Hartford Insurance Group Inc (HIG) 2016 Q3 法說會逐字稿

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to The Hartford's third-quarter 2016 earnings results.

(Operator Instructions)

I would now like to turn the call over to Sabra Purtill, Head of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to The Hartford's webcast for third-quarter 2016 financial results. The news release, investor financial supplement, slides, and 10-Q for this quarter were all posted on our website yesterday.

Our speakers today include Chris Swift, Chairman and CEO of The Hartford; Doug Elliot, President; and Beth Bombara, CFO. Following their prepared remarks, we will have about 30 minutes for Q&A.

Just a few comments before Chris beings. 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 differ materially. We do not assume any obligation to update information or forward-looking statements provided on this call.

Investors should also 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. I am pleased with our overall third-quarter results. In commercial lines and group benefits, performance was strong and demonstrates focus on maintaining margins, while being disciplined about growth in a sustained competitive environment. I'm also pleased with the actions we've been taking to improve personal auto performance.

In addition, the balance sheet and capital generation remain strong. And last evening, we announced the Board authorized a new $1.3 billion equity repurchase plan, as well as a 10% increase in our quarterly dividend.

Starting with personal lines, we are intently focused on improving auto profitability. We are implementing a range of initiatives, including aggressive rate actions that address sustained higher loss-cost trends caused by a multitude of factors, including increased miles driven, speed, and distracted driving. We are also addressing profitability through adjustments to our new class plan, more focused marketing, and the termination of unprofitable agency relationships.

I have deep confidence in the personal lines leadership team and in their strategy to improve performance. Though results remained challenged in the third quarter, we will steadily improve profitability in personal auto and expect to see better returns in 2017, as the actions we take work their way through the book.

In commercial lines, the underlying combined ratio, which excludes catastrophes and prior-year development, was very strong at 90.0. This represents a full 1 point improvement over the prior year.

I am pleased with our competitive positioning across commercial lines and with our ability to defend the margins we've worked so hard to achieve. The team is successfully balancing underwriting discipline with profitable growth in selected markets.

In small commercial, we're generating new business growth at very attractive returns. For the quarter, written premiums grew 5%, and the underlying combined ratio was 86.8.

The small commercial market has garnered a lot of attention recently, with peers and new entrants launching first-time initiatives. The Hartford has been the leader in the space. We have been investing in small commercial for over three decades, and our end-to-end capabilities are the industry's gold standard.

We continued to enhance our innovative approaches to customer experience, digital, and the use of dative analytics, all backed by our industry-leading customer service centers. We are committed to innovating to advance our market position. Consistent with last quarter, competitive conditions in the larger end of the market, such as middle market and national accounts, remained challenging.

Our primary focus is to maintain margins with selective top-line growth. This quarter, we had continued success in that goal, with improved underlying combined ratio on a relatively flat premium base.

In middle market, retentions remained strong, as we worked to retain our best accounts, and our 93.1 underlying combined ratio improved more than 0.5 point over prior year. New business, however, declined 15%, reflecting pricing in underwriting discipline.

Outside of our P&C businesses, group benefits generated strong profitability, with a 5.6% core earnings margin, an improved disability loss ratio, and good sales in a competitive marketplace.

At Talcott, the business continues to perform consistently, and in line with our expectations, while mutual funds posted another solid quarter. And, third-quarter investment results benefited from stronger limited partnership income. Excluding partnership returns, the solid underlying performance of our investment portfolio reflects measured risk-taking and disciplined investment decisions.

We continue to make progress in executing our strategy to invest capital in our businesses to expand capabilities. We closed the acquisition of Maxum in July, and the team's expertise in the E&S market is already paying dividends and broadening our commercial lines risk capabilities.

We also expanded the mutual funds platform. We've entered into smart beta ETF space through the acquisition of Lattice Strategies, and further broadened our actively managed investment offerings through a relationship with Schroders.

I spent a lot of time on the road this year, meeting with and listening to our distribution partners. As I reflect on those conversations, what really stands out is their support of our consistent approach to new and renewal business, along with their trust and confidence. And they like the fact that we're becoming a broader and deeper risk player.

This is encouraging feedback from our partners, whom share my confidence in The Hartford's ability to execute, given the fundamental strength of our platform and the improvements we've made to the organization.

