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

Thank you. Good morning and welcome to The Hartford's webcast for second quarter 2016 financial results. The news release, investor financial supplements, slides, and 10-Q for this quarter were all released yesterday afternoon and are posted on our website. Our speakers today include Chris Swift, Chairman and CEO of The Hartford; Doug Elliot, President; and Beth Bombara, CFO. Following their prepared remarks, we will have about 30 minutes for Q&A. Just a few notes before Chris begins. Today's call includes forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and actual results could be materially different. We do not assume any obligation to update forward-looking statements, and investors should consider the risks and uncertainties that could cause actual results to differ from these statements. A detailed description of these risks and uncertainties can be found in our SEC filings, which are available on our website. Our presentation today also includes several non-GAAP financial measures. Explanations and reconciliations of these measures to the comparable GAAP measure are included in our SEC filings as well as in the news release and financial supplement. I will now turn the call over to Chris.

Thanks, Sabra. Good morning, everyone, and thank you for joining us today. From a bottom-line perspective, second-quarter results were disappointing. Higher prior-year development, including A&E, lower current accident year personal auto results, lower net investment income, and higher catastrophe losses led to a decline in our core earnings. However, I am pleased that our commercial lines and group benefits businesses continued to generate solid underwriting results. And book value per share, excluding AOCI, grew 5% over the prior year and 2% since yearend. You all are aware of the challenges our industry is facing due to greater commercial lines competition, unfavorable auto loss cost trends, and significantly lower interest rates. In commercial lines, competition is becoming more aggressive, especially in national accounts and Middle Market. Some companies are expanding into new markets, while other long-standing competitors are now willing to accept lower pricing or weaker terms and conditions. Renewal rate increases are hovering near short-term loss cost trends in most lines, so expanding margins from here will be difficult. While we have continued to deliver good commercial line results by focusing on underwriting discipline, retention, and maintaining underlying margins, we see fewer opportunities to grow the top line in middle and larger account markets over the next several quarters. We will continue to pick our spots prudently. In personal lines, increased vehicle miles driven as well as distracted driving have continued to put pressure on auto loss cost trends. Based on our analysis of the deterioration in frequency and severity, we strengthened reserves for accident year 2015 and increased our loss ratio estimate for accident year 2016. In hindsight, I'm disappointed we didn't recognize earlier the magnitude of the changing trends. Doug will update you on the pricing, underwriting, and agency management actions we are taking to get margins back…

Thank you, Chris, and good morning, everyone. Commercial lines and group benefits posted a solid quarter, even as market headwinds have intensified. In personal lines, results were disappointing, as loss trends in accident year 2015 continued to emerge adversely to our expectations, driving both unfavorable prior-year development and a deterioration in our estimates for accident year 2016. Let me get right into personal lines, which posted a core loss of $55 million for the quarter, down from core earnings of $42 million last year. The underlying combined ratio, which excludes catastrophes and prior-period development, was 94.2, increasing 5.1 points versus last year. This is primarily due to higher auto liability loss costs, which I will discuss in a minute, partially offset by a decrease in direct marketing expenses. Homeowners performance continues to be excellent. We experienced a slight uptick in fire-related losses, but this is compared to a very favorable second quarter 2015. Cat losses in the quarter were $104 million, $7 million higher than second quarter 2015, but generally in line with our expectations. Overall, we were pleased with the trends of our homeowners book. Included in the personal lines underwriting loss this quarter is $75 million pre-tax of adverse auto liability development, primarily related to accident year 2015. The factors behind this adverse development remain consistent with those we described in the first quarter, which are related to higher employment, resulting in more people on the road. As a consequence, we are seeing both increased frequency and severity of bodily injury claims, which generally have the longest reporting lag and highest severity. Despite our first-quarter reserve action, losses from the 2015 accident year emerged well above our previous expectations during the second quarter. Due to the deterioration in these trends for the 2015 accident year, we also raised…

