacy. In group benefit, we're very pleased to be positioned for top line growth with our book of business performing well. Renewal rates on business in the first quarter twenty fifteen are very strong as is new sales activity. New sales with oneonefifteen effective dates are up over 60% versus a year ago. And our win backs, cases that left several years ago and have now decided to come back to us continue to be impressive and especially gratifying. Our service and claim capabilities are the reason. We truly have a differentiated experience and we're continuing to build on those capabilities. First, as we expand in the voluntary market, we're making additional investments in our products and capabilities to provide an even better experience in an increasingly consumer driven market. Second, we're investing in enhanced producer analytics and increased field resources aligned with targeted growth markets. We expect our Group Benefits core earnings margin to be relatively stable between five and five point five with underwriting performance helping to offset declines in investment income. Overall across all of our businesses, we're focused on competing in an aggressive and disciplined manner. We believe that we have an opportunity to grow our business through smart product expansion and deeper local partnerships with our distributors. We have great skills and talent that can be deployed more widely without pushing beyond the boundaries of sound underwriting and risk selection. Without pushing beyond the boundaries of sound underwriting and risk selection. In summary, we're very pleased with our progress in 2014 and excited to extend our reach in 2015. Let me now turn the call over to Beth. Beth. Thank you, Doug. I'm going to briefly cover the other businesses and key 2015 business metrics before turning to the capital outlook for Talcott and the holding company. Mutual funds core earnings rose 17% in 2014, primarily due to an increase in fees from higher average assets under management, excluding Talcott related funds. As noted on slide 19, long term fund performance remains solid with 64% of mutual funds outperforming their peers over the last five years. For the year, mutual fund sales were stable at $15,200,000,000 as growth in equity fund sales was offset by reduced fixed income sales. During the year, we exited certain types of funds and transferred some funds to our investment operations, which resulted in negative mutual fund net flows of $1,400,000,000 Adjusted for these items, net flows were about breakeven for the year. In 2015, we expect modest growth in core earnings as growth in mutual funds AUM will Telkot's VA products. Telkot's core earnings summarized on slide 20 rose 5% for the year much better than originally expected due to higher limited partnership income and lower contract holder initiative costs. Contract counts continue to decline, down year over year by 13 for variable annuities and 18% for fixed annuities. There's only been a modest decline in institutional covered lives as the majority of the block consists of longer duration structured settlements and pension related terminal funding liabilities. In 2015, we expect Talcott's core earnings to decline about 15 to 20% to a range of $340,000,000 to $370,000,000 Almost half of this decline is due to lower projected limited partnership returns, which were 10% in 2014 versus 6% projected in 2015. Excluding the excess 2014 return in limited partnership income, core earnings are projected to be down around 10% in 2015, consistent with the runoff of the annuity blocks somewhat offset by lower expenses. Turning to the corporate segment on slide '21, '20 '14 core losses were about flat to the prior year. The 2015 core loss outlook of $235,000,000 to $245,000,000 is slightly better than 2014 due to lower interest expense from planned debt repayments in 2015. During 2015, we expect to spend up to $1,000,000,000 for debt management, which will help us move towards our long term target of debt to total cap in the low 20s. Rating agency adjusted debt to total cap was 28.4% at December 3134 or 26% pro form a for the projected 2015 repayments. Turning to investments on slide 22. We remain pleased with the credit performance of our portfolio with only $59,000,000 of impairments in 2014 compared with $73,000,000 in 2013. Investment yields, however, remain a challenge due to market conditions. Our portfolio yield has held up reasonably well in the low interest rate environment, averaging 4.1% this year, excluding limited partnerships, or down about 10 basis points. Our 2015 outlook, which is based on market yield curves, projects a modest decline in the portfolio yield due to lower reinvestment rates. Our outlook for annualized P and C C only pretax portfolio yield is 3.9% including limited partnerships. Turning to our capital management plan. Through January 3035, we have repurchased approximately $1,900,000,000 dollars totaling 52,000,000 shares for an average purchase price of $36.46 under the $2,775,000,000 share repurchase program and repaid $200,000,000 of debt maturities from the $1,200,000,000 debt management program. Our core earnings outlook includes the impact of the completion of both programs in 2015, although the precise number of repurchased shares will depend on market prices. To summarize, as