As we close out the year, we will remain focused on maintaining margins in commercial lines and group benefits, and improving profitability in personal auto. Though we continue to face industry and market headwinds, we have the skills, experience, and commitment to successfully carry out our strategy and to create shareholder value. Now I'll turn the call over to Doug.

Thank you, Chris, and good morning. Overall, this was a solid quarter for our property and casualty, and group benefits businesses. We posted strong results in both commercial lines and group benefits, where we continued to effectively navigate very competitive market conditions.

In personal lines, there are positive signs that our pricing actions and underwriting initiatives are gaining traction, even as frequency trends remain elevated. In the third quarter, personalized posted core earnings of $25 million, up $8 million from third quarter last year.

The underlying combined ratio, which excludes catastrophes and prior peer development was 96.1, increasing 0.5 point from last year. This is primarily the result of higher auto loss liability loss costs, partially offset by a decrease in expenses. Catastrophe losses in the quarter were $37 million, down $31 million from third-quarter 2015.

In homeowners, the underlying combined ratio of 79.6 improved 2.8 points versus last year, driven by favorable expenses. The underlying loss ratio was in line with prior year, but running above our expectations for the quarter. Year-to-date performance in this line has been very solid, as we continue to take rate increases and effectively manage our underwriting execution.

In auto, the underlying combined ratio of 103.1 was 1.5 points higher than we posted in third quarter last year. This reflects the 2016 emergence of increased loss cost trends partially offset by lower expenses. The underlying auto loss ratio for third-quarter 2016 is slightly elevated when compared to 2015, after adjusting for the unfavorable 2015 accident-year development, which we recorded in the first half of this year.

For the 2016 accident quarter, frequency trend was approximately 3%. Our first- and second-quarter 2016 loss picks have continued to hold. Severity continued to increase slightly on the 2015 accident year, but remained within our estimates, and we had no prior-year development for auto this quarter.

We expect the substantial rate, underwriting, agency management, and new business actions we have implemented to begin earning their way into the book of business in the coming quarters. We are beginning to see early signs of expected improvement in our business metrics, and given persistent trends, we're moving aggressively on multiple fronts.

For example, we continued to accelerate our rate filings. We now expect to achieve nearly $240 million of annualized rate increases on the auto line, based on our current in-force business. This is $30 million higher than our projection as of second-quarter 2016, and double what we achieved in 2015.

We expect written pricing in the fourth quarter to approach 9%. The earned premium impact of this rate is ultimately based on the customers we actually renew. We expect the combination of rate increases and mixed change in the book of business to drive auto margin improvement in both 2017 and 2018. New business marketing has been reduced in many jurisdictions until the increased rates are in effect in the market.

In AARP direct auto, new business was down 36%, AARP agency auto was down 29%, and other agency auto was down 45%. We've also reduced our direct marketing spend, lowered operational costs, and reduced commissions, which contributed to a 3-point improvement in the expense ratio.

As a result of these profit improvement actions, written premium growth for both AARP direct and AARP agency was flat for the third quarter 2016. Other agency was down 20%, consistent with our strategy to shift our business mix toward AARP members and our more highly partnered agents. Retention in our AARP channels was relatively stable, a positive outcome as we increase rates.

The revised 2016 full-year underlying auto combined ratio of 101 to 103 that we shared with you last quarter is under pressure from continuing frequency trends. We were expecting the rate of change in auto frequency to moderate in the second half of 2016, based on the elevated levels that emerged in the second half of 2015.

Given higher-than-expected frequency trends this quarter, we now expect the full-year underlying auto combined ratio to be at the higher end of our range. Achieving the 2016 full-year underlying combined ratio of 93 to 94 for total personal lines will be dependent on auto frequency trends and homeowner losses in the fourth quarter. Although auto frequency has been elevated longer than we expected, my confidence grows every day that we're moving in the right direction to restore profitability in this business.

Shifting over to commercial lines, we had a strong quarter, with core earnings of $247 million, up $31 million from third-quarter 2015. The increase is largely attributable to higher net investment income and increased underwriting gain. The combined ratio of 93.9 improved 0.6 of 1 point versus prior year, due primarily to less unfavorable prior-year development and a lower expense ratio, partially offset by higher catastrophe losses.

Workers' compensation continues to perform very well. This is our largest line of business. Our strong margins improved slightly in the current accident year, and we continue to manage this line very closely, remaining vigilant on pricing and lost cost trends.

