Good day. My name is Jack, and I will be your conference operator today. At this time, I would like to welcome everyone to The Hartford's Fourth Quarter 2017 Financial Results. 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 thank you all for joining us today. Today's webcast will cover our 2017 financial results and 2018 outlook for selected business metrics. We announced our fourth quarter and full year 2017 financial results last night and the news release and investor financial supplement are available on our website. Please note that consistent with prior year-end periods, our 10-K will be filed at the end of the month, but we have included some additional data in the investor financial supplement that will be in the 10-K, such as the P&C loss reserve roll forward. Also please keep in mind that as a result of the agreement to sell Talcott Resolution, current and prior financial results for this former segment have been accounted for as discontinued operations, which is in our Corporate segment, as required under U.S. GAAP. This change does not change net income for prior periods, but it does reduce core earnings as income from discontinued operations is included -- is not included in our core earnings calculation. If you have any questions about this change, please consult the IFS and the 10-K when filed, but also feel free to give the Investor Relations team a call with any questions about the accounting. 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 time 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 be materially different. 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 these risks and uncertainties can be found in our SEC filings, which are available on our website. Our commentary 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 1 year. I'll now turn the call over to Chris.

Good morning and thank you all for joining us today. 2017 was an eventful year at The Hartford with several major accomplishments, including the acquisition of Aetna's U.S. group life and disability business and the agreement to sell Talcott Resolution. However, bottom line results were negatively impacted by the loss on sale of Talcott and the charge for U.S. tax reform. Core earnings were up 11%, and core earnings per diluted share were up 19% despite exceptionally heavy catastrophe losses in 2017. This is an outstanding result, reflecting the strength of the organization. Commercial Lines margins were strong, Personal auto profitability improved great, Group Benefits and Mutual Fund results were excellent, and we had very good investment returns across the board. Looking back over the year, I am truly pleased with our results and impressed with our team's ability to deliver on the numerous initiatives we have underway. In Personal Lines, I am very pleased with the strong improvement of our auto line, where the underlying combined ratio improved by 4.2 points. Improving auto profitability has been a top priority for our management team, and this is a significant milestone as we position the business to return to growth by leveraging the historical strengths of our AARP relationship. Overall, Personal Lines results were significantly affected by the major catastrophe events of 2017 with full-year CAT losses more than double our average annual expectations. In Commercial Lines, we began 2017 focused on maintaining our strong underlying margins as we correctly anticipated increasing competitive forces. Margins did remain strong, although we expected pressure in workers' compensation and general liability. However, as Doug will discuss more fully in his comments, we have some optimism that pricing environment may improve in 2018, and our disciplined approach to underwriting and pricing will serve us very…

Thank you, Chris. And good morning everyone. Looking back on our business objectives for 2017 and the results achieved, both operational and financial, this was an excellent year for our Property & Casualty and Group Benefits businesses. In Group Benefits, we capped off a year of outstanding earnings and solid top line growth with the Aetna acquisition. In Personal Lines, we delivered strong improvement in the underlying auto combined ratio. And in Commercial Lines, we successfully achieved top line growth while balancing underlying profitability in competitive markets. Our financial results were impacted by historic were impacted by historic industry catastrophe losses, but we're pleased with how our property book performed in these extreme events. Our claims team and the entire enterprise responded to our customers with the care and diligence our brand represents. In the midst of these tragic events, we were at our best, backing our promises and helping our customers rebuild their lives. I'd like to share a few thoughts on our 2017 financial performance for each of our business units, beginning with Group Benefits, where core earnings for the year increased to $234 million, up $30 million from 2016, with a core earnings margin of 5.8%. The group disability loss ratio for the year improved by 4.9 points due to positive pricing as well as favorable incidence and recovery trends. The group life loss ratio was very solid but up one point versus prior year due to favorable changes in reserve estimates in 2016. Looking at the top line. 2017 fully insured ongoing premium increased 14%. Excluding the two months of results from the Aetna acquisition, growth was 3%. Overall, book persistency on our employer group block of business, including the business acquired from Aetna, was approximately 90% for the year, and fully insured ongoing sales of…