detailed on slide 24, core earnings in 2014 rose 9% to $1,500,000,000 which was the high end of the 2014 outlook. Core earnings per diluted share rose 16% to $3.36 due to the increase in core earnings and the impact of the capital management program. The core ROE rose to 8.4%. Book value per diluted share excluding AOCI at December 3134 rose 4% to $40.71 from year end 2013, largely due to the capital management program. Shareholders' equity excluding AOCI declined 6% to $17,800,000,000 as the contribution of net income was more than offset by share repurchases and dividends. Our consolidated 2015 outlook, which you can see on slide 25, is for core earnings of $1,550,000,000 to $1,650,000,000 which at the midpoint is 7% above 2014 results once you exclude favorable items in 2014 such as CAAT and limited partnership returns both better than outlook as well as unfavorable prior accident year development. On a per share basis, including an estimate of the impact of share repurchases during 2015, core earnings per diluted share would be approximately $3.65 to 3 point $0.85 Slide '25 lists several of the key business metrics for 2015, most of which we have already covered. Based on our 2015 outlook, we estimate an increase in core ROE to about 8.7% to 9.2 compared with 8.4% in 2014. As you know, one of our principal financial goals is to increase our ROE. We are frequently asked about our target ROE and how much we can improve ROE each year. As you can see, we have made a lot of progress over the last few years and we expect an additional 30 to 80 basis points of improvement in 2015. Our goal is to generate an ROE above our cost of equity capital, which based on the current beta and market factors is about 10.6 today. As you can see on slide 26, our P and C group benefits and mutual funds ROEs have been improving nicely. Note that the business ROEs on the slide are unlevered, so they do not include any debt allocation or interest expense. The unlevered P and C group benefits and mutual funds ROE has risen from 10.6% in 2013 to 11.2% in 2014 and we project additional improvement in 2015. These levels exceed our current cost of capital of 8.4% including debt, indicating that we are creating shareholder value in those businesses. The tel cut ROE, however, is much lower and reduces our consolidated ROE to below our cost of capital. However, as you can see on this slide, our one year beta has declined from almost two at the beginning of twenty thirteen to about 1.25 today. The reduction in the size and risk of Telkot is the principal reason that the beta has declined and is an important contributor to our progress in reducing our cost of capital. Nevertheless, our beta remains higher than other P and C companies, which range from 0.6 to 1.15. We have made a great deal of progress in driving ROE growth and reducing our cost of capital. We are optimistic about continuing to make progress with the goal of generating ROEs above our cost of capital. Now I would like to turn to our capital outlook and specifically our views of excess capital in Talcott. As we have stated, we have been evaluating the appropriate capitalization for Talcott taking into consideration its improved risk profile with the sale of Japan. Our previous standard was to maintain a minimum of at least 325% RBC in a stress scenario. We have now updated that to a 200% minimum RBC in a stress scenario. Of course, in more favorable markets, the actual RBC levels will be much higher. Slide 27 displays the allocation of Telkot's five point six billion dollars of statutory surplus at December 20 VA, '2 point '2 billion dollars is allocated to institutional and fixed annuities and $700,000,000 to other, which includes reinsurance credit exposure on divested businesses and our COLI BOLI book. That leaves $1,500,000,000 of surplus that we consider today to be excess in the stress scenario in which we intend to take out of telco in stages. Last week, the first dividend of $500,000,000 was paid to the holding company. We expect an additional $500,000,000 in the second half of twenty fifteen and the remaining $500,000,000 in early twenty sixteen. Slide 28 shows the capital margin in Telkot under base, stress and favorable scenarios, the detail of which are in the appendix. All of these scenarios assume we take the 1,500,000,000 in dividends by early twenty sixteen. Assuming the stress scenario occurs in 2015, we estimate a remaining capital margin at the end of twenty sixteen of about $400,000,000 which roughly equates to a 240% RBC comfortably above the 200% level. Slide '29 provides a reconciliation of capital margins in the different scenarios. The VA hedging program helps protect surplus in down markets. In fact, a significant portion of the approximately net $800,000,000 negative impact from VAs in the stress scenario results from the reduction of fee income that would result from lower asset levels. CellPass major source of capital margin impact in the stress scenario comes from institutional and fixed annuities due to investment related impacts and the impact of interest rates. Finally, before turning to your questions, I wanted to summarize our holding company cash flow for 2014 and our outlook for 2015. During 2014, the holding company had about $2,900,000,000 in positive cash flow, including the Japan sales proceeds. During 2015, we expect dividends of about $1,900,000,000 I would note that our projection for P and C dividends is lower in 2015. Having accelerated dividends in 2014, we do not have ordinary P and C dividend capacity until the third quarter of twenty fifteen. During 2015, we expect to use approximately $2,600,000,000 for holding company obligations and the capital management plan, resulting in net holding company cash and short term investments of approximately $1,800,000,000 at year end 2015. This is a very strong base that positions us to deploy capital accretively for shareholders in 2016 and beyond. 