The Hartford Financial Services Group, Inc. (HIG) Q3 2016 Earnings Report, Transcript and Summary

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. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Sabra Purtill, Head of Investor Relations.

Good morning and welcome to The Hartford's webcast for third quarter 2016 financial results. The news release, investor financial supplements, 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 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 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 rebroadcasted 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 will now turn the call over to Chris.

Thanks Sabra, good morning everyone and thank you for joining us today. I'm pleased with our overall third-quarter results. In commercial lines and group benefits, performance was strong and demonstrates focus on maintaining margins albeit 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 remains 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’re 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 determination of unprofitable agency relationships. I have deep confidence in the personal lines’ leadership team and in their strategy to improve performance. Though results remain 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 excludes catastrophes in prior development was very strong at 90.0. This would represent a full point improvement over the prior year. I’m pleased with our competitive positioning across commercial lines and with our ability to defend the margins we 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 complaint 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 goal standard. We continue to enhance our innovative approaches through customer experience, digital and the use of data 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 remain challenging. Our primary focus is to maintain margins with selective topline 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 work to retain our best accounts in our 93.1 underlying combined ratio improved more than 0.5 over the prior year. New business however declined 15% reflecting pricing and underwriting disciplines. Outside of our P&C businesses group benefits generated strong profitability with a 5.6% core earnings margin and 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 in broadening our commercial lines and risk capabilities. We also expanded the mutual funds platform. We entered into smart-beta ETF space through the acquisition of Lattice Strategies and further broadened our actively managed investment offerings through a relationship with Schroder. 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 renewable business along with their trust and confidence. And they like the fact that we are becoming a broader and deeper risk player. This is encouraging thing back 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 and 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 continue 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, personal lines posted core earnings of 25 million, up 8 million from third quarter last year. The underlying combined ratio which excludes catastrophes and prior period 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 2016 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 remain 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 being 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 are moving aggressively on multiple fronts. For example, we continue 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 customer's we actually renew. We expect the combination of rate increases and mix 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 cost and reduced commissions which contributed to a 3 point improvement in 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 auto 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 are 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 improves 0.6 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 lost cost increases. We also recorded 18 million pre-tax of prior year development to address severity trends, primarily in small commercial in accident year 2015. Auto was a relatively small line for us representing approximately 10% of commercial TNC premium. We are achieving our highest written price increases in this line and continuing 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. On the specialty, we are 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 result in 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 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 premiums 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 point from third quarter 2015. This was primarily due to favorable workers compensation margins and lower expenses partially offset by higher auto loss cost and unfavorable non-catastrophe property experience. Middle market written premium in the quarter was down 0.7 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 audit premiums and several retro accounts. Normalizing for these items, written premium is up modestly and 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 in 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 2016. We continue to feel competitive 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 is 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 continue 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 lost trends and restore underwriting profitability in personal auto. And finally, I'd like to welcome our new Maxum teammates to the Hartford. Maxum's capabilities are perfectly aligned with our strategy to become a broader 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 segment, 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 3% reduction in investment management fees. Total AUM was up about 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 the 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 add smart data exchange traded funds to our portfolio line-up. 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 sub advisor relationship with the adoption of ten mutual funds managed by Schroder Investment Management with about 3 billion in AUM. These funds which have been rebranded as the Hartford Schroder funds broaden our platform and expand our offerings particularly in international and emerging markets. Talcott continues to perform well focused on running of 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 were 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 in fee income as the book continued to run off offset in large part by reduced expenses. This quarter, full surrender activity on an annualized basis was 7.4% for variable annuities and 5.4% for fixed annuities. Talcott DAC unlock charge was modest this quarter as adjustments to variable annuity lapsed and market assumptions largely offset the impact of writing of the remaining DAC on our fixed annuity book. The fixed annuity DAC write-off was caused by the impact of the sustained low interest rate environment resulting in lower expected growth profits on the book. As we said in July, during the third quarter, Talcott paid a 250 million extraordinary dividend to a holding company completing our expected 750 million dividend plan for 2016. In 2017, we expect to request dividend in the range of 500 to 600 million. Investment results were strong this quarter with a sharp improvement in limited partnership returns. Limited partnerships investment income totaled 93 million before tax this quarter compared to 22 million before tax in the third quarter of 2015. This quarter's annualized investment returns 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 annualized 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 developments and limited partnerships core earnings per diluted share rose by 7% over last year or $0.06 cents 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 to 60 million before tax which would consume a large portion if not all of our fourth quarter CAP 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 dividend 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 repay 275 million of maturing debt consistent with our previously announced plan. In 2017, we intent 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 dividend and holding company cash flows in total will be about at the same level as in 2016. While Talcott dividend will be 500 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 with personal auto are well underway. We continue 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 instruction for the polling for the Q&A and then we will start.