Commercial auto, on the other hand, continues to be under pressure across the industry, and we increased our 2016 accident year loss ratio estimates to reflect the ongoing loss-cost increases. We also recorded $18 million pre-tax of prior-year development to address severity trends, primarily in small commercial and accident year 2015.

Auto is a relatively small line for us, representing approximately 10% of commercial P&C premium. We are achieving our highest written price increases in this line and continue to take aggressive underwriting actions.

The commercial lines expense ratio was favorable in the quarter, improving by 1 point versus third-quarter 2015. However we expect our full-year ratio to be in line with prior year.

I'm especially pleased with our renewal written pricing in standard commercial lines, at 2% for the quarter, essentially stable over the past five quarters. To achieve a few points of price in this competitive environment is a positive reflection of the solid discipline exhibited by our front-line teams. Our strong performance in small commercial continued this quarter. We had excellent results on both the top and bottom line. The underlying combined ratio of 86.8 was consistent with last year.

Excluding the results of the Maxum acquisition, which closed during the quarter, the underlying combined ratio actually improved by 0.2 of 1 point versus third-quarter 2015. This reflects an improvement in workers' compensation and a lower expense ratio, offset by deterioration in auto and package results.

Written premium in small commercial was up 5% in the quarter versus prior year. Maxum represents approximately 1 point of this growth. Retentions continue to be strong, and new business, excluding Maxum was up 5% to $135 million as we continue to execute in a very competitive market.

Moving to middle market, we posted an underlying combined ratio of 93.1, improving 0.7 of 1 point from third-quarter 2015. This was primarily due to favorable workers' compensation margins and lower expenses, partially offset by higher auto loss costs and unfavorable non-catastrophe property experience.

Middle market written premium in the quarter was down 0.7 of 1 point compared to prior year. New business of $99 million was down 15% from last year, as we continue to maintain our pricing discipline in the face of competitive market conditions.

Specialty commercial had another very strong quarter. The underlying combined ratio of 93.7 improved 5.4 points versus prior year, driven by strong margins across national accounts, bond, and financial products. Specialty commercial written premium was down 4% compared to third-quarter 2015. In both years, the written premium is affected by auto premiums and several retro accounts. Normalizing for these items, written premium is up modestly in specialty commercial, driven by solid new business in national accounts. We continue to navigate these markets effectively, and I'm pleased with our pricing discipline and overall results.

In group benefits, we had a very solid quarter with core earnings of $51 million, up $4 million from prior year, resulting in a core earnings margin of 5.6%. The increase from core earnings was driven primarily by higher premiums, lower disability losses, and lower expenses, partially offset by higher group life losses.

The group life loss ratio of 80% for third-quarter 2016 was driven by higher-than-expected mortality claims from larger policy values. We've experienced similar trends in the first half of 2016, and are evaluating underlying factors and appropriate actions going forward.

Fully insured ongoing premium was up 5% for the quarter. Overall book persistency on our employer group block of business continues to hold around 90%. Fully insured ongoing sales were $61 million for the quarter, flat to third-quarter 2015.

We continue to feel competitor pressures, particularly in long-term disability. As with our property and casualty businesses, we remain disciplined on pricing and underwriting, successfully differentiating our offering on superior service and claims capabilities.

In summary, this was a solid quarter for our businesses. Commercial lines and group benefits delivered strong results, demonstrating our commitment to disciplined pricing, strong retention, and maintaining margins as we continued to experience competitive market conditions. In personal lines, we're pleased with the early traction our initiatives are gaining. Pricing, underwriting, and agency management actions are working their way through the book of business to address elevated loss trends and restore underwriting profitability in personal auto.

And finally, I would like to welcome our new Maxum teammates to The Hartford. Maxum's capabilities are perfectly aligned with our strategy to become a broad and deeper risk player in the marketplace, and I look forward to working very closely with this team on the journey ahead. Let me now turn the call over to Beth.

Thank you, Doug. I'm going to cover the remaining segments, the investment portfolio, and capital management before we turn the call over to questions. Mutual funds core earnings were down $1 million from third quarter of 2015 due to a 3% reduction in investment management fees. Total AUM, was up 6% from a year ago, due to a 9% increase in mutual fund AUM, which was partially offset by a 6% decrease in Talcott AUM. The decrease in investment management fees reflects a continued shift to lower fee mutual funds, consistent with industry trends.