Thank you, Doug. I'm going to cover the other segments, the investment portfolio, and capital management, before we turn the call over for questions. This quarter, in P&C other operations, we completed our annual asbestos and environmental reserve study. As a result of this study, we added $197 million before tax to asbestos reserves and $71 million before tax to environmental reserves. The increase in the asbestos reserves was due to mesothelioma claims not decreasing as expected over the past year for a small subset of peripheral defendants in adverse jurisdictions. The environmental charge reflects higher claims severity, including for additional properties tendered during settlement discussions and increased legal defense and cleanup costs. After tax, the A&E development increased $40 million from second quarter 2015, resulting in core losses for the segment of $154 million compared with $113 million in second quarter 2015. We are disappointed with the development on this book. And as we have said before, we continue to evaluate options for these exposures, taking into account factors such as the value we add by managing these claims ourselves, the loss of investment income versus the cost of a transaction, as well as whether it is a partial or permanent transfer of risk. Earlier this week, we were pleased to announce a definitive agreement to sell our UK runoff P&C book to Catalina. This agreement provides for a permanent transfer of these liabilities and is not expected to have a material impact on our financials. Mutual funds core earnings were down $2 million from second quarter 2015 due to lower fees as a result of lower assets under management. Total AUM was down about 4% from a year ago, consisting of a 2% decline in mutual fund AUM principally due to lower market values over the past 12…

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

[Operator Instructions] Your first question comes from the line of Thomas Gallagher from Evercore ISI. Your line is open.

Hi. This is Alex Scott standing in for Tom. Quick question on the A&E. Did the sale of the UK runoff business impact the A&E charge this quarter? In other words, was there an element of this charge that's some kind of true-up ahead of the transaction?

Thanks for the question. This is Beth. The A&E charge that we took this quarter was not impacted by the UK sale at all.

Got it. And just thinking about the lower reserves pro forma the transaction, would that be expected to reduce future charges? Or do you think sort of the underlying experience you are seeing more than offsets this?

Alex, it's Chris. It's going to be hard obviously to predict the future. We try to make our best estimates every year with our ground-up study. There are a concentration of accounts that seem to be getting picked on year after year. But I mean, it's really hard to predict what's going to happen in the future. I think what the transaction should tell you is that we are proactively looking at our legacy books, whether it be the life or P&C side, and seeing if there are better owners for those books over a longer period of time than holding them. So we'll continue to challenge ourselves on the U.S. block, but we'll make our best estimates every year. But Beth, would you add anything else?

Just the only thing I would add is if you look over the last couple of years and just the prior-year development that we've experienced on the claim that we will be transferring as part of the sale, it's been anywhere from $25 million to $55 million of prior development that we've recorded in that book. So obviously that level of reserve increases going forward would obviously not be there.

And we typically have done historically the UK operation in the fourth-quarter reserve studies?

There is a variety of reserve studies that impact the book of business that we just sold. But the largest amount of prior development that we've experienced has typically been in the fourth quarter when we looked at non-U.S. asbestos and environmental reserves that were in that book of business.

Got it. Thank you.

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

Hi. A couple questions here related to the personal lines. First, Doug, could you talk a little bit about why this took you all probably longer than the rest of the industry to identify some of these trends? And maybe the kind of lag in reporting. Anything related to ACA or what do you think is causing that?

Good morning, Brian. Let me take a shot at that. Let me try to separate it into a few components. Number one, I think you know and we should just state it that there has been pressure across the industry the last couple of years. Right? So if we look at accident year 2015 versus accident year 2014, we do see that pressure point. At the heart of your question is why were we late on it? I would say this. Number one, our physical damage frequency estimates at year end for accident year 2015 are still holding. So the number of collisions we predicted for that accident year book still look very solid. Didn't change much in the first quarter and have not changed in the second quarter. Second piece, which we talk quite a bit in the first quarter and also have developed in the second quarter, the number of bodies that are injured in those crashes during accident year 2015, we are seeing more people injured and we are seeing more coverages influenced. So the frequency of components of loss has grown in our 2000 accident year 2015 book. And the third piece, which ties into that last statement, our bodily injury severity across the book has had pressure. And that pressure was evident in the first quarter as we look back on 2015. And we see another point to a point and a half of pressure in the second quarter. So that really forms a basis for why the changes. We are disappointed that we didn't see all of it, but we've gone back and it's not like we missed a number of accidents in our book. We are missing the features around them and have made pretty significant changes to make sure not only are we on top of 2015, but we've adjusted for 2016 moving ahead.

