The Hartford Financial Services Group, Inc. (HIG) Q1 2018 Earnings Report, Transcript and Summary

Good morning my name is Amy and I will be your conference operator today. At this time, I would like to welcome everyone to The Hartford First Quarter 2018 Earnings 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, Amy. Good morning and thank you all for joining us today. Today's webcast will cover first quarter 2018 financial results, which we announced last night. The news release, investor financial supplement and the 1Q 18 slides and 10-Q are available on our Web site. Our speakers today include Chris Swift, Chairman and CEO 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 on 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 also available on our Web site. Our commentary today 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, which are available on our Web site. Finally, please note that no portion of this conference call may be reproduced or rebroadcast in any form without Hartford's prior written consent. Replays of this webcast and an official transcript will be available on The Hartford's Web site for at least one year. I'll now turn the call over to Chris.

Good morning. And thank you for joining us today. Our results this quarter were excellent with solid underwriting and investment performance. Higher pretax results were the primary driver of earnings growth with the added benefit of lower tax rates. Core earnings per diluted share of $1.27 were up 67% over first quarter 2017 and up in each of our four major businesses. In P&C, underlying combined ratio was improved for both commercial lines and personal lines with better auto results in each segment. In addition, lower catastrophe losses and favorable prior year development contributed to higher underwriting results. All of our markets remain competitive. But that said, we are confident in our ability to execute and grow in this environment. In commercial lines, the pricing trend is mostly positive and we achieved higher rates in property and liability lines. However, Workers’ compensation renewal premium rates are generally flat to slightly down, reflecting the favorable loss experienced of the last several years. Doug will provide more insights into pricing trends. Group Benefits core earnings more than doubled to $85 million this quarter, driven by improved disability results, earnings on the acquired business and lower taxes, offset by higher mortality on the life business. In addition, first quarter of 2017 had a guarantee fund assessment for Penn Treaty. Disability trends continues to improve but were offset somewhat by elevated mortality. We think this variation was within a normal range of mortality experienced, especially in the first quarter, which is historically more volatile. Mutual Funds posted excellent growth in earnings and AUM with positive net flows and healthy market appreciation from a year ago. Net investment income was up 10%, mostly due to higher invested assets with virtually no net credit impairments. Limited Partnership returns were very strong this quarter. Lastly, we are hard at work on the integration of the Group Benefits acquisition and the separation of Talcott Resolution. Both of these major projects are proceeding as planned with dedicated multidisciplinary teams working collaboratively and on schedule. We expect Talcott sale to close by June 30th. As a leading insurer of U.S. businesses and their employees, we benefited from increased employment in small business formations, particularly in Commercial Lines and Group Benefits over the last few years. We may see additional growth if the lower more competitive U.S. corporate tax structure increases GDP growth and employment. With regard to the quarter, I am pleased with our top line growth in Commercial Lines. Small commercial new business grew 8% with momentum in both our Standard Commercial book and Maxum our E&S specialist. The top line was just shy of $1 billion of net written premium, putting $4 billion annual level within range, and up from $3.2 billion in 2014. We expect Small Commercial’s growth to continue this year, including the impact of the recent renewal rights agreement with Foremost, which will take effect in July. This book is comprised of small commercial business segments that we know well and underwrite profitably. Combined with our best in class technology, customer service and claims capabilities, this deal will generate an attractive return for us. Group Benefits’ earned premium grew 66% this quarter from both the acquisition and strong new sales along with solid persistency. Our market presence across all customer segments has improved, particularly in national accounts, which we expect will help drive additional growth from expanded market opportunities. Looking forward, investing in our company remains the cornerstone of our strategy. We want to achieve profitable organic growth, particularly where we have attractive margins and strong competitive advantages. This requires developing better data and analytical tools and expertise, including leveraging our new claim system which some of you have seen in action. We also want to become an easier company to do business with. This requires investments, especially in technology. The technology initiatives currently underway include a new Commercial Lines policy administration system, which is a multiyear project. Another initiative is the integration of Aetna's disability claim system across the combined group benefits book. This integration, which is on schedule for completion by year-end, will give our customers market differentiating capabilities for absence management. With customers expecting us to provide digital service and capabilities similar to what they experienced at other companies, like Amazon, we must continue to build better digital interfaces for agents and policyholders. These investments will create faster turnaround times, reduce costs, improve ease-of-use and increase efficiency and customer service satisfaction. For instance, our automated certificate of insurance capability available 24x7 has dramatically decreased response times at a fraction of the cost from our prior process. Finally, before turning the call over to Doug, I wanted to spend a few minutes on our capital management strategy and objectives. With our business is achieving returns well above our cost of capital, I want to be clear that we prefer to invest for profitable organic growth. However, we will not compromise our underwriting or pricing standards just to grow the top line. We will remain disciplined. From a strategic perspective, we believe acquisitions can help build greater competitive advantages and accelerate earnings growth. The Aetna acquisition is an example of that, and we’re really pleased with its performance. However, acquisitions are often expensive, especially in today's markets, and they have execution risks that need to be clearly understood. Currently, our primary focus is in the Commercial Lines space where we are building broader risk and underwriting expertise organically. We will consider financially accretive acquisitions that accelerate these goals. And to-date the deals that we have done in commercial lines have been smaller bolt-on transactions. As the specific areas of interest, we are particularly focused on specialty lines and industry verticals. There are, however, certain product lines or businesses, such as reinsurance, that we do not currently view a strategic. That should not imply we would never buy a company that has a minor or small reinsurance portfolio, but it does mean that the majority of the business would need to align with or complement our Commercial Lines strategies. And it has to meet our financial objectives, meaning that we expect an acquisition to deliver returns above our cost of equity capital in a reasonable period of time. We measure that return by future earnings power and capital efficiency, including expense savings, improved underwriting results, growth synergies, other benefits produced by the acquisition. In addition to organic growth and acquisitions, capital management is an important tool for creating shareholder value. We have been and continue to evaluate the best use of deployable capital, including the anticipated proceeds from the Talcott sale. And we continue to weigh business opportunities against share repurchases and other capital management actions. Our goal, consistent with our track record of a balanced approach to capital management, is to optimize deployable capital for shareholder value creation while maintaining a strong balance sheet. And as a fellow shareholder, I assure you that we will continue to be thoughtful and disciplined in our approach. We will not make hasty decisions and we do not feel rushed to make long-term impactful choices. Rather, we will be patient and thoughtful regarding these matters. To wrap up my comments, 2018 is off to a great start with solid financial results and opportunity to grow in each of our businesses. I am excited about the many initiatives underway, and I look forward to updating you on our progress. Now, I will turn the call over to Doug.