[Operator Instructions] Our first question comes from Ryan Tunis from Credit Suisse. Your line is open.

Just a couple on personal lines on the auto. So I think you guys mentioned that severity and frequency were bolstered up 3% year over year. I'm just wondering if the actions that you've taken so far contemplate things continue and they get a little bit worse or still running at these levels or should we think about the actions you've taken - do those more assumed in 2017, 2018 do I have a kind of what’s been like more of a 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 the third-quarter was a little higher than we expected to be particularly given what we thought were ever going to be favorable trends against the 2015 patterns in the back half of the year. As we lean into fourth quarter, obviously we will 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 the January but I will say this, it looks to us like we are in an environment where loss trends don't look like averages over the past ten years. So we are anticipating an abnormal environment hoping that it isn’t as abnormal as the last two years have been but we will talk more about that with more detail in January.

And then my follow-up I guess is probably a little bit more of a modeling one around auto. But just thinking about the momentum on the expense ratio there? I mean the fact that that's improved a lot direct marketing costs have come out. I guess lower bonuses should that continue to come down over the next few quarters or it is sort of way you’re running now reflect all the actions you've announced or have planned?

Two things I would say, first is, clearly we are taking extraordinary change leverage if you will based on our revised open road plans. 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 more normal run rate going forward, but we’re continuing to match our pricing adequacy, our view about profitability with our marketing strategies and they are incredibly correlated. So we will 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 kind of 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 as 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 advancements 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 nine point surprising activity that is very reflective of our aggressive approach to getting on top of these loss trends.

Okay. And I guess just a follow-up real quick to that, I think you also mentioned, it's not just renewal rates, it’s also mix change. I guess when you think about longer-term getting back towards the 96 to 96.5 [indiscernible] how much of that do you think really relies on getting renewal rate versus just kind of, maybe undoing some of the things that happened a year ago, in terms of just improving I guess 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 will say this. There are clearly positive signs that are going to manifest inside the aggressive rate actions offsetting some of the trends that we are seeing in our book as well. I’m also encouraged by the number of levers that we’re working in our other agency and in our other channels. So as we think about kind of this roll forward into 2017 and 18, 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 costs and the loss trends that are in the marketplace today.

Brian, it’s Chris. The only color I would add for you is, remember, we are optimistic about the AARP book, its 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 channel for those customers that want to go through an agent and really shut down some of the other agency non-member agency as we call activities where we’ve 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.

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

Thanks so much. I guess just, Doug, just one question just on personal auto, when you talk about improvement in ‘17 from the actions you’ve taken so far, what are your assumptions around loss trends. You mentioned you were a little bit surprised with 4Q sort of 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 we 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 in our day that we also are spending a lot of time looking at industry, the fast-track data that I know all of you look at. So as we look forward, we have expectations based on the actions we are 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 from our own loss trends. If you step back from that and you 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. So our lens into ‘17, ‘18 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 a reason that our rate activity in ‘16 is 2X what it was in ‘15, 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 ‘17, 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. And then you mentioned marketing spend as a lever in personal lines, can you talk about how much room 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 sort of juice is there in that operating lever?

Michael, it’s Chris. I would say we’ve been fairly aggressive in polling 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 I mean 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 ‘17, but if there is any additional discomfort, what we are seeing, it is a lever that we could continue to modify and pull. So if we are 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, just there has been some activity in the space on the acquisition side with rates sort of lifting up a little bit here recently, can 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. I mean, really, we put that block into run-off five years ago, really with the idea of reducing risk and policyholders’ liabilities reliability over time. We wanted to return excess capital to the holding company and we always wanted to meet our customer commitments. So I think over the last five years that 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’s provided the holding company with a good deal of capital that has allowed us to manage in the most efficient way. So as we look forward, we’re perfectly comfortable running this off over a longer period of time, but myself, Beth and 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 will always be prudent in exploring opportunities, but I wouldn't foreshadow a lean one way or another at this point in time. I mean it's running off as we’ve planned and if there are solutions out there that make economic sense for us, that would be acceptable with the regulators that take care of our customers and employees, we would explore that.

The next question comes from Randy Binner from FBR. Your line is open.