Great, thanks. Maybe just a quick follow-up there. My recollection is that most of your business is annual business. So how long is it going to take to get back to kind of where you want to be on auto profitability?

When you look at our auto book and we share the numbers XX. We've got 5, 6, 7 points that we need to get back at, right? And that's probably not doable in a 12-month period. But Ray and Chris and Beth and I and the team, we are driven over the next couple of years to see incremental progress quarter by quarter. And certainly by 2018, we feel like we are going to be in a much healthier spot relative to long-term targets.

Thank you.

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

I wanted to jump to some of the comments that Beth made around Talcott. And I guess in particular, it sounded like you said there was potential that the low rate environment could eliminate cash flow up from Talcott in 2017. I just wanted to make sure I heard that right. And if so, is there any change to the stress scenario you had in your 4Q 2015 presentation around low rates? Because I guess our view had been that there was enough market good guy in that test to offset the bad guy of low rates, if you will. So just trying to understand that comment better and if the rate impact has changed in that analysis.

Yes, thank you for the question. Let me clarify. What I was referring to is that when we look at surplus generation in Talcott for 2016, with the potential to have to need to increase cash flow testing reserves at the end of the year, that surplus generation of $200 million to $300 million we could see decrease in it or be eliminated. I do expect that we will have dividends from Talcott in 2017. What the amount of dividends will be will be dependent on kind of where we end the year at. As we look at our stress scenarios, we feel very comfortable with the amount of capital that we have and we have updated those scenarios for a steeper decline in interest rate. So when we did those scenarios at year end, we were assuming that the 10 year at the end of 2017 would be at 1.61%. And now when we stress that, we are looking at a 10 year of 1.15%. And so with that, our stress margin capital that we shared with you in December would come down and probably be slightly under $1 billion. But I think that still gives us capacity in 2017 to take dividends from Talcott.

So the stress margin capital of a little under 1.0 you just said, would that compared to the 1.6 that you initially had in that presentation?

Yes. And that's again takes into consideration the fact that we were taking $750 million of dividend out in 2016, which we have done.

All right, perfect. That's all I need, thanks.

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

I guess Doug, a couple questions back to personal lines. Sort of looking at now what we've seen manifest here, continued challenges in what appears to be getting our arms around the issue there. But when I look at the supplement and look at rate-taking activity there, it looks like you've gone from 5% before anything manifested to about 7% now. So I would like to square that to your comment about significant rate taking. But your policy count retention is flat. And new business has come off modestly. So I'm just trying to square all of those things. Like how is it that with everything that's taken place that we are not seeing the foot come off the gas entirely? Why is there any new business and why isn't retention coming down further?

[Technical Difficulty] by saying that our performance in AARP versus our agency book do have different profiles over time. So there is a management of our different customer segments that just underlies all I'm talking about. But I think with that, it's important just to set the stage. Over the last couple of years starting in April of 2014, we started rolling out a new class plan designed to improve our competitiveness, particularly in underpenetrated segments. We also expanded our agency distribution around that, appointing some firms which had no prior relationships with us. And those changes were going on at a time when the industry was starting to lean into higher frequency and some severity news. So probably not the best time to be rolling out a new class plan. I want to give you some evidence of what we've been working on. The last state in that class plan was rolled out in August of last year - August of 2015. That was Florida. We now have the third fine-tuning or iteration of those class plans going into effect across the country. So we've been tuning those plans over this two-year period. We are also leaning into rate. So our achievement of rate today is greater than we expected the plan to need six months ago. And I would say to you that we are leaning in harder the second half of the year subject to our work with the various states. So the disappointment is we've leaned into a growth mode over the last couple of years at a very difficult time. Further, some of that growth was more pronounced in several states with higher overall loss costs, such as Florida. When you think about Florida, we've got a lot of retirees in certain pockets of the…