Our team has been proactively responding to the changing mutual fund market. As Chris mentioned, our acquisition of Lattice adds smart data exchange-traded funds to our portfolio lineup. This is a fast-growing market with positive net flows, and Lattice is an innovative platform that we can grow and also use to launch actively managed ETFs in the future.

In addition, last week we added a new subadvisor relationship with the adoption of 10 mutual funds managed by Schroder Investment Management, with about $3 billion in AUM. These funds, which have been rebranded as The Hartford Schroders funds, broaden our platform and expand our offerings, particularly in international and emerging markets.

Talcott continues to perform well, focused on running off the annuity books efficiently and effectively while returning capital to the holding Company. Core earnings decreased this quarter by $3 million, compared with third-quarter 2015, but we're well ahead of our outlook due to very strong returns on limited partnerships, both from improved hedge fund performance and higher private equity returns. Excluding the impact of limited partnerships, the decrease in Talcott's core earnings was due to the decline from fee income, as the book continued to run off, offset in large part by reduced expenses.

This quarter, full surrender activity on an analyzed basis was 7.4% for variable annuities and 5.4% for fixed annuities. Talcott's DAC unlock charge was modest this quarter, as adjustments to a variable annuity lapse and market assumptions largely offset the impact of writing off the remaining DAC on our fixed annuity book. The fixed annuity DAC write-off was caused by the impact of a sustained low interest rate environment, resulting in lower expected gross profits on the book.

As we said in July, during the third quarter, Talcott paid a $250 million extraordinary dividend to the holding Company, completing our expected $750 million dividend plan for 2016. In 2017, we expect to request dividends in the range of $500 million to $600 million.

Investment results were strong this quarter with a sharp improvement in limited partnership returns. Limited partnership investment income totaled $93 million before tax this quarter, compared to $22 million before tax in the third quarter of 2015. This quarter's analyzed investment return for LPs was about 15%, which is well above our 6% outlook, and has pushed our year-to-date annualized limited partnership return back up to 7%.

Hedge fund performance was slightly positive compared to losses in third-quarter 2015, and private equity income was exceptionally strong, including a significant valuation write-up for one of the partnerships this quarter. Excluding limited partnerships, the before-tax analyzed portfolio yield was 4.1% this quarter, slightly lower than 4.2% last year, due to the combined impact of lower reinvestment rates and lower income from non-routine items. Given the low level of current interest rates, we continue to expect portfolio yield compression in the fourth quarter and into 2017.

Turning to credit performance, our investment portfolio remains highly rated and well diversified. Credit experience was good during the quarter, with total impairments and mortgage loan valuation reserve charges of $14 million before tax, down from $39 million in third-quarter 2015. In 2015, we had a higher level of credit losses, including intent-to-sell impairments on some floating-rate and non-investment-grade securities, including some energy-related exposures.

To conclude on earnings, third-quarter core earnings per diluted share were $1.06, a 23% increase from third-quarter 2015. Excluding prior development and limited partnerships, core earnings per diluted share rose by 7% over last year, or $0.06 per share.

Catastrophe results were largely consistent with third-quarter 2015, with no major hurricane losses in either period. For hurricane Matthew, which was a fourth-quarter event, we currently estimate losses of $40 million to $60 million before tax, which would consume a large portion, if not all, of our fourth-quarter cat budget of [$60] million before tax.

The 12-month core earnings ROE, excluding Talcott, was 9.1% and the P&C core earnings ROE was 11%. Both of these metrics include the unfavorable prior development on personal auto and A&E reported in the first six months of 2016.

Turning to shareholders equity, book value per diluted share, excluding AOCI, rose 6% from a year ago, resulting in total shareholder value creation, including dividends, over the past 12 months of 8.4%. Finally, during the quarter, we repurchased $350 million of stock. During October, we repurchased 2 million shares for $85 million, leaving approximately $195 million remaining under the 2014 to 2016 equity plan of $4.375 billion.

Yesterday, we announced a new equity repurchase authorization and an increase in our quarterly dividend. The new equity repurchase authorization is $1.3 billion, and is effective October 31, 2016 through December 31, 2017. We expect to use the new authorization ratably over 2017. The quarterly dividend was raised by $0.02, or 10%, to $0.23 per share.