Thank you, Chris and good morning everyone. First quarter results for property and casualty and Group Benefits were excellent, with each of our business units executing effectively against their priorities. Commercial Lines posted a very strong quarter as markets remain competitive. In Personal Lines, auto margins continued to improve. And Group Benefits had an outstanding quarter of strong core earnings growth even after adjusting for the Penn Treaty guaranty fund assessment in first quarter 2017. All our businesses benefited this quarter from favorable net investment income results, and in P&C lower catastrophe losses versus prior year. Let me provide some detail on our business unit performance. The Commercial Lines’ first quarter combined ratio was 93.3, improving 2.7 points from 2017. The decrease was primarily due to underlying margin improvement in auto, the result of pricing and underwriting actions taken in recent years and a swing to favorable prior year development versus adverse development last year. The prior year development was primarily driven by Workers’ Compensation where our loss trends have been favorable. Property and commercial auto also were slightly favorable. The underlying combined ratio for commercial lines, which excludes catastrophes and prior year development, remains very solid at 90.4, improving 0.5 point from 2017. Market conditions showed some signs of price swing in the quarter, yet continue to remain competitive. I remain pleased with our execution on the front-line. Renewal written pricing in Standard Commercial Lines was 2.5% for the first quarter, down 30 basis points from last quarter, primarily driven by small commercial workers’ compensation. Our margins on this book of business remain very healthy and renewal written pricing remains positive, giving us a strong foundation for competing in the marketplace. In middle market, renewal pricing was very competitive in January, but February and March showed more positive signs with prices increasing in all major lines in the back half for the quarter. I expect further positive rate movement in the quarters ahead for property and GL and continued strong pricing for auto, the lines most in need of margin improvement. Our middle market business still needs more rate and I suspect that we are not unique in that regard. We believe the appropriate path is to continue pushing for rate increases, consistent with long-term loss cost trends and to maintain underwriting discipline even though retention has come under pressure. Small commercial had an excellent first quarter with an underlying combined ratio of 87.5. Written premium grew 1% with $166 million of new business. This is our largest new business quarter in history, up 8% from last year. New business from the recently announced foremost renewal rights deal will begin in early third quarter and our team has been active in recent months working with agents to prepare for successful transition. We're excited about expanding our relationship with many of our current agents, while adding new partners through this transaction. This opportunity leverages the power of our small commercial platform to grow top and bottom line through inorganic consolidation, complementing the organic growth success we've achieved in recent years. Middle market delivered an underlying combined ratio of 92.2 for the first quarter, improving 1.6 points from 2017, mainly due to lower commission expense this quarter and slightly better margins in several lines. Written premium increased 4% based on solid retentions and strong new business production of the $141 million. The increase in written premium versus last year is coming primarily from our specialized practice teams, including our expanding construction and energy verticals. Written premium in our traditional block of business was essentially flat to 2017, impacted by continued soft pricing and excess market capacity. In Specialty Commercial, the underlying commodity ratio of 97.5 was flat to 2017 as slight margin deterioration in financial products and national accounts was offset by lower commissions, driven by the mix of business. Written premium was down 2% for the quarter, largely due to a decrease in bond, which had a very strong first quarter of 2017. Personal Lines continues to show progress with an underlying commodity ratio of 89.8 for the first quarter, improving 1.4 points from a year ago. In Personal Lines auto, the underlying combined ratio was 94.2, 2.4 points better than 2017. Loss cost trends remain within our expectations in the low single-digit range. I’m increasingly positive about our improving financial performance in recent quarters. Returning to written premium growth for Personal Lines remains a priority for us. Our higher expense ratio in the quarter reflects our increased marketing efforts and ARP direct auto. Early response rates have been strong, but our conversion ratios are not where they need to be for us to grow. We have a number of initiatives underway to lift our close rate, and I expect new business to increase over the course of 2018 as our price increases continue to moderate as well. In Group Benefits, core earnings for the quarter were $85 million with a margin of 5.6%, driven by favorable disability results, the recently acquired book of business from Aetna and lower tax rates, offset by higher mortality in our life book of business. The lower disability loss ratio reflects better than expected incidents and recovery trends across multiple action years. This favorability was offset by higher life loss ratio. There are two drivers here. The most significant factor accounting for approximately two thirds of the increase is the mix of the Group Life book toward larger accounts, resulting from the Aetna book of business. We expected these large accounts have a lower expense ratio and run a higher loss ratio consistent with our own historical national accounts experience. The second factor is slightly higher mortality this quarter across the entire life book. At the moment, we see this as normal volatility and we will monitor it carefully to ensure that we react appropriately if necessary. Persistency on the combined employer group block of business was approximately 90%. Fully insured ongoing sales were very strong at $454 million. It was an excellent sales quarter across all market segments and product lines, with an especially strong start to the year in voluntary. As Chris shared, we’re very pleased with the pace of our integration on the Aetna Group Life and disability business. Our go forward leadership team is in place. We are currently installing Aetna’s disability claim platform on our infrastructure, and plans to begin converting business in early 2019 are on track. On an annualized run rate basis, we’ve achieved $60 million of the $100 million target for expense reductions consistent with our goals. A large portion of this comes from the corporate cost and IT finance and marketing. We have also solidified our line of sight to the balance of our target reductions in claim, product, underwriting and other business functions. All-in the integration has been very successful thus far. The teams have become one and we are executing effectively, both internally and in the marketplace. In summary, we were off to a very solid start in first quarter 2018 across all our businesses. We remain focused, disciplined and balanced in our execution to deliver profitable growth. Let me now turn the call over to Beth.

