Sabra R. Purtill – Senior Vice President-Investor Relations Christopher J. Swift – Chief Executive Officer Doug Elliot – President Beth Bombara – Chief Financial Officer.
Jay H. Gelb – Barclays Capital, Inc. Vincent M. DeAugustino – Keefe, Bruyette & Woods, Inc. Brian R. Meredith – UBS Securities LLC Randy Binner – FBR Capital Markets & Co. Erik J. Bass – Citigroup Global Markets Inc. (Broker) John M. Nadel – Sterne, Agee & Leach, Inc. Jay A. Cohen – Bank of America Merrill Lynch Tom G.
Gallagher – Credit Suisse Securities LLC Robert Glasspiegel – Janney Capital Markets.
Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to The Hartford’s Third Quarter 2014 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. And 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, Tiffany. Good morning and welcome to the Hartford’s third quarter financial results webcast. Our result, the Investor Financial Supplement, 10-Q and financial results presentation, which includes our fourth quarter 2014 outlook were all filed yesterday afternoon and are available on our website.
Our speakers today include Chris Swift, CEO of the Hartford; Doug Elliot, President; and Beth Bombara, CFO. Following our prepared remarks, we will have about 30 minutes for Q&A.
As described on Page 2 of the financial results presentation, today’s call includes forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance, and actual results could be materially different.
We do not assume any obligation to update forward-looking statements and investors should consider the risks and uncertainties that could cause actual results to differ from these statements. A detailed description of those risks and uncertainties can be found in our SEC filings, which are also available on our website.
Our presentation today also includes several non-GAAP financial measures. Explanations and reconciliations of these measures to the comparable GAAP measure are included in our SEC filings as well as in the earnings release. I’ll now turn the call over to Chris..
Thank you, Sabra. Good morning, and thanks for joining us today. Yesterday afternoon The Hartford reported outstanding third quarter results. Core earnings were $477 million or $1.06 per diluted share, up 25% year-over-year on a per share basis. We delivered earnings growth in every business, and saw the benefits of the capital management program.
Catastrophe losses and limited partnership returns were both favorable in the quarter. The third quarter results reflect the progress we are making across the company. Profit margins expanded in every business.
In total P&C, the combined ratio, excluding cats and prior-year development improved 2.6 points to 90.2 reflecting our sustained focus on pricing improvements. We are also growing the top line in P&C. In small commercial written premiums were up 7%, fueled by positive pricing and new business premium growth.
In both consumer markets and middle market the top line was up 3%, reflecting pricing and disciplined underwriting. Doug and Beth will provide additional detail in insights about the quarter. When I reflect on the numbers, the most important takeaway for me is that the results demonstrate that the Hartford is on the right track.
Investments we have made to drive profitable growth have taken hold and we are starting to see the positive results. Looking ahead, our primary objectives are improving return on equity and growing book value per share to drive top-quartile shareholder returns. To do this, you can expect to see continued progress in four major areas.
First, expanding product in underwriting capabilities; second, increasing distribution effectiveness; third, improving the customer experience in operating efficiency; and fourth, effective capital management including the ongoing runoff of Talcott. Let me address each of these briefly.
Since 2011, we have been expanding the P&C product suite and underwriting tools to diversify our business mix and meet changing customer needs.
As you know, the initial focus in P&C Commercial was expanding our property and liability expertise to complement the existing workers compensation capabilities and we are pleased with the progress in these areas. We continue to add new capabilities to allow us to meet more of the insurance needs for broader range of customers.
Over the last year, we have updated our commercial auto underwriting tools, addressing changing trends in that market. We also recently signed a new property reinsurance program that enables us to underwrite accounts with up to $500 million of covered property per location.
Finally, we remain focused on expanding the voluntary product suite and group benefits, preparing for a more employee centric model as the market adjusted to the new healthcare environment.
Employee choice benefits is an expanded group benefits of voluntary offering, which is being rolled out with customized educational materials to help employees to make informed decisions about their benefits.
On the distribution side with the ongoing consolidation of the brokers and agent channel, it is more important than ever that we offer intermediaries, products and services that position us as a go-to provider for their customer needs. More than 11,000 agents and brokers are licensed to do business with The Hartford.
Our objective is to continue to effectively serve larger brokers and agents by anticipating and meeting the needs of their evolving business models, while also continuing to serve and support the thousands of agents who are the lifeboat of small commercial, and consumer markets businesses.
For example, the market leading ICON platform in small commercial helps agents of all sizes to get customer quotes in a timely and efficient manner. In addition, our award winning operation centers effectively handle customer service for many distribution partners, bringing them to spend more of their time on business generation.
Our third area of focus is improving the customer experience and increasing operating efficiency. Well, The Hartford has strong capabilities in claims and policyholder servicing.
We have the opportunity to significantly improve the back office’s efficiency and the customer experience with the previously announced investment commitment to improve our technology infrastructure. The objective is to increase The Hartford’s ease of doing business and put the ultimate customer at the center of our activities.