As you know, reducing debt and improving our debt service ratios have both been important objectives over the last few years. This month, we repaid $275 million of maturing debt, consistent with our previously amounts planned. In 2017, we intend to repay $416 million of senior notes in March, which is our only 2017 debt maturity.

Our 2017 capital plan was developed with the expectation that 2017 dividends and holding Company cash flows, in total, will be about at the same level as in 2016. While Talcott dividends will be $500 million to $600 million, which is down from the $750 million we received this year, we expect this reduction will be offset by higher dividends from our other subsidiaries and other holding Company resources.

To conclude, this quarter's results were strong, and as Doug discussed, our profitability improvement initiatives for personal auto are well underway. We continued to generate very strong margins in commercial lines and group benefits, and we are growing profitably in small commercial, our top performing business.

Finally, with disciplined execution, year-to-date investment results remain very good, and along with generally favorable equity market levels, have helped Talcott deliver good bottom-line results. With strong earnings and capital generation, we were very pleased to be able to announce our capital management plans for 2017. I will now turn the call over to Sabra so we can begin the Q&A session.

Thank you. Michelle, we have about 30 minutes for Q&A. So if you can give the instructions for the polling for the Q&A and then we will start.s

(Operator Instructions)

Ryan Tunis from Credit Suisse.

Hi, thanks. Just a couple on personal lines on the auto. So I think you guys mentioned that severity and frequency were both still up 3% year over year. I'm just wondering if the actions that you've taken so far contemplate things continuing to get a little bit worse or still running at these levels? Or should we think about the actions you've taken? Do those more assume that in 2017, 2018 you'll have what's been like more of an historical normal in terms of frequency especially?

Ryan, good morning, this is Doug. Let me take that question and try to pull apart a few of the pieces. First thing is that we were a little disappointed that our frequency in third quarter was a little higher than we expected it to be, particularly given what we thought were going to be favorable trends against the 2015 patterns in the back half of the year. As we lean into fourth quarter, obviously, we'll watch those three months carefully. Encouraged by what we are seeing in October, but need to finish the year strong for 2016 to complete itself.

As we think about 2017, we'll share more when we get to January. But I'll say this, it looks to us like we're in an environment where loss trends don't look like averages over the past 10 years. So we are anticipating an abnormal environment, hoping that it isn't as abnormal as the last two years have been. But we'll talk more about that with more detail in January.

Okay, and then my follow-up is probably a little bit more of a modeling one around auto. But just thinking about the momentum on the expense ratio there, and the fact that's improved a lot, direct marketing costs have come out, lower bonuses. Should that continue to come down over the next few quarter? Or does where you're running now reflect all the actions you've announced or have planned?

Two things I would say. First is, clearly, we're taking extraordinary change, leverage, if you will, based on our revised open-road plan. So yes, we did some things in the third quarter that were a bit outsized compared to our run rate. So yes, you need to step that back to get a normal run rate going forward.

But we're continuing match our pricing adequacy, our view about profitability with our marketing strategies, and they are incredibly correlated. We'll continue to do that quarter by quarter.

This is an approach that we are keenly focused on margins, and the margins have to be in line for us to be ramping up marketing efforts. So I hope to see a different day soon, but we'll work hard at that.

The other thing I just want to say is, well, I think you've seen and hopefully heard in my script, we've worked hard on the rate-change activity. And many of you that have looked inside the state filings have seen the advancement of that strategy. I gave you a forward look into the fourth quarter. That's evidence of really what's happening at the desk level.

So as our filing momentum continues, we expect fourth quarter to show 9 points of pricing activity. That is very reflective of our aggressive approach to getting on top of these loss trends.

Okay, and just a follow-up real quick to that. I think you also mentioned it's not just renewal rate, it's also mix change. When you think about longer term getting back toward the 96 to 96.5 underline, you'd run that historically, how much of that do you think really relies on getting renewal rate versus just maybe undoing some of the things that happened a year ago in terms of just improving the mix of the book?

Yes, I don't want to give you an exact, definitive answer, because I'm not sure there is one, but I'll say this: there clearly are positive signs that are going to manifest inside the aggressive rate actions, offsetting some of the trends that we're seeing across the industry, by the way, not just in our book, but clearly in our book as well.