Thank you, Doug, I am going to briefly cover first quarter results for the investment portfolio, mutual funds and corporate, and provide an update on the Talcott sale before taking your questions. Core earnings for our P&C and Group Benefits businesses included continued excellent investment results both from an income and credit perspective. For the quarter, net investment income totaled $451 million, up 10% over the prior year quarter, primarily due to the fourth quarter 2017 Group Benefits acquisition, which added about $3.4 billion in invested asset to the portfolio. In addition, LP investment income was up $15 million with annualized returns of about 19% compared with 16% in first quarter 2017. As you may recall, our outlook for LP return is about 6%, reflecting a longer term view and the expectation that returns may moderate as the cycle progresses. Excluding LPs, investment income was up 7% and the portfolio yield was 3.7%, down slightly from first quarter 2017 due to the impact of the Group Benefits acquisitions. As a reminder, the acquired investment portfolio was mark-to-mark on the date of the acquisition, reducing the portfolio yield and group benefits, excluding LPs, from 4.3% in third quarter 2017 to 3.8% in first quarter 2018. P&C investment yields, excluding LPs, were essentially flat over the last year averaging 3.7% in first quarter 2018, which is also consistent with reinvestment rates in the quarter. Looking forward, we expect to forecast yields over the balance of 2018 to be relatively consistent with 2017. My final note on the investment portfolio is that credit performance remains strong with no net impairments in the quarter and only $8 million before tax over the last four quarters. The low level of impairments reflects an overall benign credit environment and the careful underwriting of our portfolio. Turning to mutual funds, first quarter core earnings was $34 million, up almost 50% from last year due to combination of lower tax rate and higher investment management fees. Income before taxes was up 23%, reflecting 17% increase in investment management fees, driven by higher average assets under management. Investment performance remained strong with 68% of Hartford Fund beating their peers on a five year basis. Net flows totaled $678 million in the quarter, including particularly strong flows in exchange traded products, which totaled about $194 million this quarter compared with $22 million in the first quarter 2017. Core losses for the corporate category totaled $66 million, up from $52 million in first quarter 2017 due to the impact of lower tax rates. The loss from continuing operations before income taxes in corporate was actually $10 million lower than last year, but the offsetting tax benefit was $21 million lower due to the reduction in tax rates. During March, we completed two debt transactions, repaying $320 million of 6.3% senior notes and issuing $500 million of 30 year senior notes at a coupon of 4.4%. Looking forward, this June we will call at par $500 million of hybrids with a coupon of 8% and 18%. As a result of these transactions, interest expense will decrease by $2 million before tax sequentially in the second quarter and then decrease by an additional $8 million before tax per quarter beginning in the third quarter. Taken together, these actions will reduce outstanding debt by about $320 million by the end of the second quarter and reduce our average coupon rate and total annual fixed charges. At March 31, 2018, our rating agency adjusted debt to capital ratio, which takes into the account pension liabilities, equity credit for hybrids and AOCI, was 29.9%, up from 28.8% at year end. The increase is primarily due to the impact of higher interest rates reducing AOCI. Total debt to capitalization, excluding AOCI, was essentially flat at 27.9% compared with 28% at year end. Through earnings and debt repayment overtime, we expect to reduce our rating agency debt to total capital to our target in the low to mid 20s. In total, first quarter core earnings were $461 million, up $173 million from first quarter 2017. Core earnings benefits from higher P&C, Group Benefits and Mutual Funds’ pretax earnings, as well as the lower corporate tax rate. On a pretax basis, core earnings rose about 48% or $183 million, while income taxes only increased $10 million as the effective tax rate on income from continuing operations decreased from 24% in first quarter 2017 to about 18% in first quarter 2018. The core earnings ROE was 7.8% this quarter compared with 5.1% a year ago. Keep in mind that this is a trailing 12 month calculation not an annualized return for the quarter, so it includes the impact of high catastrophe losses in the last three quarters of 2017, as well as the higher corporate tax rates last year. As we have stated previously, we expect the 2018 core earnings ROE to be in the 11% to 12% range. Book value per diluted share, excluding AOCI, was $36.71, up 4% from December 31 2017 due to the impact of earnings less dividends. Book value per diluted share was $36.06, down 3% from December 31, 2017 as higher interest rates reduced AOCI. I know many will look at all in book value for P&C companies, so as a reminder, our March 31, 2018 shareholders equity includes $892 million of AOCI for assets that are part of Talcott. Therefore, we would expect June 30, 2018 book value per diluted share to be reduced by about $2.45 from March 31, 2018 upon the closing of the sale. As an update, the Talcott sales process remains on schedule to close by June 30th. As part of the regulatory approval process, the Connecticut insurance commissioner has scheduled a hearing for May 17th after which the state has up to 30 days to issue a ruling. Aside from the regulatory approval, the work to separate Talcott is well underway. Under the terms of the sale, we will continue to provide certain transition services to Talcott for up to two years, and we have a five year contract to manage their investment portfolio. The fees and expenses for those services will be included in our corporate segment going forward. After expenses, we expect that the Talcott sale will generate net cash proceeds to the holding company of approximately $1.7 billion, including $300 million of pre-closing dividends. In addition, the holding company will retain total tax benefits of about $700 million, including NOLs and AMC credits. To conclude, the first quarter was a good start to the year with underwriting and investment results remaining quite strong despite catastrophe losses higher than our outlook. While the capital markets have been more volatile recently, like most insurance companies, our investment income will benefit from a higher rate environment overtime so long as inflation trends are modest. In addition, equity market values remain high helping generate strong returns on our private equity limited partnership portfolio. I will now turn the call over to Sabra so we can begin the Q&A session.