One example is the ongoing rollout of a new P&C claim system, which will improve claims efficiency, enhanced by new data and predictive analytic capabilities. We are also working to upgrade digital and customer self service functionality across the P&C operations. These enhanced capabilities will help continue to differentiate The Hartford.
Finally, capital management will be a critical element as we redeploy excess capital from two sources, the go forward businesses and Talcott Resolution. With improving fundamentals, the P&C companies are positioned to continue to generate significant amounts of excess capital.
In addition with the recent corporate reorganization both the group benefits and the mutual fund companies now represent independent sources of dividends to the holding company.
As we have discussed previously, we also intend to return capital to the holding company from Talcott over time both through the generation of statutory earnings and the runoff of the legacy annuity liabilities.
In combination, capital generation from the businesses and from Talcott will continue to provide The Hartford’s flexibility to pursue a broad range of capital management actions while we invest in new capabilities to drive future profitable growth.
In closing, I’m confident that The Hartford is on the right track to achieve our goals of the higher ROE and growing book value per share. During the third quarter, we made progress in each of the four areas that I discussed today and we are committed to continue their progress in the quarters and years ahead.
Now, I would like to turn the call over to Doug..
Thank you, Chris, and good morning. We posted an outstanding quarter across our property, casualty, and group benefit businesses. We’re very focused on execution in our frontline teams where we worked closely with our distribution partners and make critical risk selection decisions.
We believe that our energy here is paying off as we optimize pricing and retention to drive franchise value over the long-term. Let me share some highlights by business beginning with P&C commercial, consumer, and then group benefits. Our results in P&C Commercial remain very consistent with recent quarters.
Strong underlying margins were driven by written pricing gains, sound underwriting management, and growth in our target business lines. We feel very good about our performance as the market shows signs of increased price competition.
For the quarter, we delivered core earnings of $268 million, up $92 million versus prior year on an all in combined ratio of 90.4. Very low current accident year catastrophe losses in the quarter contributed $26 million to the improvement.
The balance of core earnings increased is largely due to improved margins and slightly favorable prior year development. The underlying combined ratio excluding CATs and prior year development was 90.2%, an improvement of 3.1 points versus prior year.
These financial results reflect our operating focus and discipline and give us confidence that we’re making sound strategic and tactical decisions. On the top line total written premium was up 1%, excluding our programs business P&C Commercial grew 4% for the third quarter.
We also achieved written pricing gains of 5% for standard commercial outpacing current loss cost trends. While the measurement of writing pricing and loss cost is essential to our business. Our management of profitability is far more sophisticated than these two overall metrics convey.
Detailed insights drive our risk decisions, especially as written pricing and loss cost trends are converging. In every book of business, there are cohorts that are performing below targets. These might be defined by geography, industry class or underwriting profile just to name a few.
Calling this business and taking corrective action is central to achieving and maintaining target margins. That’s why I always say there is more work to be done whether it is in certain lines of business or specific risk classes we need to remain keenly focused on our operating risk discussions on an account-by-account basis.
Let’s now take a more in-depth look at the results of our P&C Commercial businesses. Our performance in small commercial demonstrates the ongoing strength and momentum we’ve developed in this business. The third quarter underlying combined ratio was 85.6, 1.5 points better than 2013. The all-in combine ratio was 86.4.
Written premium grew 7% driven by new business premium growth of 11% and policy retention at 84. Both the new business growth rate and the policy retention rate were consistent with trends in the second quarter of this year reinforcing our strong momentum as we had for year-end.
As Chris noted, we’re very excited to see our investments in this business coming together to deliver exceptional financial performance. In addition to our excellent technology and customer service platforms, we have robust analytics running behind the scenes on every facet of this business.
We are successfully balancing growth and profit because we know where the business opportunities exists, we understand loss trends at the most granular levels, and we’re partnering with our agents to manage pricing, appetite and growth.
Moving to Middle Market, we continue to make steady progress with an underlying combine ratio of 92 down 3.9 points versus prior year. Renewal written pricing remained ahead of loss cost trends building on our margin improvement from recent years.
I’m especially pleased to note that our underlying combined ratio in Middle Market workers compensation is down over 8 points for the quarter versus last year. After several years of disciplined pricing and underwriting actions on this book of business, it’s gratifying to see the combined ratio within our target range.
Written premium growth in Middle Market was 3% driven in part by solid results in property and general liability as we continue to have success in building our new business mix.
Over the last 12 months, we’ve made several important changes to strengthen leadership in a number of geographies and to better align our field organization with key distribution partners. These actions help to deliver new business of $112 million, up $5 million from a year ago and consistent with second quarter 2014.
We view our Middle Market written pricing trends averaging in the mid single-digit range this quarter as being quite strong given our improved overall profitably since 2012. Commercial auto continues to lead the way for written pricing increases. I expect just to continue as we suspect many others are not at our target combined ratios for this line.