2014 was an outstanding year for The Hartford with significant improvement in margins in P and C and group benefits, continued net flow improvement in mutual funds and a substantial reduction in risk at Telkot. We are focused on growing core earnings in 2015 offsetting the decline in Telkot earnings with growth in the other businesses. In addition, Telkot is generating excess capital allowing us to deploy capital in more accretive ways to drive ROE improvement. We look forward to updating you on our progress in 2015 to grow both ROE and book value per share to drive shareholder value creation. I will now turn the call over to Sabra, so we can begin the Q and A session. Thank you, Beth. We have about thirty minutes for Q and A. And as usual, we would appreciate it if people could limit themselves to one question and a follow-up and then re queue so that others have opportunity to ask a question in the time we have available. Tiffany, could you please give the Q and A instructions? Your first question comes from the line of Brian Meredith with UBS. Your line is open. Thanks. A couple of questions here. First for Doug, I'm just curious with the underlying combined ratio improvement both in personal and commercial, how much of that is going to come from expense initiatives versus loss ratios still improving here given where rates are in line with loss trend? Let me tackle the personal lines first and then we'll come back to commercial. We still have a very consistent approach in personal lines and we'll be addressing loss trends through pricing in a very similar manner as we are in 2014. So I look at the strategy in 2015 with personal lines, it's very consistent with 2014. On the commercial lines side, obviously, an evolving environment. And as we talked to you on this call and shared our numbers last night, you know that the fourth quarter was down a little bit on the pricing side versus third quarter. So we're being thoughtful about how 2015 will play out. We've got a number of strategies in different places. But much of our improvement is coming number one from the fact that our written prices in 2014 will earn their way into 2015. And I would say that much of the expense work we're doing is being invested back inside the platform. So most of the work and most of what you'll see inside the combined ratio will be pricing and underwriting driven. Okay. And then the second question, I'm just curious on capital management guidance here and you make the comment the additional $500,000,000 from Tilecutt you're expecting to look to use that for debt paid on. I'm just curious why that decision particularly given that debt capital is incredibly inexpensive right now. Why would you kind of make the decision to kind of continue to pay down your debt? Brian, it's Chris. I'll let Beth comment too. But I think what we've said all along is that this two year plan is a balanced plan of equity and debt. If you look closely at our language, I mean, we have allocated up to $1,000,000,000 of debt repayment this year. Half of that is just maturing debt and the other half is what I'll call optionality to really look at our debt stack to continue to drive down basically our debt to cap ratios as Beth described. Beth, would you add anything else? Yes. I'll just add a couple of things. First of all, the I think you referred to the $500,000,000 dividend from Telkut being the same thing as the $500,000,000 of debt reduction and they're not related. So I would separate the two. As Chris said, we announced our debt management plan last year. And you may recall that in the fourth quarter, we had anticipated using up to the $500,000,000 to reduce debt. And we decided to take a pause because interest rates had decreased at that time and they're still low. And so we'll continue over the course of 2015 to look at opportunistically what makes sense for us to use that $500,000,000 in a way that we think is in the most benefit to our shareholders. Great. Thank you. Your next question comes from the line of Randy Benner with FBR. Your line is open. Hey, good morning. Thanks. I wanted to touch on trying to understand the pace of the runoff and particularly through the trend that we're seeing in VA surrenders. So that came in I think at 11% in the fourth quarter and trying to adapt throughout the year. But the contract count for VA was down about 13% for the year. And so I'm just trying to think about what's the right way for us to think of how these liabilities run off? Is it more of that full year result? Or is it something that could trend down into the single digits as we look to 2015? Thanks, Randy. It's Beth. So a couple of things I'd say on that. As you know, we did have some initiatives in 2014, which