Thank you, Beth. Before the operator Amy gives the Q&A instructions, I wanted to remind everyone of our upcoming Annual Shareholder Meeting on May 16th. Please remember to vote your proxies. Amy, could you please repeat the Q&A instructions?

At this time, we will be conducting a question-and-answer session [Operator Instructions]. Your first question comes from the line of Jay Cohen with Bank of America Merrill Lynch. Jay, your line is open.

As you think about M&A in the commercial business, I’d love to get a sense of past deals, well, specifically Maxum. I guess that’s around the larger ones you’ve done, in the commercial business. Can you -- and it disappears within your organization. Can you give us a sense of the returns you’ve been able to generate since you’ve acquired that? And then secondly the smaller question, with Foremost, I think that premiums there were roughly $200 million. Any sense of how much you expect to keep on renewal?

On both these, we will tack in between Doug and myself. On Foremost, it is about $200 million block of premiums, and a lot of it depends on the persistency and the rollover. I think we feel very good about signing up the agents and in their authorization, and more importantly data to easily quote this. So it’s hard to predict. But I suspect we’ll keep 75% of the overall book long-term. On Maxum, I would say that was relatively a small deal. And if you remember, it was approximately $200 million-ish we spent. We went through some level of restructuring and shutting down certain aspects of their business model, really to build the new small commercial E&S model, which we’re very pleased with. I think on earnings basis to think about it, we’re making about $10 million to $15 million after tax in core earnings. We’ve avoided some businesses that were unprofitable and we’re really excited about the opportunity to integrate E&S into our quoting platform. Doug, what would you add?

