The Hartford Financial Services Group, Inc. (HIG) Q1 2016 Earnings Report, Transcript and Summary

Good morning. My name is Carson, and I will be your conference operator today. At this time, I would like to welcome everyone to The Hartford’s First Quarter 2016 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. [Operator Instructions] Thank you. Sabra Purtill, Head of Investor Relations, you may begin your conference.

Thank you. Good morning and welcome to The Hartford’s webcast for first quarter 2016 financial results. The news release, investor financial supplement slides and 10-Q for this quarter were all release yesterday afternoon and that posted on our Web site. I did want to take this opportunity to apologize for the technical difficulty that delay the posting of the supplement yesterday, while we do not expect to have this issue again, I wanted you all to know that filed a 8-K with a news release and supplement before we post the supplement on the Web site and that’s usually within just a few minute after the news release goes out. So even without yesterday’s snafu you can always find the supplement in the 8-K before you’ll see it posted in the financial result section of our website, just to heads up because we know that earnings nights are pretty hectic. 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 notes before Chris begins, today’s call includes forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and actual results could be materially different. We do not assume any obligation to update 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 website. 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 news release and the financial supplement. I’ll now turn the call over to Chris.

Thanks, Sabra. Good morning, everyone, and thank you for joining the call. I’m generally pleased with our results for this quarter, particularly in commercial lines and group benefits each of which delivered strong margins. We grew book value per share excluding ALCI’s 7% over the past year and achieved a 10.3% core earnings ROE excluding Talcott. We repurchased $350 million of shares during the quarter and plan to complete our buyback program by the end of 2016. However core earnings were down 15% over the last year as we continue to face some of the same headwinds from the second half of 2015. First personal auto lost cost trends remain challenging, which impacted margins and lead to strengthening reserves for the 2014 and 2015 accident years. Second, commercial lines performance has been very strong, but compensation continues to intensify, making it more challenging to grow at acceptable returns and third consistent with capital market activity, limited partnership investment income remains low similar to the second half of 2015 with an annualized yield of only 1%. This was a difficult comparison with the first quarter of 2015, were returns averaged 14%. Given these headwinds, I’m pleased with the continued progress we’ve made in most of our lines of business. Doug and Beth will go into further detail about first quarter performance, but I like to touch upon a few highlights, both positive and negative. We generated strong margins in commercial lines, supported by underwriting discipline across all of our businesses. All in combined ratio improved 4.8 points, due to lower catastrophes and higher favorable prior year development, while the combined ratio excluding catastrophes in prior year development improved 2.8 points to 89.6. Group benefits remained strong with a core earnings after tax margin of 5.5%, top line growth from good January sales performance and solid in-force book persistency. All though mutual funds core earnings were down slightly, the business continues to deliver steady investment performance and had positive flows in equity funds. In February Barents recognized our 2015 investment performance naming Hartford Funds as a Top 10 fund family for the third time in the last four years. While many of our businesses sustained their track record of underwriting improvements, personal lines results were disappointing overall. The combined ratio excluding catastrophes and prior year development improves slightly to 89.7 but this was entirely attributable to the very strong homeowner’s results due to lower non-cat weather and fire losses. However, personal auto results deteriorated with a 1.6 points increase in the combined ratio excluding catastrophes and prior year development. Doug will talk about the underlying trends that contributed to these results as well as the initiatives we have underway to improve profitability including pricing actions. Given these trends and the time needed to implement responsive actions that earn it, we currently expect a 2016 personal lines combined ratio excluding catastrophes and prior year development to be at or above the high end of the 90 to 92 outlook we provided in February. Turning from our financial results, I like to provide an update on our few recent investments in products and distribution to make it us a broader and deeper risk player. On March 16, we announced our agreement to acquire Maxum Specialty Insurance Group, a well-respected ENS insurer with an experienced management team and a strong underwriting culture. The addition of Maxum will further strengthen our market leadership in small commercial by extending our product capabilities, adding ENS talent and helping to improve the customer agent experience. We are hard at work on our integration plans. Our management team recently spend time with Maxum employees introducing them to the extended team and to the opportunities that Hartford will bring to their business. In terms of the transaction process, we filed our Form-A with the Delaware regulator this month and expect to close the acquisition in the third quarter. We are all eager to begin working together and to demonstrate the power of our joint capability once this deal close. We also announced the expansion of our international insurance placement capabilities for commercial lines customers. Our new alliance with AXA [ph] corporate solution enables us to offer U.S. customers coverage for the international exposures with a primary focus on developed market such as Europe and Asia. Hartford will maintain underwriting and pricing control of these policies and will assume a 100% of the risk through a reinsurance agreement with AXA. Beside from these two projects, we are hard at work on other initiatives in investments to accelerate premium growth and improve our operating capabilities. I look forward to sharing our progress with you in the future. Before turning the call over to Doug, I’d like to comment on some of the change in dynamics in the P&C industry. Some carriers are retreating or refocusing their businesses due to poor underwriting results while others are undergoing strategic and leadership changes. Technology based disruption is acceleration affecting all industry participants. At the same time, we see competition intensifying, continued low interest rates in lost cost challenges such as in personal auto. We recognize these challenges posed by these dynamics and I remain confident in our ability to navigate this more difficult environment including to work required in personal lines. The Hartford has this strong foundation and an experienced management team with the resolve to maintain underwriting discipline and expense control. We are reacting to these changes in the landscape and are focused on execution. Now, I’ll turn the call over to Doug.

