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

Good morning. I'm Tracy Benguigui, insurance analyst at Barclays, and I'm pleased this morning to have a fireside chat with Doug Elliot, President; and Beth Costello, EVP and CFO from The Hartford. Good morning, Doug and Beth.

Good morning.

Good morning, Tracy.

Just quick housekeeping items, and then I do want to get some big picture thoughts from Beth and Doug. Just a reminder, on the left side of your screen, you could submit questions through the Q&A box. We also have our audience response system, which is our polling questions, and I will strive to read those results in real-time, if you could kindly submit your answers. With that, maybe I'll turn first to Beth, who will then turn it over to Doug for some big picture thoughts on the current macro environment for Hartford.

Great. Thank you, Tracy, and very happy to be here this morning. It's probably an understatement to say that 2020 has definitely been a unique year. And when we talk about it internally, we bucket things into sort of pre-COVID and post-COVID. And if we go back to the beginning and the start of the year, we were very pleased and continue to be pleased with the progress that we were making on the performance of our underlying businesses, including the integration of Navigators and all that was going on there. And I know Doug is going to talk a little bit about that in a few moments as to what we're continuing to see in the marketplace and the momentum that we have there. We also started the year planning to really take a hard look at our overall efficiency of the company. And as you know, it positioned us to be able to announce in July the program that we call Hartford Next, which is really focused on improving our overall efficiency ratios as measured by expense ratios in our P&C and Group Benefits business. This is a company-wide program. It consists of over 600 discrete projects that we have very detailed plans and milestones that we're executing to and positions us well to achieve our objectives by 2022. And I think our disclosures around this program as part of our earnings release in Q2 provide a really good road map for investors as to what we expect. As it relates to COVID impacts, obviously, we saw a lot of activity there in Q2. And again, I think we laid out very clearly in our disclosures where we took action and the reviews that we did relative to our book. And I know later on, we'll probably talk a little bit more about COVID impacts and what we might be seeing in Q3. And then lastly, as it relates to investment returns, obviously, an area of focus given the low interest rate environment that we see ourselves in, as we have mentioned, we are holding a little bit more liquidity than we normally do. And obviously, that has put a little bit of pressure on our investment returns. But on a positive note, on the second quarter earnings call, I had commented that our limited partnership portfolio, we were expecting to potentially see some additional losses there in Q3, not to the same level we saw in Q2. But just given sort of the continued economic strain, I thought that, that would still bleed through some of our valuations. And really pleased to see that as we've been getting statements in, not only are we not seeing losses, but we're probably going to see returns pretty consistent with what we saw last third quarter, which on an annualized basis was about 15.3%. So significant improvement there for a variety of reasons that we're obviously very pleased to see as we think about how that portfolio performs. And I think on that positive note, I'm going to turn it over to Doug to give a few comments on just underlying business performance.

Thanks, Beth. And maybe to start with 6 months into COVID, we feel very good about how we're operating in the environment from both an employer, employee, broker perspective. So I think we're firing on all cylinders. I continue to be encouraged with the financial progress we're making in Global Specialty post the Navigator acquisition and also our improvement in Middle & Large Commercial. Very encouraged by continued strong pricing in those segments, which I'm sure we'll talk more about this morning. Excellent margins continue in Group Benefit and Small Commercial. And in closing, a couple of comments. One is, we feel like we've got the products in-house today, post all the building we've gone through the last 5 years to compete successfully over the next 3 to 5 years. And I'm really encouraged. I look at our talent across the board, I feel like we are -- have never been in a stronger position. So I'm bullish on our future. I look forward to engaging in the Q&A. But thanks, Tracy, for setting this up.

Excellent. I think you -- both of you actually gave a good preview of what's to come in this morning's discussion. Maybe just to quickly hit on COVID-19. There's been a wide range of industry losses ranging, I guess, as low as $30 billion to $100 billion. And given the longer tail nature of a pandemic than a natural catastrophe, the numbers are not coming in as fast and furious. So unsurprisingly, if you look at company reporting, the math does not add up. Do you think insurers are adequately putting up IBNR at this point? Or are their hands tied to the difficulty estimating loss probability with any certainty?