So on the Foremost piece, Jay, mid-17s would include some shock loss from our normal run rate retention in small. So we’re anticipating that. We won’t -- we’ll not run as strong as we run our normal retention, very excited about that. And as we talk about early third quarter just so you're all aware, we're quoting 90 days out in advance. So we're actually right now in market quoting July actively, but the premium won’t hit the books for a couple months. On the Maxum side, very strategic opportunity for us. We didn't have E&S talent in this organization, we didn't have relationships on the distribution side. And we clearly wanted to challenge ourselves with a product breadth opportunity in the small commercial and middle market arena. So just getting started many of you know that we now have expanded our product capability in small, including an E&S opportunity on our ICON quoting platform very excited about the early days but we’ll be talking more about it over time. I think it bodes well and it has a bigger opportunity for us to be a broader deeper player in small commercial over time.

You next question comes from the line of Brian Meredith with UBS. Brian, your line is open.

I guess first quick one for Beth. Can you remind us what is the stranded cost from Talcott, how much that was in the quarter and how that is going to be running off here over the course of next 12 months to 18 months?

So when we think about cost and again stranded cost, we think about as costs that were allocated to Talcott overhead cost and obviously would not go with the transaction. And on an annualized basis, we see that in the $35 million to $40 million range, and that’s pretty even across the quarters. And our expectation is over the next 12 months to 18 months, we’ll see those costs reduce. Again, we will be providing some transition services to Talcott over that period as well and being reimbursed for some of those costs as they continue to use some of our infrastructure. So we’ll have a slight offset to that but it’s in that range.

And those are sitting in your corporate line item right now?

Yes, we have that [technical difficulty] and they’re included in core earnings.

And then Chris, Doug, I'm wondering if you could talk a little bit more about just the competitive environment out there. What's happening with workers' comp insurance? Clearly, an areas that you're seeing some pressure on pricing. Is it worse than you’d anticipated, is that at all questioning maybe where your underlying combined ratio guidance is for the year for the commercial space?

Brian, I just quickly then get out of the way and let Doug share with you his thoughts. But as we sit here today, as I said in my comments, we got off to a terrific start and we feel really good about our ability to execute and in a competitive complex environment. So all the guidance that we’ve provided or drivers, we still feel very good about. And in fact, if you saw in certain drivers, whether it’d be combined ratio and personal lines or commercial lines, we’re outperforming. But there will be a little bit of a reversion to the mean over the next nine months. But I’m really pleased with the team, how we’re standing up and new capabilities, new product sets and being disciplined while we’re pushing for more business with our distribution partners. But Doug what would you add technically?

A few things start with very pleased with the way the first quarter pricing trends ended. So Brian, a bit disappointed in our January performance on pricing, made some adjustments, looked at our book harder and feel really good about progress we made in February and March. And I expect that progress to continue into the second quarter. Secondly, I would always ask you to continue to think about small commercial versus middle over our other markets, so different dynamics, different pricing issues across those and different mixes for us in those areas. And then obviously there is a workers’ comp versus the non-workers’ comp. So we’re pleased with our February-March pricing and see some lift in property, GL, continued in auto and I expect that to continue. I expect that to continue over the next three quarters, particularly as I shared in my script, in middle market we need right net book. Our non-specialty middle book needs more rate and we intend to go after and chase it and do the right things. Relative to comp, our numbers across our markets but especially in small commercial and workers comp, are very good, very good. And they are also very good across industry in general. So this is leading to the pressure on your rates. It’s leading to experience factors for insurers that are looking more favorable. And because of that, I think we have a more competitive marketplace. The other thing just in closing we are watching loss trends very carefully, and they have been consistently in a very good spot for an extended period with workers comp. Little bit of frequency uptick back to more zero range in last couple quarters. And clearly, there are inflationary pressures around that we are watching medical carefully. So when I put them together, yes, I think there are some things that probably will cause some compression in workers’ comp line. But relative to where we are, I feel like we are working our leverage being thoughtful about our territories and doing everything we can to understand the dynamics of the line and make good choices going forward.

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

My first question is on personal auto. You have made great improvements in the margin side. Is that increased spending to show your confidence you fill your margin at the targeted levels, you want to grow top line a little bit faster? And will that spending, not just you but also some of your peers, as well as the potential say mandate lead to reductions post the tax reform, actually your growth on the margin improvement you have made?