Thank you Chris and good morning everyone. We started 2016 with strong results in commercial lines and group benefits continuing our solid execution from 2015 and successfully adapting to a changing competitive landscape. Results in personal lines were disappointing as we took reserve actions to address emerging auto liability lost cost trends. I’ll share more in commercial lines and group benefits in a moment. But first I’d like to cover our results for personal lines. Core earnings for personal lines were $23 million for the quarter down from 75 million last year. Catastrophe losses were $22 million higher in 2015 which was a particularly light cat quarter for personal lines. First quarter of 2016 included several well documented storms in Texas where we have teams currently deployed to assist our customers. Also included in core earnings this quarter is 65 million pretax of adverse auto liability development, primarily related to accident years 2014 and 2015, partially offset by favorable development in property. The adverse auto liability development for accident year 2014 resulted from bodily injuries severity trends with losses emerging more slowly than we expected. As more claims from this accident year are reaching settlement we recognize that our previous reserve estimates were too optimistic. For accident year 2015, our auto liability booking reflects the higher severity estimates that carry forward from 2014 as well as increased frequency trends. A revised estimate of ultimate frequency trend for the third and first quarter of 2015 is now approximately 1 to 2 points higher than we estimated at yearend, reflecting the continued reporting of bodily injury claims from those accident quarters. That puts our frequency call for the second half of 2015 in the mid-single digit range. The personal line underlying combined ratio which excludes prior period development into catastrophes was 89.7, improving two-tenths of a point from last year. Favorable non-catastrophe homeowner losses and a lower expense ratio more than offset adverse auto losses. Frequency which picked up in the second half of 2015 appears to be moderating somewhat in the current accident quarter at 2%. Severity on the other hand is notched up to 4%. Overall we believe that our lost cost trends are consistent with recent quarters. However as frequency and severity matures our accident quarter estimates may change. As we continue to analyze the underlying trends and understand what is driving them, we nevertheless recognize that we need to take actions to address the profitability of our auto book. We're working aggressively on several fronts, first our rate filings in the first quarter of 2016 were double the number from first quarter of last year representing an average rate change in the applicable territories of 6.5%. The number of rate filings we have planned for the full year is 40% higher than in 2015 with an average increase in those territories of 6.6% in direct and 8.5% in agencies. Given that we mainly issue 12 month policies much of the 2016 filed rate change will earn into the book in 2017. Second, in addition to addressing the underlying market trends with rate we're taking other targeted actions to improve our profitability. In agency we have terminated 2,200 unproductive relationships, de-authorized 2,300 agents from the AARP program and rolled out a new compensation structure focused on key partner agents. Agency written premium was down 8% in the quarter. However AARP agency was up 6%. We expect this shift in business mix to our AARP members and our more highly partnered agents to contribute to improved profitability over time. On the direct side we’re targeting our marketing spend to more adequately priced customer segments and addressing underperforming business with targeted pricing and underwriting adjustments. Our program with AARP remains the cornerstone of this business. We're confident that we have head room for growth with the current membership base and as we've seen over many years with this business we will continue to deliver both strong customer value and profitability. While personal lines clearly has challenges to address, I'm very pleased with our results in commercial lines, where we continue to prioritize retentions and margins over growth amid increasing competition. We delivered core earnings of 249 million with a combined ratio of 91.1. This was an earnings increase of 15 million from first quarter 2015 and a combined ratio improvement of 4.8 points. Lower property losses, favorable prior year development and improved workers' compensation margins were largely offset by a decline in net investment income of 37 million after tax. Catastrophe