I'm also encouraged by the number of leverage that we're working in our other agency and in our other channels. So as we think about this roll forward into 2017 and 2018 there are going to be benefits, important benefits on both sides of that equation. But I want you to know that based on my pricing comments this morning, we are leaning into what we need to do to address the cost and the loss trends that are in the marketplace today.

Ryan, it's Chris. The only color I would add for you is remember, we are optimistic about the AARP book, it's relationship, our knowledge in that market. And so, consistent with Doug, I'm not going to give you a precise formula, but there is a substantial amount of improvement that will come from a retrenchment and a focus on our core, our core AARP, our abilities to market to them in a direct and an efficient fashion, while using the agent channel for those customers that want to go through an agent and really shut down, shed some of the other agency, non-member agency, as we call it, activities where we tried to grow a little too fast in the past. So I would not underestimate the mix comment that you said, because it will improve the results over that two-year period of time.

Thanks so much, guys.

Michael Nannizzi from Goldman Sachs.

Thank you so much. Doug, just one question just on personal auto. When you talk about improvement in 2017 from the actions you've taken so far, what are your assumptions around loss trend? You mentioned you were a little bit surprised with 4Q holding flat and not improving. Are you optimistic in your outlook? Or are you taking into consideration in that view of improving trends and profitability what you saw here so far in the fourth quarter?

Thanks, Mike. The loss trend discussion is an interesting one today, right? So we're spending a lot of time on our data. We also are spending a lot of time looking at industry data, fast-track data that I know all of you look at.

So as we look forward, we have expectations based on the actions we're taking that we're going to see improving signs in our book of business. And based on some of the early progress across both retention of our existing book and also the new business we're putting on, we feel good that we are turning the dial in a favorable direction on things we can control relative for our own loss trends.

You step back from that and look at fast-track data and you see aggregate severity and frequency in this industry over the past seven, eight quarters in a very different spot. Our lens into 2017, 2018 has changed a bit over the last couple of quarters as has our approach to rate change.

So they are directly correlated. It's the reason we're ramping up. It's the reason that our rate activity in 2016 is 2 X what it was in 2015. But Mike, I would say that we are willing to be mobile and agile and adjust to what we see going forward. We do think it will be a bit more tempered in 2017, but at the moment, we need to see better signs across the industry that auto experience is going to demonstrate that.

Got it. Thanks for that. Then you mentioned marketing spend as a lever in personal lines. Can you talk about how much room do you have there, as a lever, if you want to -- if that's an area where you decide you want to pull back further? How much juice is there in that operating lever?

Michael, it's Chris. I would say we've been fairly aggressive in pulling that lever over the last two quarters. How much more we do, obviously, is a function of where we see the ability to market on a more targeted basis, state basis, where we think there is still opportunities to acquire business at acceptable rates.

So I'm not going to give you a precise formula, but it's been cut back quite substantially already. We feel good about the level, where it is right now from a run-rate side, particularly as we head into 2017. But if there is any additional discomfort from what we're seeing, it is a lever that we could continue to modify and pull. So if we're running pro forma, about 50% of what our historical rate has been, we still, theoretically, have $0.50 on those additional dollars to pull.

Great, thanks, and then just one last one, if I could. There's have been some activity in the space on the acquisition side, and with rates lifting up a little bit here recently, could you just talk about Talcott and the potential there or any potential interest from third parties, and if that's something that you are -- you would consider more specifically now than maybe previously? Thanks.

Thank you, Michael. I think you know the stock answer. We're not going to comment upon rumors or speculation. So, but I could share with you maybe just a framework that probably many of you have heard over the years in what our strategy and goals with Talcott were.

Really, we put that block in to run off five years ago, really with the idea of reducing risk and policyholder liabilities over time. We wanted to return excess capital to the holding Company, and we always wanted to meet our customer commitments.

So I think offer the last five years, it's played out exactly as we would have wanted. The book is, the liability side of the book has been reduced over 50%, and Talcott has provided the holding Company with a good deal of capital that has allowed us to manage the -- manage in the most efficient way.

So as we look forward, we are perfectly comfortable running this off over a longer period of time. But myself, Beth, we've always said we'd always consider a permanent solution if it was really, truly permanent. And that usually, in our vernacular, means a legal entity sale. So I think in the future, we'll always be prudent in exploring opportunities, but I wouldn't foreshadow a lean one way or another at this point in time.

It's running off as we planned. And if there are solutions out there that make economic sense for us, that would be acceptable to regulators, that take care of our customers and employees, we would explore that.