impacted that VA count coming down, which is why you see the 13%. And as you point out, as we went into the fourth quarter, we did see a reduction. And our estimate for 10% for next year, we feel very good about when we look at sort of historical trends and the fact that we don't have a planned significant initiative in 2015 at this point. So as the year progresses, if we determine that there is something that we would do, we'd obviously update you. But we think right now from all that we can see in our analysis that a 10% is a good place for us to plan for 15%. Okay. And then the this is a 10% on no initiatives. And then on the fixed and institutional blocks, is there anything initiative wise or transaction wise that would make sense there? It seems like maybe the window for transferring those kinds of risks to some institutions is not as open as it was in the last couple of years. Any color you can provide on that side? Yes. So I think about it in two pieces. So we have our fixed annuity block and again the surrender rates or contract decreases that we highlighted for the year were impacted by some of the initiatives that we had in that block. And we'll continue to look to see if that makes sense to do in the future. As it relates to the institutional block as we've discussed before given where rates are at this time, we don't really see a transaction or for that book to really be economical for us since we'd be basically locking into these very low levels. If the interest rate environment changes as we said in the past, we'll of course look to see if there's something more economical that we could do with that book. All right. Great. Thanks. Your next question comes from the line of John Nadeau with Stern Energy. Your line is open. Good morning, everybody. A couple of quick questions for you. So if I think about and Beth, and I'm glad that you sort of commented on the $500,000,000 from Talcott being above the what was already embedded in your two year capital management plan. So if I could get at the question maybe a little bit differently, I think you're targeting to end the holding company cash levels by the end of twenty fifteen at around $1,800,000,000 I guess my question is what's your target longer term in terms of how much cash you want to keep at the parent on an ongoing basis? Sure. Thanks. So when we look at the cash at the holding company, we typically start with looking at what our annual expenditure is for covering holding company obligations, so interest in shareholder dividends, which again you can see on our slide is about $600,000,000 for 2015. So we typically talk about a target in sort of the 1.5 times range for that. And then of course, you'd always want to have I think a little bit of cushion, but that's kind of how we look at that. Okay. So it's fair to say you've got a pretty sizable cushion versus that level? Yes. As I said in my comments, I think ending at $1,800,000,000 is a very strong position. Again, that doesn't include the $500,000,000 that we anticipate to take out of talcot in 2016. Yes. So I think that positions us very well as we head into 2016. Okay. And then just a bigger picture question. Given where rates are and you guys I think are obviously taking that into account in some of your outlook here investment income related and other. But with all the mix shift in the company, particularly the reduction in the risk and size of Talcott, can you give us an update on how we should think about the longer term earnings pressure and maybe balance sheet risk from a sustained sort of 2% or sub two percent ten year environment? Yes. So if you think about the projections that we have for you and maybe what I'll do is I'll just talk more about our P and C book. If we looked at our outlook right now for 2015 and if rates sort of remained at current levels and didn't follow the forward curve, for 2015 we'd probably see a very modest compounding effect of that. I think the counterpoint to that though is what would happen on P and C pricing. So there's obviously the NII impact, but then there's also just what does that mean for the broader environment if we were to remain in a low interest rate environment. But that kind of gives you a sense for the P and C portfolio. And then related to Telkot or group maybe is anything we should be thinking about? I mean discount rate on the group disability side or spread pressures within Telkot? Yes. So again, if I look at that same measure sort of putting in all in HIG, which would include the group and Talcott piece and again if rates remain flat from kind of where they are now that $7,000,000 to $10,000,000 impact rises to $16,000,000 ish. So again, there's obviously some impact on that. I don't have a breakout between talcah and group. And obviously group, I would say there again is a pricing dynamic that would also have to be taken into consideration. John, it's the only yes. Just to offer from a group benefit side, I mean, we've been discounting reserves for 2014 and we plan in 2015 in the 3.5% range. So I think our liability structures are already reflecting that lower interest rate environment. Really helpful. So we're looking at maybe 1% earnings pressure from sustained low rates at least for one year. Okay. Thank you. Your next question comes from the line of Jay Cohen with Bank of America