losses for the quarter were 14 million less than in 2015, while first catastrophe losses were above our expectations in both 2016 and 2015, this is typical volatility associated with storm activity. Intense weather in the Southwest particularly late in the quarter has continued into April and we're fully engaged to meet the needs of our customers. Renewal written pricing in standard Commercial Lines was 2% for the quarter, flat to the fourth quarter of 2015. I'm very pleased with this outcome and our continued balance of retention, pricing and new business. Lost trends in workers' compensation remain favorable and returns are within our target range. We released workers' compensation reserves across commercial lines reacting to the favorable emerged frequency we've experienced in more recent accident years along with the continued benign severity trends. We had adverse development in General Liability including the GL component of the small commercial package business, often referred to as business owner's policy or BOP. Within certain risk classes we've seen an increase in claims with greater complexity and likelihood of litigation. Losses on these claims are tended to emerge more slowly and we have revised our estimates accordingly. Looking at small commercial, the business continues to perform extremely well. The strong margins posted again this quarter along with the continued top line growth reflect the momentum we have generated in this key market segment for us. The underlying combined ratio was 86.7, 2.9 points better than last year. The improvement was driven mainly by favorable non-catastrophe property losses and a modest improvement in workers' compensation results. Written premium was up 2% in the quarter reflecting strong retention and solid new business flow even as competitive conditions intensify. New business of a 146 million was up 4% from 2015. Moving over to middle market, we posted an underlying combined ratio of 92, improving 1.7 points from first quarter of 2015. The improvement is largely driven by favorable non-catastrophe property losses and continued margin improvement in workers' compensation. Written premium declined 4% in the quarter. We're pleased with our retentions and ability to maintain solid pricing levels. However new business was down 21 million versus last year. Our submission flow was off 7% this quarter verse a year ago as well as more account following outside our underwriting and rate adequacy thresholds. I suspect that higher retentions across our competitors, coupled with our targeted underwriting message are driving this result. We expect moderated news business levels over the next few quarter as we balance growth aspirations with our objective to maintain the improved profitability that we’ve worked hard to achieve. Within especially commercial, the underlying combined ratio is 94.3 improved 4.8 points versus prior year, reflecting particularly strong margin improvement in natural accounts and financial products. Favorable prior year development in financial products contributed to especially commercials combine ratio of 76.5, this is based on our continued favorable experience in D&L. National accounts continues to perform well under market conditions very similar to middle market, competition is intense but we’re comfortable with our retentions and the new business accounts we’re winning. Finally circling back to group benefits we delivered solid results with core earnings of 48 million down approximately 8% from 2015, producing a core earnings margin of 5.5%. The main drivers to the decline were lower net investment income and slightly higher losses offset by lower expenses. The overall performance of our group life and disability, both remains strong and I’m pleased with our operating performance. The modestly higher loss ratio is primarily due to year-over-year volatility in ADND claims and disability severity driven by slightly higher average wage on recent claims. Looking at the top line fully insured ongoing premiums was up 1% for the quarter. Overall book presidency on our employer group block of business continues to hold around 90. Fully insured ongoing sales were 266 million for the quarter, this is our second higher sales quarter over the past six years surpassed only by first quarter 2015, which was exceptionally strong. In summary we are well positioned to cross Commercial Lines and Group Benefits to meet the challenges of increasing competitor conditions. We’re focused on retaining our accounts and maintaining margins and in Personal Lines we’re aggressively addressing lost trends through numerous pricing and underwriting actions. Let me now turn the call over to Beth.

