The Hartford Insurance Group, Inc. (HIG) Earnings Call Transcript & Summary

[Audio Gap] So thank you for just for the opportunity. I thought I'd just touch upon a couple of things. 2019 was an excellent year for The Hartford both strategically and financially and the results speak for themselves. But at a high level, we generated $2.1 billion of core earnings, an ROE of 13.6%, and we're able to grow book value per share, about 11% for the second consecutive year. Strategically, I think we've proven we have the ability to acquire and integrate operations, companies into our platform that help us expand our underwriting capabilities, expand our product sets and grow our distribution channels and capabilities. So really at The Hartford, we have been focused and we'll continue to focus on execution and organic growth. We talked about for Navigators, the integration is proceeding well. We're about 9 months into it. And I think we have our arms around it as far as what we have and the capabilities that we acquired. We're pleased with it, but we're really focused on improving the underwriting performance of that business unit. We're looking at how we cross-sell within our larger platform. We think we're bringing to Navigators the enhanced claims capabilities with our fast claims operations, and then really leveraging all The Hartford capabilities. And when I say that, I specifically mean data and analytics and our deeper actuarial capabilities. So things are on track. In our earnings call in the fourth quarter, we did reaffirm our view that we can create $200 million of incremental core earnings. And what we did was we shortened that by a year. When we closed the deal, we talked about generating that over a 4- to 5-year period of time. Now we think we could generate that over a 3- to 4-year period of time. And as I said, we have our arms around Navigators, its operations, the changes that we've done over this past year, give us great confidence going forward that we'll be able to expand margins. We also talked about expanding Navigators margins in that 5% to 6% range on an overall combined ratio. And that, again, is really driven primarily by underwriting action, pricing actions, limiting limits, policy limits, looking at terms and conditions differently, and quite honestly, exiting businesses, particularly in London that just weren't profitable. So if I then changed to the commercial lines, we provided our guidance for an underlying combined ratio in that 92% to 94% range. That is an improvement over this year, primarily, again, driven by the 5 to 6 points of Navigators improvement and I mentioned where that's coming from. And then also, we see improvement in our core small commercial, middle and large commercial segments in spite of some margin compression, slight margin compression in workers' comp. And that's just reality. That's just reality. And I'm being honest and transparent as we always are. If I look at group benefits, group benefits had an outstanding year with $539 million of operating earnings, core earnings, a margin of 8.9%. And largely, what we're foreshadowing is that, that we're at the late stages of finalizing the integration of the Aetna book, and we're pivoting towards growth. Growth in new products, new services that complement our existing core capabilities and ultimately focusing on a better customer experience, particularly the employer experience. As it relates to capital management, I think we continue to be thoughtful in managing excess capital that's generated beyond what we need to fund growth in our operations. We announced our $1 billion buyback program a year ago. We expect to buy back about 800 million of shares this year in 2020, and we raised the dividend 8%. So as I sit here, Jay, I think we ended 2019 with significant confidence and momentum as we head into 2020, about improving our operations, particularly margins and creating shareholder value for that. So that's what I would say.

Any opening comments from you, just about how the balance sheet shaped up relative to what you expected at the end of the year.

Yes. I think when you look at the things that we've done over the years to get the balance sheet, I think, in a very good position, and we've talked for a while about our goals relative to leverage ratios and so forth and see ourselves really within reach of those goals as we look to pay down, obviously maturing debt this March. So very pleased with the profile there. As Chris commented on, we're pleased to be able to increase the dividend again this year. And so I think it positions us very well going into 2020.

Just to follow-up something. Chris, you said about the Navigators. You talked about achieving your goals 1 year earlier. So that begs the question, what changed relative to your original expectations?

Sure. Well, we laid the path out to the $200 million as far as improved underwriting results, expense synergies and enhanced net investment income. All 3 of those are still the components, but we didn't anticipate this level of rate increase. We talked about it in the fourth quarter. I mean, basically, the Navigators Group is plus 15% and closer to 18%. And we see that continuing into the second half of '20. So as those rates earn in, you roll forward a couple of years of continued rate increase. We think we do have our arms around loss cost trends for Navigators. It's just -- it's going to -- we're going to hit our goals a year sooner than we anticipated.