Thank you, Doug. I'm going to briefly cover fourth quarter and full year results from the other segments and investment performance before taking your questions. Turning to Mutual Funds. Fourth quarter core earnings were $37 million, up 76% after excluding a state tax benefit recognized this quarter. Full year 2017 core earnings were $110 million, up 41% over the prior year due to higher investment management fees as market appreciation and over $3 billion in net inflows drove an 18% increase in total segment AUM to $115 billion. Investment performance remains strong, with 60% of Hartford Funds beating their peers on a five-year basis, which contributed to the robust sales. Corporate, which has been restated to include Talcott as a discontinued operation for all periods presented, had a net loss of $4.1 billion in the fourth quarter due to the $3.1 billion loss on discontinued operations and an $867 million charge resulting from U.S. corporate tax reform, reflecting a reduction in the value of net deferred tax assets. The Corporate net loss for the year was $4.5 billion. In the quarter, Corporate had core losses of $51 million, slightly better than prior year, primarily due to a state tax benefit of $5 million. For the full year, Corporate core losses totaled $229 million. Regarding Talcott, the sale and separation process is on schedule, and we expect to close by June 30. Since the transaction economics were locked in at signing, our results for the most part are not impacted by Talcott earnings going forward. The investment portfolio continues to perform well. For the quarter, net investment income, which now excludes Talcott, declined about – by about 4% to $394 million, primarily due to lower income from limited partnerships compared to the prior year. For the full year, net investment income…

Thank you, Beth. Before beginning Q&A, I wanted to mention that Bank of America will be hosting Chris and Beth on February 14 for a fireside chat at the annual Insurance Conference. Their discussion will be webcast, and there is a link to the webcast on our – on the Investor Relations section of our website so you can listen to it live or in replay. Jack, could you please repeat the Q&A instructions?

[Operator Instructions] Thank you. The first question comes from Brian Meredith with UBS. Your line is open.

Yes, thank you. Chris and Doug, I was wondering if you could comment on your thoughts of the impact of tax reform on pricing potentially going forward with respect to Personal Lines but also workers’ compensation insurance.

Sure, Brian. I’d – happy to provide some color, and Doug, I’m sure, will provide his views also, which are similar. I think the dialogue and debate here on tax rate is you got to put it in the context that it’s just one component of pricing. I mean, there’s other components: loss trends, underwriting classifications, acquisition costs, operating costs. I mean, so it’s – you need to manage all of them together. I would also say it depends on the starting point from a pricing indication side of what may or may not change at the price level to a customer. As we said in our comments, we’re going to try and expect to hold on to a significant portion of the tax benefits in the near term, but we are going to put in our models for pricing purposes that are filed ultimately with regulators the new effective tax rate. I think ultimately, this will come down to then as far as, ultimately, a game theory of just what happens at the market level, what do competitive forces in the market do. But I would also state that not all lines of business are price adequate. And as I said in my prepared comments, we’re going to try to improve those lines where we need price action. I think the other thing, too, I alluded to, and I’m going to give you the dollar amount, but we are going to accelerate some IT investments, digital investments in product development and data and analytic investments over the next two years. I would say that incrementally is about $50 million pretax that’s in our plan. It’s in the guidance that we provided you. So that’s how we’re thinking about tax reform from more of a macro level. But Doug, what’s your point of view?

I guess I would just add, Chris, that I continue to think about our line profitability and our segment profitability, so feel very good about our auto progress but still more work to be done. We posted a 99.7 point of progress this year, but that doesn’t leave a lot of underwriting profit, and we still have more work to do in that line. So we will see how this plays out. A lot of our pricing actions are already determined for 2018, and we’re determined to improve our profitability, particularly in Middle Market and Personal Lines auto. So we will continue to talk about this and share as we go forward. I think it’s still early.

Got you. And then one for Beth. Beth, just thinking about taxes and tax reform and elimination of the AMT, what is the kind of cash benefit that you expect kind of on an annual basis from just the reduction in cash taxes paid?

I’m sorry, how much is the benefit or where is it going?