Thank you Doug. I’m going to cover the other segments, the investment portfolio and our capital management actions before we turn the call over for questions. Mutual funds core earnings were down 2 million from the first quarter of 2016 due to the impact of lower average AUM. Total AUM was down about 6% from a year ago, consisting of a 3% decline in mutual fund AUM principally due to market levels and a 17% decline in Talcott AUM, primarily reflecting surrender activity. Fund performance remains solid with 56% of all funds and 68% of equity funds out performing peers over the last five years. Net flows were negative a 186 million as positive equity net flows were more than offset by negative flows in ’16 comps. Over the last 12 months net flows were positive 776 million. Telcotts core earnings declined from a 111 million in the first quarter of 2015 to 77 million slightly below our outlook, as limited partnership income was significantly below our 6% annualize return assumption. Limited partnership returns impacted all of our segments which I will cover in the more detail in the investment section. Surrender activity was lower than last year at 6.7 for variables in annuity and 4.4% for fixed annuity. Annualize surrender rate in the first quarter of 2015 were at elevated levels of 10.9% and 6.2% respectively as they included the impact of several contract holder initiatives all of which concluded in 2016. Corporate reported a size better core loss of 51 million compared to a core loss of 62 million in the prior year. The primary driver was lower interest expense due to our debt capital management program. Turning to investment our before tax portfolio yield, excluding limited partnership with 4.1% this quarter consistent with both the first and fourth quarter of 2015. Non-routine investment income, such as make whole payments on bold calls was minimal this quarter totaling 6 million before tax compared with 26 million in the first quarter of 2015. The P&C portfolio yield excluding limited partnerships declined to 3.8% from 4% in the first quarter of 2015, primarily due to lower non-routine investment income and reinvestment rate over the last 12 months that was lower than the overall portfolio yield. This quarter’s yield improved slightly over the 3.7% achieved in the fourth quarter primarily due to lower investment expenses. Pre-tax investment income from limited partnerships with 8 million or an annualized yield of 1% compared with 99 million or a 14% annualized yield in the first quarter 2015. While returns on limited partnerships are volatile, our average annualized return of the last three years was 9% well in excess of our 6% planning assumption. The decline in income this quarter is due to losses on hedge funds and a lower income on real estate funds compared to the prior year which benefitted from gains on sales of underlying properties. Our hedge fund performance has generally been better than the global hedge fund index. However hedge funds in general have not performed well recently and we have been reducing our allocation to them overtime. The credit profile of the investment portfolio remains strong. Total impairments in mortgage loan valuation reserve charges in the quarter were 23 million before tax compared with 42 million in the fourth quarter and 15 million in the first quarter of 2015. Energy related credit impairments have increased in the past year as credit deterioration and downgrades continue in the sector. Our energy portfolio totaled 2.4 billion at March 31, 2016 down from 2.5 billion at year end 2015 and 3.7 billion at year-end 2014, a reduction of 36% over the past 5 quarters. We sold about 200 million of energy exposure during the quarter resulting in a net realized loss of about 30 million before tax. As energy prices have remained volatile, we continue to manage our exposure proactively with a preference to own higher quality credits that we believe can withstand a lower-for-longer price environments. To conclude on earnings, first quarter core earnings per diluted share were $0.95, down 9% from first quarter 2015 largely due to decrease from the partnership income and a result in personal auto. The 12 months core earnings ROE was 8.8% in total and 10.3% excluding Talcott. The P&C core earnings ROE was 12.7% and group benefits was 10.2%. These are strong results given the difficult operating and capital market environments over the past year. Turning to shareholders equity, book value per diluted share excluding AOCI rose 7% from a year ago resulting in total shareholder value creation including dividend over the past 12 months of 8.7% versus our target of 9%. During the quarter, we repurchased 8.4 million shares for $350 million at an average price of $41.72 per share. During April through the 27 we have repurchased a 105 million leaving 875 million remaining under the authorization. As you know, we tend to be consistent in our approach of repurchases and expect to use the remaining authorization over the balance of the year. To conclude, in 2016 we remain focused on maintaining margins in commercial lines and group benefits and working to improve performance in Personal Lines. Despite challenging capital markets, our investment portfolio continues to perform and we are focused on effectively and efficiently managing the write-off of Talcott. I will now turn the call over to Sabra so that we can begin the Q&A session.