So should we expect then in the third quarter that we are going to see new business - we're not going to see any new business and we're going to see retention levels down? I mean, like when are we going to see those metrics? Because we've talked now the last few calls about this. And it just feels like on the one hand, we've got issues still trying to understand why they continue to change relative to expectations. But then on top of that, what you are doing in the field as far as new business - I hear everything you are saying, but when do we expect that we are going to see what should be a natural decline in retention as you take aggressive rate action and, you know, just a complete drop-off of new business and advertising?

Let me share a few numbers of new business in the second quarter, just to stage the answer. Our AARP Direct was off 8% in the quarter. Our other agency was off 37% and our overall auto new business was off 14%. That's a demonstration of some of the moves we've made. On the pricing side, we look at the adjustments we're making and there is still big chunks of our book that are with the pricing we are putting in place, we want to retain those customers. So the numbers I shared on new are more a reflection of how we are moving into these territories and the customers we are seeking to add and bill to our book. But the retention strategies are tied into rate adequacy. And in some places, we are very rate adequate, and other places need a lot of work. And the numbers you are looking at our averages, so the span around those averages between most distressed and well under control do vary widely.

Do you think you'll be able to provide some more granularity so that we can evaluate how you are progressing in these stressed and non-stressed books in the future? Because it sounds like - yes, it sounds like there is a big gap between what you are reporting in these numbers and what you are doing strategically. But we just don't have the information to see that. And just given the time lag that this has been going on now, I would hope that we could see a little bit more information on exactly what tactics you are pursuing and what effectiveness those tactics are having.

That's fair. Let us take that back, discuss it with ourselves, and see if we can't address the gap there.

Michael, it's Chris. I appreciate your feedback. And hopefully you get a sense from Doug's tone and my tone that we are equally as frustrated as you are. And if a little more data helps, that's great. But I think the overall message here, too, is we have been reacting. We have been pushing ourselves since year end to look harder at things. But as I mentioned before, we are balancing this with a partner, a 30-year partner, where I've looked at history and how we've worked together, how we've grown this book. We produced strong returns over a longer period of time. And we need to balance a level of stability with AARP and its members while we are taking these aggressive actions. So as Doug said, the latter half of 2015 is when we rolled out our last state with our new class plan. We've been tuning, as we say, as we've gone along. But there are still things that have surprised us, and as Doug said, some of it was industry related. Some of it was our own self-inflicted actions. And we have to take full accountability for that. And we do. But we are working and I think you will begin to see progress, particularly as we head into 2017. And we'll look closely at the metrics that we could share with you that are appropriate so that you could gauge our progress.

What do you expect your advertising budget will be in auto for the rest of the year relative either to the first half or to the last half of last year?

We've already cut 25%, 30% of our budget on direct advertising and activities along those lines. We'll continue to push ourselves, but there are areas in the country - and again, given the relationship where we still want to produce business that we think will generate adequate returns over its lifetime. So it's a balancing act. And those areas that are on fire and that require a lot of attention, we are not afraid to make those calls. On the other side, we want to be balanced, particularly with our AARP members.

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

Thanks. This is a little bit of an unfair question, and I don't mean it to be hostile. But when we look at I guess the auto deterioration, the asbestos issue, and maybe the fact that the interest rate environment in Talcott - or that Talcott is facing is worse than you'd anticipated, does there need to be maybe more skepticism culturally in how you are managing the business?

Meyer, it's Chris. I don't know what you mean by skepticism. We challenge ourselves to perform every day at high standards. We are investing in the organization for the future. Our employees are world-class and are willing to go the extra mile. But I do know that, as I said in my opening comments, we are in a challenging period of time. But I think we have the ability to manage all elements of our business and make the right judgments and write estimates for accounting purposes and make our best estimates on loss picks. And hopefully have a bias towards being conservative that gives us a margin of error to deal with in case anything goes wrong. So that's what I would say. So what do you mean by skepticism?