I assume you probably thought initially, those prices might be up single-digit?

Yes. We, in essence, had a view of, I wouldn't say exactly single digits, but in that higher range of single digits just given the needed improvement where ROEs were, but we're basically double the rate increase from our original expectations in spite of interest rates coming down. And this really wasn't an expense play for us, this was an expanded capability in maximizing our distribution play.

Let's talk about, I guess, the commercial lines market. You seem to express some conviction that this pricing momentum would continue into this year, maybe even into next year. As you look at the world, what gives you that level of confidence?

Well, the straight answer is, I don't think, as an industry broadly defined, we've really kept up with loss cost trends over the last 5 or 6 years. And if you look at where we are today in certain lines of business with our combined ratios, it's going to take 18 to 24 months of continued rate increases, rate on rate increases, I think, to hit targeted returns in commercial auto, liability and property. You couple that with a low interest rate environment, lower for longer with tenure today, 160, 155. I think as an industry, we need to continue to be disciplined and focused on rate and underwriting to make up for that loss in NII that inevitably is going to happen.

The question that I get a lot is, yes, prices are going up, but there's a reason. Claims are going up as well, not across the board but in many lines. As you look into 2020 and '21, is your assumption that the loss environment continues to get worse from here? Or get better? What's your underlying assumption?

We believe it's stable. But again, it's making up for sort of the accumulation of years of not keeping up with trends. I think we've been pretty clear that we feel good about where we have trend pegged today in that 5% range in aggregate for our portfolio. And we just need to continue to execute above that to be able to expand margins from here. So -- but I would say, again, at least for our book of business, we don't see anything dramatically shifting. We've talked about sort of our litigation rates. Our representation rates have been very stable. We're not experiencing a major shift in any of our liabilities. We've seen over the years, the last 5 years, the need to make adjustments in loss picks for certain liability lines, primarily commercial auto and general liability. We've done that. So Jay, for us in our book, we just need to keep up with that trend that we pegged for liability lines in that 5% range, primary maybe a little less. You get into umbrella and excess, it could be a little bit higher. You blend it all together. And as an industry, we just need to catch up from where we were.

Is it fair to say that the backdrop is a fairly rational industry? In other words, as you take this action, would you expect your new business to suffer notably or your renewal retention to be impacted?

What I would say is the trade between rate and retention, you always need rate ahead of retention because if you have an unprofitable account or unprofitable segment, you just need to fix it. And if it leaves you, it's unfortunate from a customer side, but that's -- you need the rate in your book. So I would say, generally, our distribution partners understand the environment. We've been working hard with them, particularly the last 6 to 9 months to educate the reason for the rate, the trend environment. And I think we have an alignment with our distribution partners about what are the actions that we need into '20 and then also heading into '21. The best example I can give you maybe is just tangible, is that we work really hard on our commercial order book over the last 6 years. It's about a $600 million book of business to us. We put about 50 points of aggregate rate into the book over that period of time and have still produced 102 combined ratio today. So when I talk about the next 18 to 24 months to get that line to targeted rate increases, we're going to need 10 to 12 points of rate this year; 10 to 12 points of rate in '21, to even get close to earning an adequate return on risk-adjusted capital.

You could argue you guys have been maybe a little ahead of the curve there. So arguably, others would have to at least see that kind of increase, if not more.

I'm not going to disagree.

Okay. That's fair enough. Let's turn to workers' comp. I guess, it was last year or the year before you had this bit of a speed bump, I think it was in the third quarter. We've talked -- I think the market made too much out of it...

Second quarter.

Was it second quarter?

Yes, I think it was the first half of the year.

Okay. What are you seeing as far as claims trends there now? And for us to actually see prices going up in workers' comp, I'm assuming there would have to be some sort of change in the claims trend.