Just a remind you that we have about 30 minutes for Q&A, if you have to drop off or if we run out of time before we get to your question please email or call the IR team today and we will follow up with you as soon as possible. Chris, could you please repeat the Q&A instructions.

Sure. Our first question is from the line of Jay Cohen with Bank of America Merrill Lynch. Your line is open.

I'll start on the personal auto side. I was a little surprised, even though you talked about pressure that you saw and you took the reserve action, when looking at the accident year ex-cat combined ratio for auto, it actually got quite a bit better than second half of last year. I would have thought, given the pressure that you saw, you would have kept a relatively high loss pick. I'm wondering why it got better from the second half of last year.

Jay good morning, this is Doug. I can go back and look at those numbers specifically but obviously we had pressure in the back half of last year and as talked about in last couple of quarter particularly on the frequency side. This year as I commented Frequency is in better shape, but overall our loss transfer generally similar. The rating actions though that we were starting to take last summer are earning their way in so we’re now starting to begin just begin to see the impact of the changes that we’re rolling through the book, so we’re trying to offset what we’re seeing in lost time Jay what actions we are taking to combat that.

I just want to add to that. The other thing you have to keep in mind to is there seasonality in the auto result, so we typically when we look at the compare, it would go to the prior year where you do see that, our combined ratio is on an ex-cat, ex-prior development for auto are up. So you do have to keep in mind the seasonality.

That's really helpful. But it sounded as if the claims trends, the claims experience you had in second half of last year, hasn't gotten worse; you just needed to go back and make sure the reserves from 2014 and 2015 were right. But it doesn't sound like these have gotten even worse from where you were second half of last year. Is that fair?

Jay what I would say is that, we did see a little uptick in the frequency of our second half and maybe this is just a good moment for me, just to define the frequencies, I think it's a complicated measure and I think it’s important that we all understand exactly what we’re saying. So let me just say. For us frequency does not solely equal just the number of accidents, frequency is a function of the number of accidents and the number of coverage elements associated with the original collision. So for example given accident will receive an initial report, essentially a physical damage or a collision claim, but as that claim develops, additional coverages may be involved such as medical, underinsured or uninsured or other BI elements. As a result our method for calculating frequency includes both the collision but also the other coverages involved and so what we saw in the first quarter was a development on the BI side of our frequency for the second half of 2015, it was not a development of the number of collisions but it was the BI associated and we include that in our calculation when we share our ultimate picks of frequency. And maybe one last clarifier, when we do share frequency trends we're providing an estimate of the claimed counts developed to ultimate for that accident period. Based on the accidents and related claim reported, we estimate how many more claims we expect to be reported for that accident period and that becomes our frequency measure, so it's not a calendar year intake across claim, it's not some of the other things that maybe others, maybe reporting ours is our best shot at the ultimate frequency in the quarter and what change in Q1for 2015 was the BI component of our collision claims second half of the year.

The next question is from Ryan Tunis with Credit Suisse. Your line is open.

I'd like to hear Doug talk a little bit more about the competition in middle markets. I think along those lines, just seeing renewal rate increases in standard commercial holding at 2%, retention did dip a little bit -- just curious. Is it fair to say that, given where pricing is now, the strategy is to maintain margin even if it potentially comes at the expense of some growth and some retention?

Right, that's a really fair way to say, I'm very pleased with the first quarter in middle market, we're seeing intensified competition, very satisfied with our pricing performance and extremely pleased with our solid retentions, when I step back though, I want to be thoughtful about how we draw the line around new business and you saw that our dollars were down, but we are satisfied we're making good choices and I'll make that trade any day because we worked too hard to get our profitability to where it is today. So let that move back in a different direction. So, that is the balance that we're trading on across all desks across the country, I'm pleased with the first quarter start 2016.