So let me use asbestos as an example of that. Because I'm not in any way questioning the competence. But we've over the past few years, we've had adverse development and the question was whether maybe you should take a bigger slug. And clearly, you were expecting a smaller - you were expecting claims to decline. I'm wondering whether maybe that approach - in retrospect, obviously, that approach didn't capture everything. But I'm wondering whether there's something in the I guess the outlook or the underlying culture that - culture is the wrong word. But just the approach that should maybe say okay, instead of expecting things to work out more favorably, maybe they won't.

Yes, that is a unique set of facts. So I take your point. And as I said before in one of the questions, you ought to take away the real message from the UK transaction is we put a piece of legacy P&C runoff behind us, that we're always challenging ourselves of how we can continue to take some of the noise out of our results. But on an economic basis, right? We've always talked about balancing the economics and noise. And this is a tough issue from a litigation perspective of how people attack the exposures that our customers have had related to asbestos. So we will always challenge our assumptions and make our best views. And I know we haven't had a stellar track record there, but we will continue to challenge ourselves, Meyer.

Okay, no, that's helpful and I appreciate it. On a more sort of granular basis, can we get the current accident - the original and current accident year auto picks for 2015 for the back half of the year?

Well, let us look for them, see if we have them in front. 2015, you said?

Right. Just so we can sort of model the year-over-year change in the back half of this year.

Meyer, with the reserve additions that we made in the first quarter and the second quarter, the 2015 auto combined ratio, excluding cats and prior-year development, is 103.5. And I think Jonathan may have the original one for the full year. I believe it was 99.0 for full year 2015 at the end of 2015. So there's been about 4.5 points of deterioration during the first half of this year. I would also note that given the actions we took in first quarter, the 2014 accident year was - at the end of 2015, it was 97.1 and that deteriorated 1.5 points during 2016, so that's now 98.6.v

Okay, that's perfect. That's what I was looking for. Thank you so much.

[Operator Instructions] Your next question comes in the line of Ian Gutterman from Balyasny. Your line is open.

Thanks. I guess I have an auto question, but just first another sort of big topic that's come up recently, Chris, is these sort of incessant every-few-months M&A rumors. And I know you've talked about it before, so I'm not going to ask you to sort of rehash what you said in the past. But from a practical standpoint, is it having any impact on your business? I guess that's what my concern is. Like are you getting too many questions from agents or clients wondering what the Company's future is? Is that a distraction at all or not an issue?

It really is not, Ian. So you can't control rumors, but it is not distracting us at all.

Okay, good. That was my main concern. On the auto to sort of follow up a little bit of what Mike was asking a you minutes ago, I feel like agency auto, specifically the agency side, has been struggling ever since I've known the Company, which unfortunately is a long time. And I feel every few years, we talk about sort of what do you need to see to affirm your commitment to that business. And I guess I still struggle with - again, the AARP business is a great business. But the pure agency side, does it feel like you are being adversely selected because you don't have the same sort of scale or systems that other people do? And we've seen obviously one competitor that that's made a lot of improvements in their cost structure to be able to low pricing and others who have focused a lot on the rating systems since they do better in that. It just feels like the business isn't necessarily at the scale it needs to be to keep up with the top players. And at what point do you maybe need to take a harder look at whether it's best in someone else's hands and you can redeploy that capital into growing things like Middle Market, where that maybe you are better fit?

Ian, it's Chris. Let me frame the issue and then ask Doug for his perspective, too. Yes, you are right. We see the same trends as far as performance. And I would say what the real strategy is right now is look, we are committed to our independent agents for all aspects of our business, while we obviously market to AARP members on a direct basis. I think what Ray and his team are really focused on right now is finding those independent agents that are aligned to our value proposition over the longer term. And our value proposition is really - my simple way of thinking about it is a product that offers real benefits to its - to the insureds that is appropriately priced and that we just don't want to be spreadsheeted against the lowest carrier. So very proud in what our brand stands for, our claims capabilities, our empathy, particularly in the mature segment. Because I think we've earned the right to be a carrier in that segment. I think what it really means, though, is how do we transition to that as quickly as possible? And you've heard the litany of activities that Doug and team are focused on, whether it be commission actions, whether it be appointments. So we are pruning the agents that are aligned to our value structure. We want to support them. We want to grow with them. So I think that is a more tailored a strategy, particularly in the mature market that we are executing right now.