Increased bodily injury severity is the primary driver, which we will continue to address through rate increases and underwriting actions. In National Accounts, written premium was down 9% for the quarter, a sizable strength in the growth we posted in recent quarters. The decline is largely attributable to uneven timing of premium flows.
When we peel back our operating metrics, we continue to see positive performance indicators within our core earnings. our retention rates remain above 90%. We’re writing two new accounts for everyone lost slightly behind our 2013 page, but still very solid. We’ve been successful in growing this book of business over the last several years.
We like our competitive niche and we’re confident in our plan for growth and profitability. In Financial Products, we had a solid quarter with written premium up 7%. This growth is coming in our E&O business where we’ve developed some very strong industry-based solutions.
In the E&O, we’re seeing greater competition in the largest segment and we’re tightly managing to our pricing standards. Shifting over to consumer, we posted an all-in combined ratio of 91.2. excluding capacities and prior year development, the underlying combined ratio was 89.4, improving 1.7 points from a year ago, largely driven by lower expenses.
Cat loss is well below our expectations. We’re above our experience in 2013. Last quarter, we shared that weather and fire losses adversely affected both auto and homeowner’s results. We have not seen any unusual patterns emerge and the third quarter was back in line with our expectations.
On the top line, written premium was up 3%, driven by continued success with our AARP through agents offering, where new business was up 11%. Auto and home renewal written pricing increases were 5% and 7% respectively, and we remain focused on improving rate adequacy, particularly in the homeowners’ line.
Our expense ratio decreased this quarter to 23.1, which is essentially flat with the second quarter. We are ramping up spending in the fourth quarter on several technology projects and new business marketing efforts and we anticipate our full-year expense ratio will be approximately 23.7.
And finally, let me shift the group benefits, we have core earnings of $38 million, were up 6% from last year.
Recall that the third party marketing relationship in our association financial institutions block will be terminated as of year-end, but will still be included in our year-over-year comparisons are based my comments now on results excluding this business. We continue to see profit improvements driven by favorable life and disability results.
The life loss ratio was down 2.9 points, due to continued pricing discipline and favorable mortality. Disability trends also remained favorable for prior year with the loss ratio improving 2.2 points that we’re beginning to see the rate of that improvement decelerate.
Long-term disability incident trends continue to be favorable, while claim recoveries were lower than prior year, although still in line with historical norms. Looking at the top line, fully insured ongoing premium declined 2%, compared to prior year.
Overall, book persistency on our employer group block of business exceeded 90% year-to-date through September and we’re very pleased with our renewal pricing adequacy. Fully insured ongoing sales of $57 million for the quarter, was essentially flat with last year.
Given the lead times on large account business, we can see that 2015 is shaping up positively. Sales activity has increased and we’re encouraged that our recent investments, particularly those to enhance our product, service and claim capabilities are resonating with customers.
In fact, we will welcome back several large case customers in the first quarter. As Chris noted in his opening, our overall suite of capabilities is allowing us to compete more effectively to win cases and then achieve greater employee participation through effective marketing and enrollment tools. These are positive signs for us.
We like everyone else are adapting to the changing benefit landscape and we’re very pleased with our progress. Let me now wrap up by noting again, this is a very strong quarter for us across P&C and Group Benefits. We remain disciplined, thoughtfully managing our renewals and finding spots to compete aggressively for new business.
We have a franchise that is getting stronger every quarter and we’re focused on bringing shareholder value over the long-term. Now, let me turn the call over to Beth..
Thank you, Doug. Last evening, we reported third quarter core earnings of $477 million, or $1.06 per diluted share. The results reflect improved profitability in our P&C group benefits and mutual funds businesses, as well as favorable catastrophes and prior-year development.
The impact of better than budgeted catastrophe losses and favorable prior-year development totaled $68 million after tax or $0.15 per diluted share. In addition to these items, we also benefited from strong limited partnership returns of $100 million before tax for an annualized yield of 14%.
Net income for the quarter was $388 million or $0.86 per diluted share, compared with the net income of $293 million or $0.60 per diluted share in the third quarter of 2013. The largest non-core earnings items this quarter was DAC unlock charge of $102 million after tax about equal to last year.
This year’s DAC unlock included a charge of $84 million after tax for annual policy holder assumptions review, reflecting modest changes in last benefit utilization expense and rate assumptions. This quarter do not have any impact from discontinued operations given the sale of our Japan business in the second quarter.
However, third quarter 2013 included a loss and discontinued operations of $72 million from the Japan business.
P&C Group Benefits and mutual funds generated core earnings of $413 million, up 30% compared with $317 million in the third quarter of 2013, due to improved underwriting margins and P&C including lower catastrophe losses, improved results from group benefits and mutual funds and higher limited partnership income.