Yes. With the benefit, you gave us the present value number, but I’m just kind of thinking, are you going to pay any cash taxes in 2018 now? What is it going to look like from a cash flow perspective for you guys?

Right. So looking at 2018, we’d expect to pay little to no tax in 2018. As it relates to the AMT credits that we’ll be able to monetize over time, that will really start when we file our 2018 tax return in 2019. So we’ll start to see those cash flows coming through as well. So when we look at both our NOLs and AMT credits and based on our current projections for taxable income, we’d expect to monetize those over the next three to four years.

Great, thank you.

Your next question comes from the line of Kai Pan with Morgan Stanley. Your line is open.

Thank you and good morning. My first question is on personal auto. If you look at your rate increases, still in the double digits, I assume your loss cost trend probably in the mid to single digits. So there should be 5 point improvements in the core underlying margin going forward. So I just wonder why the guidance is only sort of showing 150 basis points to the midpoint. Are there more to come?

Kai, this is Doug. I would start by suggesting that over the next couple of quarters, you’ll see the written pricing come down a little bit. So our earned trends now that we’re achieving improved profitability are going to be slightly less than we’ve had in the past. The other thing is we had very good trends across our frequency and severity in 2017. Hard to suggest they’re going to repeat next year, so I – we try to be thoughtful and conservative in our selections going forward. I think those two combinations still imply that we will see improvement in the auto line underlying going forward. We’d love to see the same rate of change in 2018 that we saw in 2017. But we’ll have to see how that plays out.

Okay. Then my second question on Commercial Line, could you talk a little bit more about the loss cost trend in workers’ compensation and general liability? And what gave you confidence to achieve the improvements, given that the 2017 results was – fell sort of the original guidance?

Sure. Our overall workers’ comp performance has been very strong, and that goes back a number of years. And although we tweaked it a bit in 2017, I still look at the overall performance and feel very good about it, particularly in our Small Commercial world. So that’s just as a starter. As we move forward, I think our sophistication in underwriting and the work we’re doing in claim to work and combat, if you will, trends that we expect to see in medical and in wage, give me confidence that we will be able to continue to produce very solid returns, right? And I – every time I think about my answer on a workers’ comp question, I do ask you to think about Small versus National Accounts versus Middle Market. They compete very differently. The results vary. But in general, we look across our segments. We feel good about the line. Our trends have been very solid. The frequency has been in very good shape for a number of years. We’re watching severity around medical. It’s still better than historical norms, but we are watching the hospitalization end of those costs. And as we go forward, we’ll kind of compete month-by-month and quarter-by-quarter and make sure we’re reflecting that in the pricing accordingly.

Thank you very much.

Kai, let me add one other – as I was answering that question, I was thinking also about your Personal Lines question. I think we’ve shared in the past that we are going to ramp up our marketing spend in Personal Lines. So when you think about the overall combined ratio, expect to see a little bit more cost in the Personal Lines expense component of combined. That's also adding to a part of the answer that I shared with you.

Great. Thank you.

Your next question comes from the line of Elyse Greenspan with Wells Fargo. Your line is open.

Good morning. I guess this is following up on some of the earlier questions. As we think about the underlying margin guidance, and this is both a Personal and Commercial Lines question, it seems like your commentary points to some improvement on the loss ratio and potentially higher expense ratios, given investments in both of the businesses. Is that how you see it when you think about 2018 with the spread between the loss and the expense ratios?

Elyse, it's Chris. I would say, from a higher level, yes, generally the case. I mean, we think we could obviously get some rate in the book. We're going to try to manage frequencies and severities to a good outcome, but we are going to continue to invest in the organization, both IT, digital product. I would say that our expenses issue were probably a little elevated, primarily compensation related from our goals in performance side. So I would say that there is going to be a reversion to the mean going forward on compensation costs. But as far as investments in those areas that I described, that'll continue at a healthy pace.