Merrill Lynch. Your line is open. Yes. Thank you. Just I guess a more of a business question. I was interested to hear that you're through the AARP relationship going to be selling small commercial business. I'm wondering do you have a sense of what percentage of the AARP members own small businesses? How big a population are we talking about here? Jay, good morning. It's Doug. We are aware that there are more than 1,000,000 members that have small businesses. These I would characterize them largely as micro small businesses, Jay, employees less than five. But there is a sizable component. I think it will take us time to work at that, but we're excited about the opportunity and look forward to partnering with ARP in broader ways going forward. That's great. Many of the questions were answered. Thank you. Your next question comes from the line of Jay Gelb with Barclays. Your line is open. Thank you. First, I just want to clarify on a previous statement from Beth. That $500,000,000 of flexibility to repurchase additional debt, did you say that could also go into share buybacks? No, I did not say that. What I said was that we had earmarked $500,000,000 and that we would look at through the course of 2015 when the appropriate time is for us to use that for debt management. Okay. The other point I wanted to come back to is I believe after second quarter there was some outlook with regard to ROE potential. And previously it was low 9% in 2015 and I believe 30 to 50 basis point expansion in both 2016 and 2017. So that prior guidance would have gotten you right to around 10% in 2016. Is that still a reasonable expectation? Jade, it's Chris. I'll ask Beth also to comment. I think some of those comments you're attributing to me. So I still stand by him, but I would say that I think the headwinds were just are a little bit more than six, seven months ago honestly. Low rates P and C pricing cycle has gotten a little more challenging as Doug and I have been saying. So it's not beyond the realm of possibility, but it is a higher degree of difficulty as we sit here today. And if you really think about it, once we get beyond 15%, which again we've I think given fairly tight guidance as far as ROE. I think then we're in that 20 to 40 basis point annual improvement from there. So Beth would you add any other color? No. I think you said it very well. As we talked about before, we had we did we do expect to see in 2015 a larger increase than that $20,000,000 to $40,000,000 that Krista just mentioned, because of the capital management actions that are working in from the sale of Japan. But I think that that's a reasonable expectation. Beyond 2015, would you expect the capital management mix to be more weighted towards buybacks as opposed to evenly split in 2015 between share repurchase and debt pay down? Jay, if you give us a little time, we'll talk about that in due course. But right now, we're focused on obviously executing the plan here in 2015. And when we get to really developing the 2016 plan, we'll give you views. But we've always said balanced. So balanced could mean within a range. But also keep in mind sort of debt to equity ratios that we want to keep in balance too. Makes sense. Thanks. Your next question comes from the line of Eric Bass with Citigroup. Your line is open. Hi, good morning. Thank you for providing the updated Talcott stat capital breakdown. I guess in addition to the stat capital, do you believe there's a level of redundant reserves at Talcott that could be freed over time? Yes. So obviously there are reserves that we hold especially in our institutional and fixed book for things that impact interest rates. And so when you look at our margins in favorable scenarios and baseline, you could expect to see some decline there, but nothing that we're expecting sort of in any significant manner in the near term. Okay. And can you provide an update on the present value of the expected earnings from Talcott, which I think you had given probably most recently at the end of last year? I think you're talking about our MCEV analysis. Yes. So again where we stand today with the VA book, we would estimate that the MCEV is still very positive and about 1 point dollars at the December. Okay. Thank you. Your next question comes from the line of Thomas Gallagher with Credit Suisse. Your line is open. Good morning. Just Beth, just a few points of clarification. So the new news we're getting here today on the whole capital management plan is the extra funds coming out of Talcott. And just remind me though the 2014 and 2015 estimates for buybacks and debt repayment That hasn't changed at all, right? Like so the twenty fourteen, twenty fifteen total capital return plan is the same as it was, but you're taking more money out of Talcott. And so my question really is, if I'm right on that, what are those funds being used for? Is it just more money sitting at the holding company? Tom, it's Chris. Let me start and then Beth could share. I think you got the fact pattern right. So the only new news here is the we've defined the amount of excess capital in Talcott at the end of twenty fourteen and we plan to take that out basically over the next twelve to fourteen months. As we really head into the second half of twenty fifteen, we'll work on call it what's next related to our capital