That covers the results from P&C and Group Benefits, so I will briefly cover the other segments. Mutual funds core earnings rose 22% over the prior year, primarily due to an increase in average retail and return in mutual fund assets under management compared with the third quarter of 2013.
Performance remains solid, with 76% of funds outperforming their peers over the last five years. Mutual funds sales remain strong at $3.8 billion and equity fund sales rose 11%.
Redemptions continue to decline resulting in positive net close for the third quarter in a row, after adjusting for the liquidation of our target date funds at the second quarter. Excluding that liquidation year-to-date, net close were positive by nearly $400 million.
Note that in October, we moved the management of some VA in retirement funds from the mutual fund segment to our investment operations. For reporting purposes this internal move will result in an outflow of approximately $2 billion from annuity mutual funds and about $700 million from retirement mutual funds in the fourth quarter.
There will be no significant impact on mutual funds earnings as a result of this move. Talcott’s core earnings for the quarter were $122 million, which was above our outlook for several reasons, including lower than expected ESV and ISV program cost and higher investment income including limited partnership income.
We continue to see a steady run-off of our U.S. VA business, where contracts have declined more than 13% since September 30, 2013. Fixed annuity contracts decreased by 5% during the quarter and are down 19% since a year ago.
Although expenses for the ISV and ESV annuity programs were lower than expected this quarter, the surrender activity for both of these programs was in line with our overall expectations. In the Corporate segment, core losses totaled $58 million, up from $16 million in the third quarter of 2013. Both quarters had favorable items.
The third quarter of 2013 include a total of $55 million of benefits related to recoveries for past legal expenses on closed litigation and a favorable settlement on liabilities at the company’s former parent. The third quarter of this year included $7 million of legal expense recoveries.
Keep in mind that the principal driver of the losses in the corporate segment is interest expense, which we expect to decline in the future because of our debt capital management plan.
We intend to repay two 2015 maturities that totaled $456 million and also to spend up to $500 million to call or tender for debt under the current capital management plan. However, with the recent change in market conditions we expect to execute the $500 million call or tender in 2015 rather than by year-end 2014.
Our investment portfolio continues to generate solid investment returns with modest impairments. Portfolio yields have held up well despite the low interest rate environment without any material change in our credit risk or portfolio duration.
Excluding limited partnerships, the average pre-tax portfolio yield was 4.1%, consistent with the second quarter and down slightly from 4.2% in third quarter 2013. Total investment income increased 3% from the prior year quarter, which is principally due to higher limited partnership income partially offset by the effect of lower asset.
The Hartford’s book value per diluted share, excluding AOCI at September 30, 2014 was $39.82, up 1% from year-end and 2% from September 30, 2013. The growth in book value per share over the last year was due to the positive impact of net income and share repurchases, partially offset by shareholder dividends.
During the third quarter, we used $845 million to repurchase common shares. We repurchased $320 million or 8.9 million shares through open market purchases at an average price of $35.78 per share. Under the accelerated share repurchase program, we began in July we paid $525 million and took delivery of 11.2 million shares during the quarter.
This program has not yet been completed. Based on the volume weighted average stock price through September 30, 2014 there were approximately 3.5 million shares yet to be delivered under the ASR.
In total, through September 30, we have used about $1.5 million to repurchase common shares under our 2014, 2015 program, which will be little less than $1.3 billion to be repurchased through 2015. As you know, one of our key goal is to drive our core ROE to a level that exceeds our cost of equity capital.
For the 12 months ended September 30, 2014, our core earnings ROE rose 8.2%, compared to the 6.4% of September 30, 2013, reflecting the growth in core earnings, as well as the impact of our capital management program. Our cost of equity capital has come down, reflecting our restructuring action.
We expected to continue to decline as Talcott runs off and the Company’s earnings volatility and risk profile become more in line with our P&C peers. Finally, before turning to your questions let me provide a brief summary of our fourth quarter outlook.
Our core earnings outlook for the fourth quarter is in a range of $375 million to $400 million or $0.85 to $0.91 per diluted share assuming about 440 million shares outstanding.
This outlook assumes catastrophe losses of about 2.5 points on the combined ratio or $42 million after tax and about $5 million after tax of prior year development for worker’s compensation accretion.
Talcott core earnings are projected at $90 million to $95 million and Group benefits is expected to be in the low to mid 40s, down from $55 million last year, which had included some favorable items.
In addition, keep in mind that limited partnership returns were strong in last year, averaging 11% annualized while our outlook for the fourth quarter assumes 6% annualized yield from limited partnership. To wrap up, the third quarter was another quarter of significant progress.
P&C and Group Benefits and Mutual Funds results were outstanding and we repurchased a substantial amount of equity under our capital management plan. We are pleased with our progress this year and remain optimistic about the future. We look forward to sharing our 2015 outlook with you in February, when we report fourth quarter financial results.
I will now turn the call over to Sabra to begin the Q&A session..