Chris, I think you've done a good job. We've shared the numbers in the past, and Ian, I don't disagree with the question. But we feel like we've taken pretty significant action, I think, about our core preferred agency group now focused around 2,000 to 2,500 agents. That's a very different number than we were trying to manage two and three and four years ago. I think about our preferred scale, we are looking at our commissions. We had 6,500 agency locations 6 months ago that had our preferred schedule. That number is down to closer to 2,500. So we are looking at expenses. I think we're working all the levers. I do feel like the book is big enough that we can be successful there. It is a terrific complement to what we do on the Direct side with AARP. And you know we are leaning into the mature component of that agency book. So I'm not giving up. I see progress underneath, but very disappointed that the first six months of 2016 have played out the way they have.

I understand, I understand. But I'm going to sneak one last one in for you, Doug. You mentioned some increasing competition in group. Anything you can elaborate on there?

You know, in the disability lines, we've just felt our hit ratios - meaning success ratios - have not been where they had been the prior couple of years. So as we look at the first half of 2016, I would've expected a few more wins in that category. We see a little bit more challenging times in what I would describe as the middle market area of group. So in that 500 to 2,000 life case, our success has not been the same as it has been in the national account space. I know we are stronger. We've had a traditionally very strong platform in national, but we have leaned into that middle market hard with resource and talent the last couple of years. So I think that is the ground. And it actually reminds me a bit of the P&C side, where I see a lot of the softer market conditions in that middle market of P&C. I see the same area in LTD and disability.

I believe we have one more question in the queue, Scott.

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

Good morning, Hartford. Two follow-ups on personal lines and the UK sale. On personal lines, it sounded like, Doug, most of the actions you are taking were on the agency side of the business, either direct agency or Agency AARP relationships. Am I right to infer there is a greater hit in the personal and your agency book than AARP, or did I misinterpret that?

Bob, there certainly are agency actions directly aligned with that side. But when I think about our pricing, our product segmentation, claim, operational, Open Road, those all have opportunity to impact favorably our Direct business as well. So don't think of this as an agency-only strategy. We are working both sides and have room for improvement on both halves.

But so agency is not being pressured more than AARP and auto? You don't give out the by-line underwriting.

Yes, we don't disclose that. I will tell you that the loss ratio - well, the combined ratio overall performance difference in those segments is in the neighborhood of 10 points. So there is more concentrated effort to get agency auto back closer to our long-term target. And there is a further distance to make that happen. But we are working across our book of business to try and to make sure our overall auto book is also where it needs to be long term.

Okay. If I could sneak one more in. On the UK sale, what percentage of your asbestos and environmental reserves does that book represent? And I think you said it didn't impact - the sale didn't impact the Q2 A&E charges, so there was none for those lines in this segment.

Yes. That's correct. There was none of the reserve charge that we took this quarter was related to those exposures. We did provide details, both in our 10-Q and our slides, on exactly what reserves are included. But just to give you those numbers, for the asbestos reserves, there is about $210 million of exposure associated with the UK sale that would go away from that column. And then about $42 million in environmental reserves. And then we've got other reserves, obviously, in the all other category of about $243 million that will also transfer. So in total, it's a little under $500 million in that reserve.

And it won't change survival ratios? I assume they are - the payout trends are similar to your other book - other reserves?

Yes. It might have them come down just a little bit, but really no significant impact.

Thank you very much.

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

Thank you. And thank you all for joining us today and your interest in The Hartford. If you have any additional questions, please do not hesitate to follow-up with us. We wish you all a good weekend and good luck with the rest of earnings season. Goodbye.

This concludes today's conference call. You may now disconnect.