We are feeling good about the progress we’re making in personal lines auto. And yes, you see the impact of some of our leaning and on the marketing side, because our expense ratios are up in the quarter. So our loss improvement is greater than the aggregate, the sum total of the change in the line of auto. So feeling very good about that, still more work to be done, and we think we will improve our close ratios over the latter half of the year as our pricing moderates, because our rate adequacies are getting better and better by the month. So we finished 2017 with roughly two-thirds of our book in a very solid position relative to rate adequacy. And as we move to the next four quarters, we’ll complete that journey and are going to feel very good. So you’ll see more moderate rated rates in our pricing profile with Personal Lines auto and as such, I expect our new business levels to grow accordingly.

My second follow-up question, probably for Chris. Thank you so much, very clear on -- your capital management priorities. I just want to drill down a little more specific. With the closing of Talcott, is there some investor anxieties on potential large deal. Could you discuss under what circumstances you would use stock to do the acquisitions. What are some financial hurdles you will need for large deals versus small cash acquisitions?

I hope we have enough time to talk through it. But what I would share with you is as I said in my commentary, capital management is important you know our priorities as far as organic growth, M&A and then returning the deployable capital to shareholders. But as it relates to M&A, I would share with you couple of themes that we've talked about in the past. We tend to think in terms of more bolt-on activities or extensions into adjacent markets. We talked about premium levels in the billion dollars, maybe even up to $2 billion of premium that a target we would have. We have a good team. We have models that watch market activity. So I can tell you as we sit here today, we don't think about using stock in a transaction, because generally a lot of the things that we think about that could be actionable at some point in time in the future are probably less than the $4 billion range. So that tends to be our sweet spot. And as I said, we're patient about exploring opportunities. We’re thoughtful about exploring opportunities. There is a lot of things that we see that -- just the numbers don't work the math can't work based on expectations of value. So all I could tell you is that we’ll continue to be thoughtful and disciplined about deploying capital to create shareholder value.

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

My first question, there has been some headlines about the NCCI pushing for basically price cuts within comp following on tax reform. How does that factor into your pricing and margin outlook on your comp business for this year also and as you think into 2019?

Elyse, as we shared last quarter, we largely see tax reform working its way through the P&L in ’18. But over time we and others I'm sure are adjusting inside our pricing models for the new tax rates. And as such, as we go through filings, we’ll appropriately make sure that we have the right tax rates in our filings as well. I look at the last three to four years of comp experience and I think of how favorable, basically the aggregate environment, has been for comp as a line. And I think that's the real fuel driving this loss cost trend that is dropping through these filings. So we have worked and continue to work hard on our claim confidences, our underwriting profile, understanding our segments, et cetera. But I wouldn’t sit here today and suggest to you that there isn’t downward pressure on pricing and workers comp, there is. I would say to you that when I think about it relative to our markets, we have a bit more flexibility at the risk level in middle. And so based on the characteristics of the risk, there is a bit more underwriter judgment involved. Clearly, our small commercial world is a bit more spot-rated. So there are a number of competing dynamics across, but the line in total had a good first quarter for us. We’re watching our trends. But it wouldn’t surprise me if there is some compression in the line over the next latter half for the year into '19.

And I think Doug the only thing I’d add to that is you always start with the fact that overall we see workers compensation as a very profitable line for us. So even with some of that pressure, we’re still very comfortable writing business in that line and growing in comp.

And my second question, Chris in terms of your M&A comments, very thorough. You did say that you guys would -- depending upon the duo and what it could bring to, you will be willing to take on a small amount potentially of reinsurance exposure. Just wanted to clarify that comment. Would that mean small amount in terms of the pro forma fitness when you think about Hartford after a deal or do you mean you would consider a deal of acquiring something and the property that you would acquire would only have a small amount to bring insurance?

Elyse more of the latter.

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

Two questions that are in-related, I promise no follow up. First, the 10-Q used some materially different language to talk about buyback compared to the 10-K. The 10-K from February said that the Hartford does not expect to offer rising equity repurchase plan in 2018. While the 10-Q filed yesterday nearly said the company does not have an equity purchase plan yet in 2018. Have you changed your stance on 2018 buyback, which of course I think you should do. And secondly, there is a press and investors have commented that you appear to have been interested in XL. I’m not going to ask about that. But also buyer of XL told everyone a year earlier that they are only interested in smaller bolt-on deals and large transactions would surprise the market. How much flexibility are you giving yourself in regard deviating from your self-imposed rules around acquisitions?

I’ll take the first question and then I’ll leave the second question for Chris. But yes, the language that is in our 10-Q was an intentional change. And as Chris said, share repurchases can be an effective use of excess capital, sustain the fact that we do not have an authorization in place today, does lead open the possibility that we could have on authorization in place at some point in 2018.

And second part about rules and flexibility.