Thank you, Beth. Before opening up the call for the Q&A period, I wanted to note upcoming dates for The Hartford. First please note that Chris, Doug, and Beth will be at the Goldman Sachs Insurance Conference in New York City on December 9th and we hope to see many of you there.
In addition, as Beth mentioned, we expect to announce our fourth quarter results and our 2015 outlook on February 2nd with a call on the morning of February 3rd.
Please note that consistent with the prior years on call on the morning of February 3rd will be a little bit longer than our normal quarterly call and we will note that and hopefully you can plan accordingly.
Tiffany, could you please repeat the Q&A instructions at this time?.
(Operator Instructions) Your first question comes from the line of Jay Gelb with Barclays. Your line is open..
Two things, first the small commercial property and casualty insurance earned premium growth of 7%. It looks like that’s the fastest versus second quarter of 2012. Policy-in-force growth was modestly positive.
So I’m just trying to get a sense of what contributions were delivering that strong growth, is it more new business or pricing?.
Jay, good morning, this is Doug. I think it’s a combination of all, right. So we had steady progress across the pricing front. Our new business numbers that we layout in the sub but were also very strong in the quarter.
And the combination that now we have in the entire platform are our ICON platform with all the products in it is being very well received by the marketplace. So we’re hitting nicely across the board and I expect that moment to continue..
Okay. And then on a separate issue, I believe for Beth.
For the Talcott earnings, we understand the guidance for 4Q, I believe previously it might have been either you or Chris did give the expectation for Talcott earnings growth for 2015 in terms of how – what order of magnitude that would decline? And if you could update us there that would be helpful, just so we can square our models..
So we I don’t believe have given an outlook for 2015 as it relates to GAAP earnings for Talcott. I believe we’ve talked about in the past is cash free earnings generation in and around that $250 million to $300 million range.
As far as the runoff of the block for your models, it suggest that as you look at our surrender rate and you can view that as a proxy as you think about the earnings in that book declining offset by the fact that we have seen market improvement for that has the counter effect of improving the fees that we get on the accepting block..
Okay.
Any other insight you can provide there or it’s a bit of a moving target?.
Then I think we’ll provide more insight when we get – in February when we talk about our outlook for 2015..
Okay. Thank you..
Your next question comes from the line of Vincent DeAugustino with KBW. Your line is open..
Hi, good morning, everyone. Just to start with two comp questions. So one of the things that we’ve, I guess, heard more often in the industry is, some of your peers trying to put on as much profitable business right now, particularly in small commercial workers comp.
And so, the thought process here that we’re hearing is that your peers want to put on as much profitable business on the small commercial side since it’s sticky and then from that essentially have a profitable base to work through the next cycle.
And so, as we kind of look at your results and see the strong and consistent small commercial underwriting result and profitability and then also seeing your retention coming up, I’m curious if you guys are taking a similar approach? And then secondly, we’re hearing a lot of chatter around the strategy.
Does that imply that we really are within workers comp starting to see that markets often?.
Vince, good morning, this is Doug. A few thoughts for you. One is that we’re very bullish about what we’re doing in the marketplace in small commercial in both platforms. And more importantly, results-wise and we share those results with you.
So as we think about areas we want to grow this franchise, clearly small commercial is right in the top row of that discussion. Secondly, workers comp is a big product relative to our small commercial offering. It’s been a profitable product work for us. It continues to be profitable and I expect that history to move forward in a very good trajectory.
So we’ve got aggressive plan moving forward. I’m pleased with the progress in the third quarter, expect that to continue and I think we’re seen as a market leader in this space..
Okay. Good call there and just a little bit more granular. So we’ve also heard that New York and California from the comp side has been particularly challenging.
I just wanted to see how the states are performing for you guys since I think they are two of your largest, and then more broadly, how loss trends maybe playing out between mid-market and small commercial within workers comp?.
Good. So few questions inside your second piece. First, there are some headwinds in a few of the states relative to filings. I would say that those headwinds really are correlated to loss experience that has been improving across the books of business. So, not total surprised.
As we look at the performance and the adequacy of our book still feel very, very good about that and we’ll continue and monitor closely and obviously with the workers compensation line, as you suggest, it is a state-by-state march, very geographic centric. Second part of your question, middle versus small.
As I commented in my earlier remarks, we are very pleased of our progress on our workers’ compensation book in the middle, slightly different tenancies, in our small book we tend to be on the micro end of small, but again, we see good signs on the frequency end; very-very low to minus frequency across both our books of business and the severity dynamics both wage and other have been very moderate over these past couple of years, so, to us the all-in loss trends are very much in check..
All right. Good deal. Nice quarter..
Thanks. Take care..
Your next question comes from the line of Brian Meredith with UBS. Your line is open..
Yes, thanks. Good morning, couple of questions here. First, just on the reinsurance program you talked about the new property reinsurance, which related to $500 million per risk. Number one, was that alternative capacity, traditional capacity and then on the top of the reinsurance any other initiatives that you are looking at right now, i.e.
internal reinsurance type programs to take advantage of the more competitive reinsurance market? And I have a follow-up..