Great. Thank you so much for all the answers.

Randy Binner from FBR.

Great, thanks. I'll ask a couple more on Talcott. One, with the run-off on contract counts, the 10% and 5% numbers, those are still good, they're slowing down a little bit. Do you have any further initiatives planned to accelerate the movement of contracts out of the block?

Sure, Randy, this is Beth. I'll take that. So at the current time, no large initiatives like the ones that you've seen in the past. I think as I've commented on before, the team is always looking at things that we can do. And I think we've done some of those larger initiatives, which obviously favorably impacted the surrender activity over the last couple of years. And now I see it as, continued tweaks on that process, but we do not have a contract initiative underway at the present time.

Okay, and then on the $500 million to $600 million request plan for 2017, can you break that out between what's operating free cash flow versus just capital release as the required capital goes down over time? And then what the timing of that would be up in 2017? Would it be -- I think this year it came up more in the first half.

Yes, so a couple of things. It's hard to parse out an exact number. If you go back to the comments that I made from July, when we look at absolute surplus generation during the course of the year, given where interest rates are, I would expect before consideration of the dividends that we took out during the course of 2016, that our statutory surplus would be a little bit lower than where we started. Because we do anticipate needing to post cash-flow reserves in the fourth quarter.

So even though through the nine months we've seen an increase in surplus before dividends, we'd expect most, if not all of that to go away as we go toward the end of the year. So when I think about the capital that we're taking out next year, it's really looking at what excess do we have under stress scenarios? How comfortable do we feel relative to the levels that would mean that we're running Talcott out at, and based on that, feel very comfortable with the range of $500 million to $600 million.

As far as the timing over the course of 2017, we haven't landed specifically on that, but I would expect that we would again, not take it all out at once, probably take some out in the first part of the year and some in the second. But that timing is still to be determined.

Just the last one is do we have a -- did you provide an update on the RBC ratio down at Talcott as of now?

No, we did not put an update on RBC ratio. I would say the RBC ratio, without giving a specific number, continue to be very strong in these market -- in this market environment. Again, when we think about excess capital and ability to take dividends out, we're always looking at it in a stress. So to some extent, what the current RBC level is, is not so much of an input for us as we think about the amount of capital that we can put to the holding Company.

All right, that's all I have. Thanks.

Brian Meredith from UBS.

Thank you. A couple of quick numbers question and one broader question for you. First, Doug, what was the impact on current-year loss ratios and commercial lines from the increase in loss picks on the commercial auto business? I imagine there was some current-year development?

There was, Brian. It was about 0.5 point across all of commercial, the impact from our auto changes.

Great, and the other quick numbers one, was the impact on reserve development for the Florida workers' comp reserve increase?

I'll take that one, Brian. As we looked as our reserve position at the end of the quarter and workers' comp, we did take into consideration the impact of those rulings and putting that in the mix, along with some of the favorable trends that we've seen, really resulted in no real change needed to our overall carried reserves.

Okay, great. And then my last question, Doug, I'm just curious, we've seen a tick up in medical cost inflation this year, at least recently. Are you seeing any signs at all of that in the workers' comp line yet?

Brian we're not. We're watching that very carefully and we are very pleased with our frequency and severity trends. It's very early in the accident year, but our 2016 workers' comp book, very good shape. Frequencies continue to be flat to down slightly, and our medical and indemnity severities are in pretty good shape. So we are not seeing the blips there yet.

Brian, it's Chris, just one point. Both Doug and I get a monthly report from our investment management arm, Himco, just on detailed inflation activity. So it is something, as you said, we watch closely.

I think also the important thing to remind everyone is, no matter what the current trends are, what we put up on the books has a long-term inflation trend associated with it. And that's in the 6% to 7% range. So to the extent that trend is not needed, then obviously, that creates excesses. But to the extent it's needed, no, it's already there and built into our reserving philosophy.

Great, and just lastly, quickly, Beth, could the [do well] future standards had a big impact on surrender rates out of Talcott as we look here forward.

We're continuing to stay close to our partners on that to understand that. I think that it could have some impact, as financial advisors look to implement the rules and think about what advice they give to their customers. At the present time, we're not expecting a significant change, but it's something that we'll look at and monitor very closely but wouldn't surprise me if we saw a little bit of a slow down potentially.