And just as the follow-up on Jay's question, I think what -- I’m just trying to get comfortable with is what we saw in the back half of last year, it sounds like it's lower initial frequency developing to something higher over the next six months or so. And now you're seeing in the first quarter you had a lower number and I mean how can we get comfortable with the fact that over the next couple of quarters that, that I think you said 2% frequency in 1Q wouldn't develop into something like 6% [ph]. I know you’re reflecting that elevated BI frequency development in the way you picked the 1Q reserves if it makes sense.

So, we've tried to understand the dynamics of what happened in the back half of 2015 and build some of those indications into the way we're projecting first quarter '16. Obviously there's a different economic and driving climate, we understand that, we're trying to build it into our productions, but we're fairly satisfied and we feel that we have a good shot at what we think happened in the first quarter and have reflected that in our financials, but I'll say this to you that the market has changed on us, it's the reason that our filings were up, we're pricing for a different level of market, and auto activity and I think between what we're doing on the pricing side and the actions we've taken on book management, we expect to see improved progress in our auto book of business in the coming quarters, maybe not all of it in Q2 but certainly the back half of the year we expect to see demonstrable progress in our auto results.

The next question is from Michael Nannizzi with Goldman Sachs. Your line is open.

Just following up a little bit there, Doug, you guys talk -- it seems like where most of the conversation here has focused on the frequency trend from 2015, but it sounded like from your filing or your release that the charge was attributable both to a lift in severity on the 2014 book as well as frequency trend. Can you help us understand those components, the magnitude of the two? And if it's a base year in 2015 on severity, how that impacted both 2014 and 2015 accident years on that front?

Sure Mike and good questions and multiple features to your question. Couple of thoughts 2014, our change in our reserve position clearly is driven by the bodily injury movement that we've now seeing. I'd start by saying that our early look on '14 through the first 12 months even in the early part of 2015 was very-very positive in fact I would say that that year was running extremely positive relative to the prior years and then things started to shift throughout 2015 and clearly as we looked at that book of business the last 90 days, we've seen pressure there. So went back and adjusted '14. It might a surprise for people to understand how much of our open bodily injury claim book is still open, unpaid as of 12/31/15, I'm talking about accident year '14 unpaid at 12/31, between 40% and 50% of our BI claims are still open, that is the component that we've seen more pressure to close, those that are closing are closing for greater dollars that we expected and it's costing us greater dollars to defend those cases as well. So, what we saw through that loss component is what drove us to '14 and then you're right we rolled that change in '14 through '15 and also had to reestablish our expectations and our base for '16 as well.

Can you give some dollars in terms of magnitude, how much was severity, how much was the 2014 issue, how much was the 2015 frequency issue?

The '14 issue was all severity.

Okay, I know, but 52 million was the total charge right, like development charge, so can you tell us, I just want to understand like the order of magnitude on the development dollars for the ’14 issue and ’15 issue?

So the 65 million was ‘14 and ‘15 primarily right? [Multiple Speakers].

And then the other half also --.

And then the other half was, okay. And then in the 15 year half of the 32 was frequency in half that was severity.

Great. Thank so much for that. And also I guess, putting into perspective, Personal Lines, probably a quarter of your underwriting profitability on a run rate basis, looking at Commercial Lines here, you talked also or Chris talked in the script about running at the high end of the range on Personal Lines. Where does 1Q put you on your scale in terms of Commercial Lines?

Mike I would suggest if you, when I look at Q1 ’15 versus ’16 we ran 2 a -- 3 points better excess year to year. Probably about a half of that would have been several property experience. The other significant chunk inside their change is our workers comp experience, I expect our comp experience to continue going forward based on all of what we can see inside our current signals that to me looks repeatable as we move forward the property had a very good quarter, I’m hoping for better quarters I know we’re taking better underwriting actions but I can’t count on all that property going forward. So think there is a may be a third to half of that is repeatable and I hope we can repeat the property as well.

Got it. And just -- go ahead, Chris

It’s Chris, I just want your follow up of on Doug’s point, because went we get our, quickly our BI activity, Doug said mean we still have substantial reserves open for the older accident years, I mean there does seem to be again this is anecdotal right now, there is a more litigious environment that we face. So as Doug described, the elements of our severity, there could be more on them, but seems to be much more litigation, jury awards that are exciding some of our initial expectations and reserve with adjustments that, we’re reflecting to a ’15 into ’16 here.