Elyse, I would add as well that we're working mix of lines of business as well underneath the broad scenario. So as an example, I did talk about surety. Surety has been a growing – with a solid performance in 2017. Our top line in surety was up 10%. It's one of our outstanding return areas. We're going to do more in surety. And so we're also mixing the book underneath. Auto is showing signs of improvement in Commercial Lines as well as Personal Lines, so that's an improvement story. So we're battling hard to, number one, maintain the strong margins we've achieved, but to see if we can do a little bit better in 2018.

Okay, great. And then another question. In terms of auto, in your guide for this year, you get to about that 96.5, which has been your target for that business. And you did 0.2 still taking rate in the high single digits. So maybe this is more when we think out beyond 2018, but do you think you can run that business better than a 96.5? Because meaning, if you keep taking high single-digit rates, essentially, you could get the margin lower or then where we just see greater expenses as well in that business.

Elyse, it's Chris. I would say, again, as I pivoted, and Doug has been talking about, too, I mean, we're trying to return to growth, right? I mean, we've had to take some aggressive actions with the book in shrinking it. So I would say that the growth aspect of it will contribute to obviously an expanding combined ratio while we continue to manage loss cost in trends. And I would say, again, it's going to be a dynamic marketplace out there, too. I mean, there is a lot of strong competition in this area. We're focused in on the more of the mature market segment with a value proposition that is somewhat different. So we remain confident that we can grow and return to the higher levels of premium volumes, which should also generate some relief on the expense ratio. But make no mistake, I mean, it's still going to be very, very competitive.

Elyse, just – I certainly echo all of Chris' focus comments on growth. The other thing I would just point out, I think I mentioned returning to mid-single digits as opposed to higher single digits. So I expect pricing over the next several quarters to be more in that five range than the higher single digits.

Okay, that’ great. Thank you so much.

Your next question comes from the line of Jay Gelb with Barclays. Your line is open.

Thank you. Beth, can you talk about the potential for share buybacks to restart and the timing on that and what we should think about in terms of magnitude of buybacks in 2018?

Yes. So Jay, I'll go back to the comments that we made in the fourth quarter when we stopped our share buyback due to the Aetna acquisition. We'll be back to you when we have a new capital management plan. But right now, we're focused on closing Talcott, and then we'll evaluate what the best use of that capital is and the timing, but not prepared to talk today about expectations for 2018.

Okay. And then my follow-up, and this is – I remember sort of asking this question on the Talcott call. I believe now that the expectation is for an 11% to 12% return on equity in 2018, I believe back when Talcott was announced, the expectation was for that to improve in 2019 as the full benefit of the Aetna transaction comes into play. Is that still the case for 2019?

Jay, it's Chris. I think the – I probably led that charge on the improvement. And I would say, generally, directionally, we still see it, but I mean, there's going to be some competing forces, right? So we always try to stay focused on hand on what we need to do in 2018 that sets up a good 2019. So know our focus is on executing, particularly as it relates to standing up Talcott as a separate company, integrating Aetna and making sure we're getting all the expense saves out of there, which obviously from an earnings side, I will contribute in 2019. But on the other hand, we are – with that 11% to 12% guide, that does reflect a significant tax benefit in 2018 that we'll have to see how that plays out in 2019 and 2020 and beyond. So that would be the only caveat that I would share with you. There could be some competing forces that impact that trend going forward.

Okay. Thanks.

Your next question comes from the line of Josh Shanker with Deutsche Bank. Your line is open.

The first question, it looks like there are some competitors in the auto market who will be stepping up to make customer growth a priority for 2018. Can you talk a little about the sales proposition at the AARP business and how you retain those customers and how those customers might be less risky to be picked off by a more aggressive competitor in the market?

Let me try to tackle, Josh, that in a few pieces. Number one, we're certainly ramping up marketing, as I mentioned, so that we get more client contact, we get more inbound activity. And based on our marketing evidence in the last 90 days, that's happening. So we're feeling more flow. Second part is our ability to close, offer competitive prices and then close. And so we're focused on our skills on the phone. We're focused on our fine-tuning of our auto class plan. Again, this is a state-by-state mix dynamic. So there are a lot of dynamics that we are working on, all trying to improve our close ratio on those inbound calls. And again, we're going to continue to move our marketing spend up as we move throughout 2018. So I expect this to be a growing positive story, but we'll have to work our way through the first 90 days, and then we'll share progress as we move throughout the year.