Yes. So you are right. We did -- basically, the first half of the year signaled that the frequency of claims, not severity. The frequency of claims in certain segments of our book was increasing. And if you remember at that time, we talked about sort of the demand surge that we suspected occurred with tax reform and hiring and getting maybe more inexperienced workers into certain job classifications that posed just more injuries early on. And that still is what largely happened in our book of business. So if you look at segments like retail, restaurants, I'll call it, high demand, maybe high turnover businesses, there was a little bit of surge hiring that just was inexperienced in certain classes, including manufacturing. I think that largely settled down in the second half of the year. And so as we sit here today, the trend really over the last 6 quarters, except for those blips in the first 2 quarters of '18, has been frequencies have gone back to normal and have been slightly negative. And severity, particularly on medical, is better than our long-term assumptions that we generate planned for in that 4.5%, 5% range. So I think the line is performing well. We still make good margins and returns, but with the continued rate rollback pressure due to good experience, those margins, as we alluded to and guided to, are going to be under some slight pressure heading into '20.

What's interesting is those factors that you cited when the frequency picked up, arguably are still around and in place. Yet it seems like the frequency settled back down again. The impossible question is, why do you think that happened? I know there's no answer, but I am sure you guys have thought about it.

I call it the demand surge, right? So when you needed workers, there was a demand surge, primarily rated, I believe, to tax reform and some of the stimulus. And then what happens is people get trained, as they get more experience, as safety always continues to improve, it reverted back to the long-term mean.

Let's talk about small commercial. You're obviously a leader in that area, but you're not standing still. You continue to make investments there. Can you talk about some of the more recent investments you've made and how they could drive growth going forward in that platform?

Sure. Yes, we're clearly, really proud of what we've done with small commercial over an extended period of time, right? And it's been about 30 years since we launched that segment of the business. And it's one that we've constantly invested in for innovation for customer experience. I think there's 2 examples that I can give you just quickly, Jay, without sounding like a commercial, unless you want me to sound like a commercial.

Go right ahead. You got a platform, might as well. We're not going to charge it for you.

Thank you. As we rolled out what we call next-gen Spectrum, which is basically our BOP policy, our business owners policy that combines property and liability insurance. We've had a BOP out there for a long, long time that is used by many different classes of business in the industry. But this one was basically a modular design. So if you think of Amazon in your shopping cart, we're able to present to agents that are quoting our BOPs a more modular approach of sort of what is a baseline policy, baseline from a liability side. And then all the additional coverages and features that you can add, whether it be cyber-enhanced protection and liability. Industry-specific recommendations for like restaurants or dentist office, so we really customized it so that depending on what type of customer you were, we're able to present to you optional coverages, price points for those optional coverages that protect your business more holistically on a more transparent basis, and clearly, with more speed, so that you know sort of your running total of what your spend for your policy is. So we think it will revolutionize the BOP business. And we weren't going to be able to do that until we basically invested in some core platform capabilities of how we administer policies, how do we quote. So those all investments started 4 or 5 years ago on a baseline basis that allowed us to innovate today with our next-gen Spectrum. The other thing that I would just say and I know everyone in this room knows it, but the power of data and analytics is real and our ability to cut down questions from, let's say, 50 years ago down to something less than 10, to be able to pre-fill data that makes underwriters and agents jobs easier, to be able to use imagery and underwriting, just the advancements in data and analytics that's embedded into the small commercial underwriting process is pretty impressive.

Just interesting, you mentioned Amazon. People are so used to buying goods that way, especially younger people, whether it's the phone or the computer, but that whole process of buying something with a card. And so, I guess, you're tapping into that. And I think certainly, as these younger people come up in the industry that's a natural thing for them.

Sure. It really is. And the way we really present it, and if you want, you can go online and see it, is it's sort of the base, sort of the good, the better, the best, and then you could see the optional coverages that are attached to each of those different characterizations of good, better and best.