The next question is from Jay Gelb with Barclays. Your line is open.

For Chris and Beth, I want to get your sense as to looking at the 2016 guidance that was provided last year. Do you still think it's achievable to get to the low end of that guidance of 1.5 -- 7.5 billion of core operating earnings before the other legacy P&C impact?

Jay, its Chris. So, the guidance that we provided at yearend, it think everyone understood the assumptions based to that in that, particularly as it relates to prior year development, our investment partnerships our combined ratio picks for commercial and Personal Line so, we’re out of business of updating quarterly, but I think you could determine the sensitivities, particularly at it relates to Personal Lines particularly as it relates to our net investment income and partnership so, I think you should be able to understand, were that is coming out right now. So as we said here one quarter into it, there are still three quarters they go, there is items that could break our way, or things that we’ll need to continue to manage so we’re not giving up on under year and still fill that the guidance we gave was appropriate.

Understood. And then for the return on equity profile, the 9% return on equity for the entire Company, that was achieved during the trailing 12 months. But I'm wondering if there might be some more downside pressure to that level, especially given net investment income, if not the Personal Lines impact.

Yes, I think that the prior comments in your question here sort of go hand-in-hand, I mean that they both are obviously in a related to extent that, the numerator in the equation get the a little softer that’s going to effect the overall ROV. So, I would agree with you that, that there are some pressures you know we face but only on quarter end, so we’re going to continue to work to a very-very hard Jay as you know.

Our next question is from Randy Binner with FBR. Your line is open.

I just wanted to follow up on some of the personal auto stuff again. So I think I was, just as a follow-up to everyone else, trying to get to the actual why, of why claims are worse on the severity side. And I think there was a comment in there that litigation is broadly worse. So I just wanted to understand that. It's not more accidents, necessarily; it's that more BI claims are developing poorly? So is that a result of litigation? Is it a result of people having worse injuries? Are you having an older driving population? Can you just flush out what's actually happening there?

Sure Randy let me take a crack at it. We certainly felt an increase in collision frequency, physical damage frequency, second half of 2015. That appears to have settled down in our numbers in first quarter, we’re reasonably quite flattish, but yes as we shared with you last year that’s off a tough compare. So we feel pretty good about collision, accidents in the first quarter. Keep in mind weather was relatively tame. So, I have to understand that as well. On the liability frequency we are seeing more features, more BI components to the collisions that are being reported and we’re addressing them. So in 2015, the uptick in frequency was both more features, more coverages attached to those collisions and that is rolling into ’16 relative to our expectations. So we reset baseline, if you will, for ’16, we have built in our pricing programs what we think are kind of new norms for severity and frequency and we’re working our way through, dealing with needing an improved financial outlook and profile for this business, we’ll get there.

So when you say more features, is that because more coverages are wrapped together in the products you are selling? Or is it just a higher likelihood that someone has BI? Or is it more just that, because you have half your claims still open, the trial bar is being more effective at prosecuting those?

Yes it not more features than the policy for sure. What we think some of the condition is due to is that we’re clearly seeing higher speeds on the highways and more highway accidents. And so with higher speeds those are more difficult accidents with more people hurt and more damage caused by those accidents. So I think it’s the complexity and the speed of some of these accidents and we’re feeling pressure inside our liability bodily injury component of getting these cases closed.

You mentioned -- is that the industry norm to have half the claims still open? It seems about right, but I'm just wondering if that's normal and if, as part of these initiatives, in addition to just raising prices if there's anything you can invest in more on the claims side, if these are becoming more complicated claims.

Couple of parts to that answer. First thing is I think that that range of 40% to 50% of open bodily injury claims on an accident year that’s 18 months out is completely within the norm, so I’d start there. Secondly, although I’ve talked about many of our underwriting and book management initiatives, they are equally as many claim initiatives that we’re embarking on both ourselves we’re looking at system dynamics, we’re looking at how we can cut data more effectively and so there are a number of diagnostics that we’re dropping on the desktops of our claim examiners, so we can do absolutely the best job possible adjudicating claims.