I would say again here, as we sit here today, we are focusing on the bolt-on category. I can’t predict what may or may not develop in the future. So as long as there is understanding about the strategic and the financial hurdles and discipline that we have with our shareholders, if we flex up in size in any way just know that we’ll continue to have high bars for performance, high bars for our alignment on strategy. I can't for shadow a scenario right now where we would do something in that major transformational area. It’s just there is not that much that's actionable.

Your next question comes from the line Randy Binner with B. Riley FBR. Randy, your line is open.

I wanted to ask about sales in the group, which were good and better than expected. And one of the risks of the integration with Aetna is losing shelf-space with distribution. So the question is how is that distribution, communication, and interaction process going? And is there a potential here for you not to have these premium lapse assumptions kick-in if sales continue to trend better than expected?

Randy, let me just -- I'll ask Doug to add his color. Again, the strategic logic of putting is to benefit business together has never been stronger or more confirmed with our activities over the last four or five months, whether it’d be feedback from distributors, whether it’d be using their claim system, whether it’d being creating a team that is really motivated to lead the market and create new opportunities to serve customers. I think we got great alignment around the organization. I would also tell you that our distribution partners and what they share with us is that they have a high degree of confidence in our ability to integrate and continue to serve their existing customers. And Doug, I think you and I see that we're being shown a lot of new opportunities and maybe in the past a standalone Hartford would not have seen, but Randy that's my perspective. Doug, what would you share?

Super sales quarter for us, and I would first comment that both the Hartford and Aetna had very strong sales quarter. So on a standalone basis would have had a terrific start to the year, but also Aetna likewise, particularly in the phase of what they're going through last year, had a good sales quarter. So you put the two together and we really start 2018 strong. Secondly, our pipeline has never been stronger. So we are active in working on proposals now. Obviously, there is a lot of activity around the latter half of ’18 effective and ’19 deal date. So Chris and I participate in many of them but our team upstairs is fully engaged; number one, on the sales side and new sales; and secondly, I think there was a piece of the end of your question about retention. So we're also working on our renewal strategy. And we were out in market with several renewal quotes on our 1119 national account jumbo deals as well. So we feel very good about it. I will be with the team in Colorado in a few weeks at EBLF engaging locally, I love what our sales and support teams are doing. We have lot of work in front of us but we feel really good about the last hundred days of progress.

And so I guess my follow-up on those comments, I guess I would characterize them as new product. So does this new platform position you to introduce new and different products into the group market, maybe move more toward supplemental, is that something that this might enable?

There was a word at the end of one of my sentences in the script that I want to make sure, I highlight here. We’re very pleased with our growing momentum in voluntary products. So we've worked hard to build out our voluntary suite and in 1119 had terrific success. And if you look in our stuff, you can you look at the other sales growth below disability and Group Lines, and see a little bit of that momentum. Now, it’s small so we’re just starting against $5 plus billion base, it's not something that is going to be huge any time soon. But the interest in that product, our ability to launch and service, the generation of new demand, we’re very excited about. And I think it will be an opportunity across both books of business, including Aetna’s.

Randy, just a simple fact is again we have 20 million customers in the book of business now. So what we’ve talked about and as Doug referred to what we've been building patiently voluntary products additional A&H products, other services that we can bring to that product set, including lease management on a more integrated basis. All of that has been on our vision and we're really beginning to execute to it that I think will really accelerate our growth and our profitability.

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

Two quick questions, first obviously P&C results were very strong. But I’m wondering whether you also saw some adverse impact from non-cat fee weather in the quarter?

Our non-cat weather pretty consistent with prior trend, so we didn’t have the same dynamic maybe others as spoken to, but there was clearly a lot of weather in the month of March and we looked across our footprint, we feel good about our cat calls but nothing that I would call out extraordinary right now.

And then second bigger picture. Can you walk us through the strategy for getting the underlying combined ratio in specialty down? Is that an expense issue a sale issue?

Largely it’s a mix issue, Meyer, because our national account book is in that segment. The duration on our liabilities on our workers’ comp excess product are in the 12 to 15 category. So that book is going to tend to run at very different combined rations than our normal middle and small. So it’s all about mix. Our national account book is performing well, strong ROEs. I just think you have to keep in mind what's in the segment very different than the other markets.

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

Couple of clarifying questions, first on M&A. I believe the range of premium volume mentioned was $1 billion to $2 billion. Would that be gross or net?

Again, when we think about it and look at it, we think in terms of gross, because then we think of our own reinsurance strategies and appetite, Jay.

And then I think it might be helpful just to understand Hartford’s excess capital position given the net of announced acquisitions versus dispositions. How much excess capital does Hartford currently have adjusted for deals that are about to close?