All right. I'll take one more stab at the $25,000 question that Jay asked. In – your preference is obviously to do a transaction, I think, overdo buybacks if the right transaction came along. But what is your appetite for letting a war chest build or the priority about returning capital as it builds to shareholders? Is there a philosophy internally about what to do with money as it comes in?

Yes. I appreciate the question, Josh. Yes, what I would say, again, in the follow-up to Jay's question, I mean, we've got a lot of levers still to continue to expand ROE. So as much as – and we talked about some competing forces that might be happening. I mean, there are levers that we have to be able to help manage to expand ROE beyond that 11% to 12% that we guided to in 2018. And clearly, capital management is one of them. So I think you've seen our history. We balanced. We're thoughtful. We're, if anything, consistent. So I would expect that philosophy to continue. I don't think there's a calculus I could share with you right now, but as excess capital builds, we know we have to deploy it effectively or return it to shareholders in a timely basis. And that's what I would say right now.

Thank you very much for the answers.

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

Doug, I'm wondering if you could give us a sense as to the auto claim frequency trends that you've embedded in current pricing?

Well, certainly, 2017, we've talked about them, right, so we feel very good. Our frequency has essentially been flat. We've had low severities, low single-digit severities. We are looking forward at similar frequency trends for 2018, and I would say small single-digit severity trends in the two to four range. So not a lot different in 2018 than what we think we're experiencing today, what we are expressing today. And that's as much as I want to give on the guidance front.

No, that's good. It's helpful. And second question, as we anticipate stronger U.S. economic growth, does that have any implications on its own for margins in workers' compensation and in Maxum?

Where we have felt that strong economy certainly is in our Bond business with construction start-ups. We've had a number of nice opportunities in our construction unit, in new projects, shovels in the ground, et cetera. And obviously, we continue to fill in Small Commercial. So the start-ups, the new economy, the small employee groups, under five, where we have a terrific product, and we have a lot of focus in that micro segment of Small. So those areas are clearly signs that we're bullish about. And I think we'll see more of that as we move through 2018. Overall, a solid economy is a good indicator of workers' comp and disability. So we understand that our trends relative to employment are good signals for key lines for us. And we have our fingers crossed that we'll see a very solid economy moving forward that we'll be able to grow from moving into 2018.

Thank you very much.

Your next question comes from the line of Bob Glasspiegel with Janney. Your line is open.

We've had sort of a turbulent financial market in the first quarter. I wonder if you could just talk about your overall investment strategy going into the market and whether you're in a derisking, rerisking, looking at this as an opportunity to buy. How are you repositioning portfolio through this?

Bob, let me start, and then Brion Johnson, our CIO, is with us here, and ask him to give you some additional color. But generally, I think we feel very good. And we’ve got a high-quality portfolio, well diversified. We’ve traded out of certain sectors a while ago that we did not think held its potential for returns. So the largest concentration we have is still in munis and in corporate investment-grade bonds. So generally, we feel very good. I mean – and if you look closely at the tape, I mean, credit spreads are holding in fairly well. We’ll see how trading goes today. So to the extent that the equity markets have been rolled over, corrected a little bit, we’re not seeing the same pressure to date in the credit environment. But Brion, what would you add?

So thanks for your question, Bob. I would say that Chris articulated it well. We take a sort of a through-the- cycle approach to the investment portfolio. We’re very comfortable with the status of the portfolio. It is a high- quality portfolio. And over time, we have been lowering the risk profile of the portfolio just as the cycle got longer and the compensation for risk got lower. So since we’ve been doing that, we’re pretty reasonably well positioned for the environment that we’re in. We’re nibbling around the edges where we see opportunities, but we’re we see opportunities, but we’re not inclined to change the overall risk profile of the portfolio in response to recent developments.