Thank you, that's perfect. And I want to sneak in one more just to make sure it gets asked. I knew that you have a cat budget for the second quarter which incorporates a lot of things that happen in May and June. But is it possible for you to comment if you are ahead of budget so far for April, in light of the continued storms in Texas?

I’ll answer that. So yes our budget for second quarter is about a 151 million and we kind of look at that sort of evenly across the three months a third, a third, a third. So if you think about our budget for April about 50, we’re running a little bit above that at this point, you know there obviously has been a lot of activity so the month of April has come in strong as it relates to cat activity and we’ll obviously continue to monitor it through the rest of the quarter.

Perfect.

Randy its Chris. Just you make an observation as Doug said I said in my prepared remarks I mean we’re obviously not happy and disappointed just where we’re at particularly in personal lines. But you should know we are doubling our efforts down to fully understand these trends take the litany of actions and it’s not only rate, as Doug said in his remarks, there is a number of other actions that we’re aggressively getting after and just know that there is a tremendous amount of energy in our Personal Lines team to get our arms around these issues and get back caught up to trends. So I am confident we can get our arms around this. We know what needs to be done, it’s going to take a little bit of time but just know the energy and commitment that we’re devoting to this.

Right and maybe one final comment and this really is a comment across several of the questions today. I think we’ve commented over the years that our ARP business has been more profitable and continues to be. So as you looked into both my comments about our rating actions which have a little more intensity around what we’re doing in the agency space and also the fact that if you look at the premium indications I gave you some growth numbers and you have a sense that we’re down overall in agency and you saw based on my comments that we’re up in AARP agency. I think that gives you a signal that our other agency business is down significantly in the quarter. We feel good about that mix we are mixing towards the strength of this franchise which is a matured driver and we’re being thoughtful of our class programs, we’re adjusting as we go and I am very confident that based on all the actions we’re taking we’re going to see progress over the course of 2016.

Alright. Thanks for the comments.

The next question is from John Nadel with Piper Jaffray. Your line is open.

Maybe a question for Beth -- but now that you have completed the original $1.5 billion dividend plan out of Talcott, the $500 million, $500 million and $500 million, and your stress scenario that you presented to us last quarter seems to indicate a pretty sizable capital cushion, I'm curious whether you have any intention at this point of going back to the insurance regulator to present perhaps another plan to extract more capital beyond the $200 million or $300 million normal dividend that you are already expecting to take out annually.

For 2016, remainder of 2016 as we've said we're anticipating taking out the $250 million in the second half and for '16 that is all we're intending to do at this point. As we roll into '17 we'll obviously continue to look at overall what capital is generated in Talcott as well as just the runoff activity to determine if there's additional dividend beyond just for that normal $200 million to $300 million, but that we would look to update more towards the end of this year.

Yes. I'm just curious about whether you have plans to -- not something that would necessarily be actionable in 2016, but you guys had obviously teed it up with the regulators sometime in advance of the $1.5 billion over an 18 month period of time. I'm thinking something similar to that. I'm looking at the policy counts and looking at the net amount at risk and the continued runoff of the annuity business. It looks like that might be setting up for some further opportunity. That's all

I think and over time there obviously is additional capital that we will be able to extract, I believe I said on our last call that when I think about dividends for 2017, I think about them not being higher than what we're experiencing in '16. So again in '16 we're doing 750 million, as I said I anticipate there would be some additional access beyond just what we're generating, but I wouldn't want you to think that there would be something above sort of the level that we're seeing this year.

Okay. And then just around the 250, which is beyond the 500 that was part of the original plan, I think at the past you have indicated that there's some sensitivity to that as it relates to the level of interest rates. Do you still feel comfortable, given where rates are?

Yes, I feel very comfortable with the $250 million even with the interest rate activity that we've seen, again as we think about sizing the dividends we take a lot of that into consideration from our stress scenarios and so forth, so feel very good about our ability to do that.

Showing no further questions at this time, I'll turn the call back over to Sabra Purtill for any closing remarks.

Thank you, Chris. And thank you all for joining us today and your interest in the Hartford. And if you have any additional questions throughout the day please don't hesitate to follow-up with the IR team. We wish you all the good weekend and good luck for the rest of earning season. Thank you.

Ladies and gentlemen, this concludes this conference call. You may now disconnect.