Brian, it’s Chris. Thank you for your question and joining us today. The $500 million per location policy was traditional. Reinsurance they are working with our long time partners. So, we feel good about it, gives us the opportunity to expand our property appetite in an appropriate fashion.
I think, as it relates to – across the alternative capital in general, I know there has been a lot of discussions in – I think fundamental review is that – the market in general is just re-thinking how to support, risk taking in general and – but as it relates specifically to our books of business, I think we’ve talked about it in the past.
I mean we feel good about our reinsurance programs, the cost of it and I will call it the more permanent nature of it over longer period, over different cycles. So, we are aware and participate in a lot of discussions and explorations of what’s feasible from an alternative capital. But we are not heavy users of reinsurance right now.
But we will continue to push ourselves to see if there is something creative – that can help benefit our shareholders..
Great and then second question, Doug. Curious, we’ve seen a drop in gasoline prices, obviously with the big drop in oil prices.
Have you guys seen any increase in frequency in the auto line or should we expect maybe that will start to pick-up here as we head into the holiday seasons?.
Our trends really have not changed much in the last quarter or so. We will certainly watch carefully and that may indeed happen with the holidays upon us, but at the moment I would say pretty much as they’ve been..
Great, thank you..
Thank you.
Your next question comes from the line of Randy Binner with FBR Capital Market, your line is open..
Yes, great. Good morning. Thank you. I’d like to follow-up on what Jay Gelb was asking a little bit on Talcott. And so, I think what we’re hearing is that when we think about capital that can come out or they’re going forward as kind of the corollary to estimating earnings.
Is it true that we can take contract count decline and thus AUM decline as a good proxy for the decline in required capital at Talcott? Is that going to be a pretty linear read for us going forward?.
Randy, it’s Beth. So, no, I was talking about earnings. When it relates to required capital, as we talked about in the past, a reduction is required. So that capital is not going to be on linear path on as the book runs off.
It obviously will decline over time and obviously impacts our views as to excess capital within Talcott, but it’s not a linear calculation..
Okay. Well, if it’s not that, what would be our best kind of tool for estimating the draft and required capital? And while I’m calling with this, the follow-up would be, I think, the RBC last was 500% there. So if required capital declines, it seems like RBC can be allowed to decline as well.
So just trying to get a feel for how you can think about how capital could be freed up there as a result of these good surrender activities you’re getting in Talcott?.
Okay, so a couple of things. First, as it relates to our views around required capital in the Talcott entities and what their needs are, as you know, that’s something that we continue to evaluate. RBC is one thing that we do look at as it relates to that.
I’ll remind you that we focus on RBC requirements in a stress scenario, not just the printed RBC in this environment. But as we talked in the past, we have been working to evaluate what should be their appropriate target going forward, taking into consideration RBC target as well as other things like absolute levels of surplus and liquidity.
And our expectation is that we will be sharing with you in February our views around the excess capital that we see in Talcott, as well as what we could see as a reasonable expectation and timetable for extracting that capital over time as the book continues to runoff.
So I’d ask you to wait until February, because I think we’ll be able to provide you better information then that will help you see how we’re thinking about the capital generation coming from the Talcott entities..
Okay. Then just one more if I could.
I mean, what is the printed RBC? If we’re not going to change the stress case conversation right now, what is the printed RBCs as off right now in Talcott, as of the third quarter?.
So as of the third quarter, we’re at about 500%..
Okay, so 500%. Okay. Thank you.
Your next question comes from the line of Erik Bass with Citigroup. Your line is open..
Hi, thank you.
If Doug, can you talk a little bit more about the growth outlook for group benefits, which it sounds like you’re pretty positive in your prepared remarks, but how much activity are you seeing in the market and how our pricing trends and then maybe also are you starting to see any benefit to premiums from employment growth or higher wages?.
Good morning, Erik. Maybe just a few comments and we’ll be back in 90 days to give you the full 2015 layout. We are encouraged by the early look at some of our January 1 activity, which is why I shared the comments that I did.
January just the beginning of the first quarter, but we’ve had some nice success on both the new business front and feel good about our retention of key existing accounts. So let’s leave it at that and we’ll be back with a broader look in 2015 in a few months..
Got it.
I guess are you seeing any benefit though from just on existing business from either higher enrollments or employment growth?.
We are working hard on our penetration inside existing accounts for sure. I would say that that work is ongoing. As you know we’re really right in the throes of enrollment season, so I would had a better sense probably out 45 days and we can share maybe some of that at Goldman Sachs.
We are seeing relatively small growth in the employment area, so don’t think the numbers of workers in our major cases, it is driving significantly upwards, in general small positive growth..
Got it. Thank you and just one more follow-up on Talcott. I guess your fourth quarter guidance is higher than what you had been guiding for the third quarter initially.