Thank you.

Meyer Shields from KBW.

Thanks, good morning. If I could start on the mutual funds business, the press release talked about higher expenses related to Lattice. Are those expenses associated with the acquisition or the operation of the business?

It's a little bit of both, Meyer. So obviously, there were some costs relative to the acquisition and then just as we bring that platform onto ours, we will see some uptick in expenses.

Okay. And then within P&C, can you talk about how Maxum is performing in terms of premium volumes and underwriting margins compared to your expectations?

Meyer, this is Doug. It's very early days. They've just been with us really 60 days. No progress or aberration to speak of, so it's been a well-performing underwriting group in its extended history. We are pleased about having them on board. But in the third quarter, there wasn't anything really to speak of that would be out of pattern for Maxum.

Okay, and then last question, if I can, can you give us an update on the agency count within the non-AARP book?

The agency count has not moved a lot since last time we spoke. I think just over 10,000 was the number of locations I think we shared with you last. So, maybe a couple of tuning adjustments we made since then. I know that we made a few more moves in Florida since the second-quarter call. But substantially, it's the same book of business and same agents; we're just working our way through our changes.

(Operator Instructions)

Alex Scott from Evercore.

Hi, I just had one quick one on Talcott. I know you mentioned the DAC rate down this quarter and for 4Q some of the statutory work. Just thinking about GAAP reserves, I know some of them are held as an embedded derivative, some of them are not. Is there any contemplation of an exit value in those reserves? How should we think about that impacting 4Q?

So as I sit here and think about our GAAP reserve, and I think you are asking about for fourth quarter, not a lot of changes that we'd anticipate relative to the annual assumption updates that we look at in the fourth quarter. There hasn't been a lot of change in those expectations. So, sitting here today, I'm not expecting that we would see a significant impact from the fourth-quarter review of our assumptions on a GAAP basis.

Okay, thank you.

Jay Gelb from Barclay.

Thanks and good morning. Beth, the $1.3 billion of buybacks in 2017, I think that's slightly above what the street was expecting going into the year. And it also feels like you pull forward the discussion of that at this point in the year. So is there anything else you can tell us about in terms of the decision that led to that amount or the timing?

So Jay, really as we looked at our holding Company requirements and the cash flows that we have and the dividends that we'd be taking out of the subsidiaries and looked at that in total, it felt like a very reasonable number to us and, generally in line with what we did this year.

As far as the timing of the announcement, we had always talked about announcing our 2017 plans as we came towards then of the year. And announcing that now and having that authorization obviously does give us the opportunity to be opportunistic in the fourth quarter, given that our previous authorization was running down. So that was really the thought process there relative to getting that authorization done now.

Okay, where does that put you or put the Company from a debt to capital standpoint, relative to your long-term targets? Also taking into account the debt that the debt running off in 2017.

Yes, so when we look at both what the debt that we paid off this month and our expectation for the maturity that we will repay in March, we are definitely marching down toward our longer-term targets. And so we've always talked about being in the low 20s, and obviously, both of those things are starting to put us there.

So when I think back as to all the actions we've been taking on the debt front over the last several years, and the way we've been going about it, feel, very, very good about the progress that we're making and getting our debt stack to be more in line with what our long-term expectations are.

That's helpful. Last one on Talcott, there's clearly a lot of moving parts, including the benefit of improved limited partnership returns in the third quarter. Is it too early to ask about where you see a normalized trend in Talcott's earnings in 2017?

Yes, I would say let's wait until we get to our fourth-quarter call and we talk a bit about expectations for 2017. I'll remind you, we did say that we will not be providing forward EPS guidance going forward, but we'll give some discussion on that.

But the way I would have you think about it is, obviously, the limited partnership returns do provide some ups and downs as you look at the Talcott earnings over the course of the year. And the majority of the non-investment income return comes from the fees that are generated on the variable annuity book, and we're pretty transparent in how that is running off. So I think if you use some of that, you get an expectation relative to run rate.

Thank you.

I have no further questions at this time. I turn the call back over to the presenters for closing remarks.

Thank you, Michelle, and thank you all for joining us today and your interest in The Hartford. If you have any additional questions, please don't hesitate to follow-up with the investor relations team, and we'd like to wish you all a good weekend and a happy Halloween. Goodbye.

Thank you, everyone. THis concludes today's conference call. You may now disconnect.