Thank you very much. Just a quick follow-up. First quarter weather in the Northeast sometimes nails you, cold and frozen roofs. Have issues yet that you’d spike out, Doug? Or…

Bob, again, I’m looking at Doug, too. There’s nothing that hits our radar screen. I mean, you’re always going to have some frozen pipes. I was in Minneapolis earlier this week, and it was cold, and – but it’s the winter. So – but nothing’s hit our desk as anything outsized right now, Doug, would you say?

I agree with that.

Thank you.

Our final question comes from the line of Jimmy Bhullar with JPMorgan.

Hi, good morning. First, I had a question on Personal Lines. As you think about the price hikes that you’ve been implementing, obviously, those have helped your margins recover. Have you been able to raise prices through all the states? Or are there states that are still pending that haven’t fully flown through yet?

Jimmy, there are still states that we are working on. So we’ve achieved rate adequacy in a number of states, the large majority of the states, certainly majority. But there’s still a couple of key states that are working. And California is one of those states that made a lot of progress, but we have a little bit more work to do as we move into 2018.

And I’m assuming that’s a material part of your business?

It is. It’s a significant part of our Personal Lines business.

Then on just – so what’s your expectation for lapses on the Aetna group business as you onboard it? And are there any concerns that they sold a lot of business on a bundle or cross-sold business with major medical? And even though you’re going to be doing it, it’s still a separate company. So what’s your expectation for lapses as you onboard the book?

Jimmy, it’s Chris. All the – and Doug made the commentary on it. All the data that we see, we knew going into it. We’re not surprised. We are obviously trying to renew as much of that business as possible. We understood their pricing approach and philosophy. We’re harmonizing it with ours. We’ll be thoughtful. I would still say that, again, the guidance that we provided, I mean, there is a tolerance for shock lapses in 2018 that we’re going to try to manage to avoid. But I think we have a reasonable to conservative plan on premiums from a lapse side. And Doug, I know we got weekly integration meetings, and we’re trying to manage to outperform that, Jimmy, but I don’t think there’s any surprises. And we’ve got similar experience with profit improvement on certain accounts in our book over the years, and we’ll execute very thoughtfully.

And Jimmy, you know how far in advance this book works, right? So we didn’t expect to see much shock lapse in 2018 because much of that had been renewed over the course of the spring and summer months, certainly, the National Account book. We are right in the throes of working hard on the 2019 book. Chris and I are heavily involved in the key account decisions. So literally, I felt like we have information we’re not sharing. We are working over the next 90 to 120 days on key 2019 renewals. And I think we’ve built in some shock, but based on what we’ve seen so far, we feel very good about the way the integration’s going, the sales force coming together, the tools and technology road map. So I’m optimistic about how this is coming together, and I think our plans are well-thought-out.

Okay. And then just lastly, for Beth, can you quantify stranded overhead from Talcott that might need to be allocated to the other businesses? And how was that accounted for this quarter?

Yes. So we estimate that when we look at the costs that aren’t transferring with the transaction, it’s probably $35 million to $40 million annually, and we expect to eliminate those stranded costs over the next 18 to 24 months. So I don’t see that as being a significant drag for our businesses. You’ll see some of those costs in the corporate line until we close. But again, when you think about the size of our expense base, it’s a pretty small amount.

And that’s stranded as well as allocated? Because there’s some probably corporate overhead that’s allocated to Talcott that’ll be – that’ll have to be allocated to the rest of the business.

Yes, that’s how I’m defining stranded. I’m looking at all the costs that we previously allocated to Talcott, looking at those things that I know we’re transferring, those things that we know will just get eliminated right away. And then this is the – really the overhead piece that we have to address.

And this quarter that number was still in discontinued operations? Or was that allocated out of that already?

It’s already – it’s in the corporate line. It’s kind of hard to see for the quarter, but yes, it’s in the corporate line.

Okay. Thank you.

There are no further questions at this time. I’d like to turn the call back over to the presenters.

Thank you. Thank you for joining us today. And if you have any additional questions, please do not hesitate to follow up with the Investor Relations team. Thank you again, and we look forward to seeing you – some of you next week in New York. Goodbye.

This concludes today’s conference call. All participants may now disconnect.