Jay, couple of things, when you look at holding company resources I think end of the quarter and we’ve got about billion on resources there. I’ll remind you we are planning on paying down $500 million of hybrids in June. We then have the net proceeds that will come in from the Talcott sale, which is about $1.7 billion as I said in my remarks, and that’s in the short term. Again, when we did the acquisition of Aetna last year, we had talked about the fact that we expected lower dividends this year from our operating subsidiaries, so no dividends from the group business. So, really as we go into 2019, we'd expect to see dividends increasing again both from P&C and from Hartford Life & Accident, which is the group business. And then the other things you keep in mind is that we will be generating cash flows at the holding company as it relates to monetizing our tax assets. And we'll start to see some of that in ’19 as we get refunds our AMT credits and then utilize those NOLs. So those are the sources that I think about over time if that’s helpful.

It is, but based on my probably simplistic knowledge of this. How does that all translate relative to what Hartford would typically desire to have in terms of holding company resources and what does that mean for us?

So as it relates to our target as a holding company, we typically look to 1 to 1.5 times interest and dividend requirements. But we also want to maintain flexibility, so as we have in the past, we’ve used our excess capital ratably over a period. So those are parameters that we think about. But again, as Chris said, we do want to make sure that we maintain a strong balance sheet and any capital that we would deploy, we would look at doing that over a period of time.

And is there a tie into that in terms of when the decision may be made whether to resume share buybacks?

Jay, I would decouple some things in terms that there's no bright line or date on the calendar to say, these are what we're trying to make decisions on. Some of it obviously as it relates to M&A is the fluidity of the marketplace and the dynamics there. We want to be able to react to opportunities that make strategic and financial sense. But we also realized that we’re not going to be able to and should not hold excess capital forever. So I think what Beth was describing is that we are going to build a healthy position of deployable capital. We’ll continue to be aware of marketplace opportunities. But at some point in time, we would have to begin a return program in the form of either increase dividends or buybacks.

Your next question comes from Yaron Kinar from Goldman Sachs. Your line is open.

So one maybe net picky question with regards to commercial, so I think you've highlighted record new business growth in small commercial. We've also achieved our more significant rate increases than in middle market and yet net premiums in small commercial have actually slowed, which I’m thinking I mean that maybe there is maybe some erosion retention levels in that business. So would that mean that there is increased shopping behavior among customers as we push through and that there is still abundant capacity willing to offer lower or maybe even unattractive rates in order to one business out there in the market?

Yaron, I don't feel that. I feel two factors relative to the core of your question. One is that we've been rather aggressive on our auto re-pricing and re-underwriting. And so our auto retentions are down significantly and that's definitely causing a bit of a drag on our overall top line and small. And then the second thing is that although we’re positive on the pricing side for comp, we’re slightly positive. And so we’re not getting any significant lift on a good segment of our small commercial book and our comp pricing. So all in, I am more focused around the auto book that we’ve taken action that we think we needed to take to correct that. I see the progress in our loss ratios that’s why we're continuing to post terrific numbers there. I don’t feel a lot difference in the marketplace yet.

And then the second question I have is with regard to the group benefits business. And I apologize if I missed that. But when you talk about the group disability improved incidents trends and better recoveries. Is that across both the legacy Hartford business and the new Aetna block, or is it coming more from one than the other?

Both disability books, Yaron, and our exhibiting solid behavior. So we feel good on both disability sides.

Amy, we have time for one more question I think.

Your next question comes from Amit Kumar from Buckingham Research. Your line is open.

Two very quick questions, number one going back to the discussion on consolidation. Would your answer on the business mix as it relates to reinsurance, would that have been different if the tax cut act would not have been passed and implemented?

I don’t think so. I mean, think in terms of strategies first and alignment of businesses you want to be, and then the finance and the math has to work, but the pre and post tax reform, we wouldn’t have had a different view.

Because I was wondering about the re-domicile aspect that’s where I was going with the question. The second question, I guess the final question I have is again going back to the comp numbers. If I look at the Schedule P and compare the Hartford Scheduled P with the industry Schedule P, and if you look at the development of loss specs, why has the development being lower. I guess why have you taken down the loss specs on lower basis versus the industry? Is there something in the book or is it just conservatism here versus the industry trends?

As we said before as we think about our comp book and the long tailed nature of that, we’re very thoughtful about some of the trends that we build into reserves, specifically around severity and medical cost severity. So we have seen, over the last few years, very favorable trend there but we really think about it more for the long-term. And so as we evaluate our reserves each quarter, we look at how things are developing and take action accordingly. But we’re not prepared to take down our long-term view of those trends or those factors that affect the reserves.

And we have made some slight adjustments, Beth, but we’ve reacted candidly more to the frequency side over the last couple of years, because we now feel like we’ve got a pretty solid look at those last couple of action years, particularly '15 and '16. So Amit, thanks for the question.

Thank you. Thank you all for joining us today. And if you have any additional questions, please don’t hesitate to follow-up with the Investor Relations team. Thank you for joining us today and have a good weekend.

This concludes our conference call. You may now disconnect.