management program. But I think what we're trying to convey and hopefully you see it is we will have additional flexibility particularly as the cash comes out of Talcott to think about what is the most accretive use of that capital going forward. We really haven't pinpointed saying exactly what we're going to do, but that's what we're going to work on and communicate it in the second half of twenty fifteen. Yes. And then the only thing I would just add just to be perfectly clear is you're correct. We are not making any changes to the plan that we announced in July that we're currently executing on. And just at this point, Tom, do you mind and again, just philosophically, I just want to be crystal clear that there really hasn't been any change in our philosophy in how we think about excess capital. You've heard us say it before and we'll reiterated here. I mean, we're going to continue to be balanced with debt and equity pay downs and repurchases. We still think it's a good use of our capital to buy in shares. We'll always have an appropriate dividend policy geared towards growing our operating earnings in P and C and group benefits. And then we've said repeatedly, I mean, we are investing in our capabilities, investing for growth and expansion as we go forward really with the eye of creating additional revenue streams that create recurring value for shareholders. So that's how philosophically we're approaching our excess capital. That makes sense to me, Chris. The I guess my follow-up is simply the of the $1,500,000,000 plan dividends at a talcot, it sounds like you're describing that as the excess capital that you believe exists in that block, but then it also generates earnings of I guess roughly $300,000,000 a year. What about the three what about the extra $600,000,000 or so of capital that you should get from retained earnings in that block? Should we also expect that? So would it be $2,100,000,000 all in? Or is the $1,500,000,000 also contemplate the money that's being earned there? Yes, Tom. So it's Beth. I would think about it this way. So again the $1,500,000,000 we defined by evaluating the actual statutory surplus at twelvethirty onefourteen and again ensuring that we would have adequate resources in a stress. So that 1.5 at twelvethirty onetwenty fourteen would obviously have taken into consideration any previous earnings that we generated on the book. But you're right as we think about it going forward to the extent a stress doesn't happen and each year we generate statutory surplus as we evaluate our statutory position at the end of any given year, we could anticipate that there could be upside to that if we generate the earnings. I would say sitting here today and looking at just a lot of the pluses and minuses that happen with statutory surplus, I would guide you to think about a range of $200,000,000 to $300,000,000 because it does sometimes bounce around a little bit for a variety of items. But again that would be something we'd evaluate at the end of twenty fifteen because obviously if a stress doesn't happen, you have one more year of earnings, one more year of the book running off and then you'd kind of evaluate it from there. Okay. Thanks. Your next question comes from the line of Bob Glassgill with Janney Capital. Your line is open. Good morning, Hartford. The life analysts seem to be dominating. Doug, I got a PC question for you. Commercial auto, you said you're raising rates. That's a source of sort of margin improvement in 2015. Where's the sort of underwriting base that you're operating from in that line? And how much are you raising rates? Bob, good morning. We've been disappointed in our commercial auto performance primarily in the middle market, but also in small commercial as well. This year, back half of the year, our pricing has been in the mid single to higher single digit range and I expect that to continue maybe even strengthen a bit as we move into the early half of twenty fifteen. So disappointed. Feel like we have some very strong initiatives both on the pricing side and also on the underwriting side to address it. Looking for progress in 2015 for sure. Okay. And then Beth, just a clarification on your answer to John on sensitivity of talcate to interest rates. You talked a little bit about earnings in general terms, but how different of a presentation on capital would you have been given if the 10 was 50 basis points higher where it was at the beginning of the year? Yes. So obviously in the scenarios that we show for stress, we are stressing interest rates in that scenario and you can see kind of the impact that we see from capital that comes from that. So I think that as we evaluated the $1,500,000,000 of excess today, I think we appropriately took into consideration additional stress and interest rates. So I'm sorry I didn't quite follow. The stress is the current environment is stressing it or it's 50 basis points from here which stress it? So the stress scenario as we outlined in our in the appendix would have the ten year at the end of twenty sixteen, I believe in like the 1.6 range. So again that would have been lower in 2015 as you go through 2016. I don't know that it's exactly the same sensitivity that you're highlighting, but that's how we looked at the stress. Got you. Thank you. Your next question comes from the