Is that’s just because of lower expenses related to the ESV program or is there anything else driving that?.
Yes, so it’s lower expenses for both ESV and ISV. There were two programs and then also as we’ve seen markets improved a little bit of an uptake because of that as well..
Got it. Thank you..
Erik, it’s Chris. In addition to what Doug said, I guess what I’m particularly pleased with the teams performance there is – I’ll share with you more in early 2015, but a number of clients, I would say large ones that we lost maybe three years ago between our replacing and some of our activities. I’m going to come back to the form.
And I think that’s just speaks to one of our reputation, our claim handling capabilities, and just the power of the group benefits franchise, so more to come as Doug said, but I’m particularly pleased with our new sales activities and old clients returning back to us..
Great, thank you for the additional color..
(Operator Instructions) Your next question comes from the line of John Nadel with Sterne, Agee. Your line is open..
Hi, good morning everybody and congrats on a very solid quarter. A question for Doug, on the P&C commercial side, so we’re seeing pricing begin to decline a bit, but it’s still above your estimated loss cost trends. I’m just wondering if there is any change in your outlook.
Yes, I know, it’s maybe a little bit premature, you want to talk about 2015 in a few months, but are you still expecting that you can generate improvement in the accident, your combined ratio moving forward maybe recognizing that some of the non-cat impacts have been probably a little bit below, what you have been pricing for..
Yes, good question, tough question and a critical one. We have seen the market become increasingly competitive over the last several months and I comment on that in my script..
Yes..
Doug Elliot:.
So, putting all this in one basket, I continue to describe the overall market place is generally rational. Especially in the sectors, we compete in, which largely or small commercial and middle. And that’s important to us in our franchise and I share those results in terms of stability.
It’s hard for us to predict these competitive dynamics going out, what I can’t tell you is that in the fourth quarter we intent to execute much in the way we had these last several quarters, which is we’re working hard to renew our best performing accounts and driving pricing in terms of those accounts that need improvement.
And I think, you know, our history we’re not afraid to walk away from accounts that we believe, we can’t get to price adequacy.
So, our price is going to be very consistent, going to watch the market place, we’re still on top of last trend and I expect that to continue in the fourth quarter and then we’ll talk more as we get out to January about 2015..
Okay, really helpful. And then maybe a question for you to Chris or Beth. Just coming back to Talcott in sort of the historical look at a stress scenario in maintaining that 325% risk-based capital ratio, I know that’s not the only metric, but it’s one that we’ve talked about pretty consistently now for a couple of years.
Given so much change and so much reduction in risk in that segment and I noticed you also mentioned a very high proportion of the remaining variable annuity reserve outside of surrender charge at this point. So potentially, we could see that surrender rate continue to stay very elevated here.
I’m just wondering whether you have actually finalized yet of you on whether the $325 million stress target income down and if so by how much?.
Hey, John, it’s Chris..
Hi, Chris..
Let me just – I’ll remind the units – let me just philosophically rate, remind you. I know you know this and others but we really want to run Talcott to be capital self-sufficient particularly in a stress scenario, so that philosophy is unchanged..
Yep..
You’re referencing the $325 million and all I would tell you is again it’s best that – we’ll cover more in early 2015, but we know that could come down. So it is going to be different going forward, we’re working our process with our various constituencies, but particularly our regulators.
So I believe we’ll have an acceptable outcome that will talk through in early 2015.
Beth, I don’t if you would add anything more?.
No, I think you said it very well..
Yes, that’s very helpful, thanks. Look forward to February..
Your next question comes from the line of Jay Cohen with Bank of America Merrill Lynch. Your line is open..
Yes, thank you. I’ve got two questions, the first is you admission that the underlying portfolio yield in your investment portfolio held up pretty well without taking much more risk and seems to defy gravity given we know about the interest rate environment.
Can you just talk about how that occurred and why that occurred?.
Jay, it’s Chris. I think – if you really look at the numbers this quarter that I think Beth talked to is our reinvestment rate was about 3.6%, the maturity I’ll call it securities rolling off this quarter were 3.7%. So I think again our HIMCO professionals continue to look for the right opportunities, I don’t think we are stretchy from a risk side.
But we do have also had some core capabilities and real estate, mortgage loans I’ll call it private placement that offers the opportunity to be very selective and try to get the best yield for the risk of return trade off..
Got it, thank you. Second question on the commercial business, the expense ratio is kind of last couple of quarters has really been at the higher end and where it has been for the past three years. I think you’re making investments in that business.
Do you think this is sort of a peak-ish number or could we see that never rise a bit further, as you continue to invest in the business?.
Jay, good morning, this is Doug.
When we think about the expense these were really are balancing two parts of equation, one part is that we’re investing back inside these business particularly on the technology side, so obviously, that’s working against this relative to absolutes here, but we have a number of initiatives inside our businesses where we’re looking at expense opportunities in general, we’re harvesting ideas that are going to make us some more efficient, productive, place over time where that is particularly relevant is clearly in the middle market, as you know in the last couple of years, our middle market top line has come down a little bit between 2011 and 2013.