Hey, great. Thanks. I'll ask a couple more on Talcott, one, with the run-off on contract counts, the 10% and 5% numbers, they’re 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. 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 sort of tweaks on that process, but we do not have a contract initiative underway at the present time.

Okay. And then on the 500 to 600 requests planned for 2017, can you break that out between what’s kind of operating free cash flow versus just capital release as the required capital goes down overtime? And then what the timing of that would be, up in ‘17, would be, I think this year, it came up more in the kind of the first half?

Yes. So a couple of things and it’s hard to parse out an exact number. If you go back to the comments that I made in 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 those through the nine months, we've seen an increase in surplus before dividends, we would expect most, if not all of that to go away as we go towards 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 that would mean that we’re running Talcott at and based on that, I feel very comfortable with the range of 500 million to 600 million. As far as the timing over the course of ‘17, we haven't - and 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 did you provide an update on the RBC ratio down at Talcott as of now?

No, we did not put an update in RBC ratio. I’d say that the RBC ratio is getting a specific number. It continues to be very strong in these markets, in this market environment. Again, when we think about excess capital and ability to take dividend out, we’re always looking at it in the stress. So to some extent, what the current RBC level is, it 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.

Your next question comes from Brian Meredith from UBS. Your line is open.

Yes. 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 in commercial lines from the increase in loss picks on the commercial art of business, I imagine there were some current year development?

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

Great. And the other quick numbers one, was the impact on reserve development for the Florida worker's comp reserve increased?

So I will take that one, Brian. So as we looked at our reserve position at the end of the quarter and worker’s 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 costs inflation this year at least recently. Are you seeing any signs at all that in the worker's comp line yet?

Brian, we are not, we're watching that very carefully and we’re very pleased with our frequency and severity trends, very early in the accident year, but our 2016 workers comp book is very good shape, frequencies continue to be flat to down slightly in our medical and our 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 and management, just on detailed inflation activity. So it is something, as he said, we watch closely. I think also the important thing to remind everyone is no matter what the current trends are, I mean, what we’d put upon 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 that trend is not needed, then obviously that creates successes, 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 DOL feature [indiscernible] Talcott as we look Q4?

So we are 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 will look at and monitored very closely, but wouldn't surprise me if we saw a little bit of a slowdown, potentially.

Your next question comes from Meyer Shields from KBW. Your line is open.

Thanks, good morning. If I can start on the mutual funds business, I guess the press release talks about higher expenses related to Lattice, are those expenses associated with the acquisition or the operation 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 on expenses.

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

Meyer, this is Doug. It’s very early days. It’s just been what is really 60 days. No progress or aberration to speak of, so it's been a well performing underwriting group in its extended history. We’re pleased about having them on board, but in the third quarter, there wasn't anything really to speak of it that would be a pattern for Maxim.

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

The agency count has not moved a lot since the 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] Your next question comes from Alex Scott from Evercore. Your line is open.

Hi, I just had one quick one on Talcott. I know you mentioned the writedowns this quarter, and for 4Q, some of the statutory work, just thinking about GAAP reserves, I know some of them are kind of how it is embedded derivatives, some of them are not, is there any contemplation when exit value in those reserves, I guess how should we think about that impacting 4Q?

So, as I sit here and think about our GAAP reserves, I think you’re asking about for fourth quarter, not a lot of changes that we’d anticipate relative to sort of the annual assumption updates that we've looked 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.

And your next question comes from Jay Gelb from Barclays. Your line is open.

Thanks and good money. Beth, the $1.3 billion of buybacks in 2017, I think that's slightly above what the street was kind of expecting going into the year, and it also feels like you kind of pulled forward the discussion of that at this point of the year. So is there anything else you can tell us about in terms of the decision that led to that amount of 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 kind of in line with what we did this year. As far as the timing of the announcement, we've always talked about announcing our 2017 plans as we came towards the end 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 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 towards our longer-term targets and so we’ve always talked about sort of 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 of the actions we’ve been taking on the debt front over the last several years and the way we have 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.

And then one last one on Talcott, there is 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 kind of a normalized trend in Talcott’s earnings in 2017?

Yes. I would say let's wait until we get to our fourth quarter call when we talk a bit about expectations for 2017. I will 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 sort of non-investment income return comes from the fees that are generated in the variable annuity book and we are pretty transparent in how that is running off, so I think if you use some of that, you get an expectations relative to run rate.

We 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 happy Halloween. Goodbye.

Thank you everyone, this conclude today’s conference call. You may now disconnect.