line of Ian Gettmerman with Ballyh Asney. Your line is open. Hi. Thank you. I guess I wanted to clarify a couple of things. First on the P and C dividend, if you said you don't have ordinary capacity until Q3, what stops you in Q3 from taking a full year's worth of ordinary dividend? Why does it have to be much less than earnings? Yes. So the way I think about it, if you look at the dividends over 2014 and 2015, we typically take out about $800,000,000 a year. And so what we did in 2014 is we just front loaded that dividend that we normally would have taken out in 2015. So over the two years, we kind of get back to our normal levels. Okay. But P and C start excess capital at the end of 2014, right? So why can't they take a full year of earnings in 2015? So typically the way we manage the P and C balance sheet and making ensuring that we're providing enough capital for the P and C business to continue to invest in its operations, we target annual dividends of $800,000,000 each year. Right. And so that's again how we looked at it. Okay. And then just quickly on talcot sort of the stress scenario. Am I remembering correctly in the past I think you've talked about the whole co cushion being for the stress scenario. Now that Talcott on its own can handle its own stress scenario, do we need to think of any HoldCo capital being held for a stress? Or is that really held for something other than a Talcott stress? Yes. So as we have said going all the way back to April of twenty thirteen, we see that the capital within the talcot entities is sufficient to handle a stress. So we are not looking to fund any deficit with holding company cash. And so when we think about the holding company requirements, we tend to focus on the actual obligations for interest and dividends And then as I said to have some buffer, but obviously much less than what would have been needed in the past. Got it. Great. Thank you. Your next question comes from the line of Scott Frost with Bank of America Merrill Lynch. Your line is open. Hey, can you hear me okay? Yes, we can. Okay, Mike. Yes, we can, Scott. Thank you. Thanks for taking my call. Just to talk about thanks for clarification on the debt management program. This is the same as you've announced in mid last year. So $500,000,000 is potentially available for tenders and or open market repurchases. That's just to clarify that's correct, right? Yes, that is correct. Okay. Could you tell us how you think about junior sub also the Glen Meadows in terms of attractiveness to your capital structure? Does it factor into considerations in terms of ratings? Also agencies have talked about improvement I think in P and C operations as one catalyst. Does that all is it your sense that they also are have already taken into account this planned capital management that you've talked about? Yes. I'll handle the second part first. So obviously our plans that we have for capital management we share with rating agencies. So they're very aware of what our intentions are and expectations for this plan. As it relates to other resources that we have like Glen Meadow, we obviously look at that as additional capital that we would have available to us. And as we get go through 2015 and into 2016, we'll take a look at what that means for us and how we might use that capital. Okay. So just to clarify, I mean, your capital management plan, is it something the agencies would have to see you execute before they would act in your sense? And again, with your capital position being the way it is, do you need those capital securities or are they just attractive from a rate perspective? And are you sensitive to sort of loss on debt extinguishment? Or is it more of an interest coverage issue that you're working toward? It's kind of probably a little bit of all of the above of what you said first of all as it relates to rating agencies. We have had a track record now for a couple of years of laying out a plan and executing on that. And we continue to share with them our expectations. And all of that is considered as they look at evaluating the ratings of the various entities. Chris and I have talked about. But we're also very sensitive to looking at Chris and I have talked about. But we're also very sensitive to looking at interest coverage and want to make sure that we're making the right trade offs there. So part of the reason why we held off a bit on using that $500,000,000 that we've been talking about is we felt the charge that we'd have to take given the current interest rate environment wasn't a good trade off. So we'll continue to evaluate that as we move forward and as rates change. All right. Thanks. There are no further questions in queue at this time. I would like to turn the conference back over to Sabra Patel. Thank you, Tiffany. We'd like to thank you all for joining us today and your interest in The Hartford. Please note that Chris and Beth will be at the Bank of America Merrill Lynch Insurance Conference in New York City on February 11 at eight a. M. We look forward to seeing you there hopefully with no snowstorm. And in the meantime, please feel free to contact either Sean or myself by phone or e mail if you have any follow-up questions on our financial results and outlook. Thank you and have a good day. This concludes today's conference call. You may now disconnect.