And so we’ve got some experienced pressures there that we are coming aggressive with making adjustments forward. But albeit looking out, I’m pretty comfortable with where we are today and very pleased with the trade off we’re making between invest and overall outcome relative to combined ratio and margins..
So this is not – it is sort of a peak-ish number.
we wouldn’t expect that to rise further from here, unless obviously the top line changes noticeably?.
Certainly, true. correct..
Great thanks..
Your next question comes from Thomas Gallagher with Credit Suisse. Your line is open..
Good morning. Just a quick one for Doug and then one for Chris or Beth.
So Doug, just I guess given what you mentioned on workers’ comp, now hitting return hurdles, I presume that’s an overall comment and I guess Commercial Auto is the other business where you had beginning rate, any – fair to say the heavy lifting is behind you from a rate standpoint, or any other businesses where you expect to get significant rate?.
Tom, good morning. I would say that our comp strategy now is fine tuning and working the edges both in middle market and also in small. I did comment that we are still re-underwriting and working aggressively on the pricing front with auto, and that’s a comment again, both across middle and small commercial as well.
The property, and liability, and our specialty books all have different strategies and I would suggest to you that our pricing mean is probably not as aggressive there as we are approaching the marketplace in auto. So somewhere in the mid single digits three to six range probably for the other lines..
Okay, thanks. And just shifting gears to Beth or Chris. so if I look at the initial 2014 and 2015 capital plan was split 80% buybacks and 20% debt reduction. and then if I look at the Japan sale got a bit more conservatives, led 60% buybacks, 40% debt reduction.
So my question is, as we think about how would Hartford capital go down in the future, how should we think about that split?.
So Tom, it’s Beth. I’ll take that. So what we’ve said in the past is that any capital management actions that we would take in the future will continue to be balanced.
We’re very mindful looking at what our leverage and coverage ratios are and as we’ve said our goal is overtime to be in the low 20s and so any actions we take we’ll continue to the balance that. So it’s not as I can say it’s an exact percentage.
It’ll really be based on the amount and looking at overall of those factors as we think about the balance sheet going forward..
So, Beth, as a follow-up then.
Since you’re still above low 20s right now, it’s fair to say that if you had extraordinary capital return actions on Talcott you probably lean more towards the conservative end of it, until you hit the low 20s threshold?.
So the low 20s is a target, we haven’t set necessary a time table for working to when we want to achieve that, we’ll just continue to be balance. So what I would say to you is I’d expect there to be a continuation of both, but not necessarily that we’re trying to be overly conservative..
And then, so just one last one if I could sneak it in from a tactical standpoint, why bother with tendering for debt? Why not just sit on the cash, earn some yield, and pay it off as you go? I guess you have some fairly big maturities in 2017.
I don’t know if that’s too long to wait or what the view of tendering versus sitting on the cash and waiting to pay maturities. .
So again, our view has been that we do want to reduce the leverage on the balance sheet. When we look at the cost of a tender or call, we obviously take that into consideration to some extent what you pay in the PB calculation on that kind of takes into consideration about that, you won’t be paying that interest in the future.
So for us it’s really a way to get us to our targets. And we’ll continue to look for the best way to execute that at the best price..
Okay, thanks..
Your next question comes from the line of Bob Glasspiegel with Janney Capital. Your line is open..
Good morning, Hartford. A question on hedging costs, which I don’t think you breakout anymore with Japan, outage come down and clearly your assets are coming down against the dollar is up and interest rates are down.
Any guidance just sort of the rough run rate of hedging costs that are below the line?.
So, Bob this is Beth. So as it relates to our U.S. VA book in the way that we thought about the spend for both the WB program and the macro program we’ve really haven’t changed those targets. I would say the macro program has probably cost us a little bit less.
We used to talk about it in $5 million range, a couple – spending a little less than that now, but we really haven’t changed our views on hedging. But you can see in our results because we still do breakout the VA hedging results that they were very modest for the quarter, which is what we’d expect going forward with Japan, no longer in our result..
I’m sorry.
The $75 million refers to what?.
What we refer to is the macro hedge program..
Okay.
That’s continuing or that’s not continuing?.
So we are continuing the macro hedge program. It’s just that the cost of that program has come down a bit given market conditions..
And that’s below the line or is that in core earnings?.
All of the hedging costs are below the line..
Okay. Thank you..
There are no further questions in queue at this time. I’d turn the conference back over to our presenters..
Thank you, Tiffany, and thank you all for joining us today and your interest in The Hartford. Certainly if you have any follow-up questions about the quarter or other items, please contact either Sean or myself by phone or e-mail and we’ll get back to you as quickly as we can today. Thank you and have a great day..
This concludes today’s conference call. You may now disconnect..