Yes, a great question. And I know an area that has garnered a lot of attention in China do that reconciliation. And obviously, it's hard for us to comment on what others are doing. But if I look at the way we've approached it, in the second quarter, we did a very thorough review of all of our contracts where we saw the potential for exposure. And then we looked very closely at things like our workers' comp book, where the activity could be a little different than what you might normally see based on some of the actions that various states were doing. And so as we put our estimates together, we took all that sort of uncertainty into consideration as we established our loss picks for the quarter. And as I had commented on when we've disclosed our results in the -- for the second quarter, we did book a higher percentage of IBNR reserves than we typically would have trying to take that into consideration. And we also looked at things that weren't just loss reserves. We made adjustments on our audit premium receivables. We made adjustments on bad debt. And as we sit here today and we look at the picks that we made, we feel very good on all fronts. I think the thing that is a little different about this, as you commented on as it relates to just sort of normal catastrophes that folks think about, is there is an ongoing exposures that are going to continue to be impacted. So for example, in our book of business, we would still expect to see in Q3, reserves needed for workers' comp and in our disability book because, again, you can't book reserves in Q2 for incidents that are going to happen in future periods. And so I think that, that has maybe at first caused a little bit of confusion, but I think people have been able to get their head around that. Other areas like our property book, I would not expect to see anything material in that regard because, again, those exposures have already happened and we booked those in the quarter. And then from some of the other areas that we had impacts in like audit premium, like bad debt, we've been very pleased with what we've been seeing through Q3 relative to those decisions that we made and would not expect to see significant movements in some of those exposures. I don't know, Doug, if there's anything you'd comment on that maybe I missed.

I would just say that we initiated a very exhaustive process. In fact, I think for the last 2 months of the quarter, we met weekly. That's what we're doing this quarter. Tracy, it is an evolving topic, I think about right now as we sit here today and the fact that the New Jersey presumption language now goes into law. We have been working on New Jersey. We understand the language in that contract and now we're looking at our books of business to see if there are any adjustments that need to be made as we move into Q3. So this is certainly evolving. And all we know is really our own book of business, which we've exhausted down through the details.

Okay. Great. Maybe a good time to turn over to our audience response system. The first polling question is, on the top line perspective, will a drop in insurable exposures from an economic shutdown outweigh hardening pricing for Hartford? Not likely, equilibrium or likely, and their results are not likely at 50%, followed by 25% equilibrium, 25% likely. I guess that's not too dissimilar. I asked the same question this morning to Alan Schnitzer. Maybe I'll just get your responses to that, these opposing forces where you have some hardening on the pricing side, but you have to kind of level that off on the recessionary pressures. Net-net, what is your view of that playoff? Maybe I'll turn that over to Doug.

Absolutely. There are absolutely 2 opposing forces here. One, I commented on in my opening statement that we're very encouraged by what we're seeing on the pricing side. On the other note, there's no question a healthy economy is good for our business. And a healthy small business economy is very healthy for what we consider a top of market, small commercial franchise. So I'd like to see both, if I could have it both ways. We see encouragement as the economy reopened. So I'm more optimistic than I probably was 60 days ago about what we're seeing in July and August relative to production. But as we all know, we're not back to full health yet, and we look forward to those days in the coming weeks and quarters ahead.

Okay. Great. Maybe just staying on pricing, get your crystal ball, the length and the size of this hard market cycle. And I know that's a very loaded question. But maybe if you want to break it down by business line.

Yes. Let's start with July and August. So we're encouraged with the continuing trend of firm pricing. So as we look through our book of business over the last 2 effective months, equally encouraged as we were in the second quarter. I think Chris Swift, our CEO, and I have commented publicly that we expect this firming price cycle to have legs. And we just go back and think about the yield curve, which has been a growing dynamic with all of us to face. Clearly, across our duration lines that will cause the extended need for price. So as we think about loss trend, we think about where the balance sheet is across the industry and the growing -- the need over the last couple of years for pricing, we think this market has legs clearly into '21, and then we'll have that discussion further with you next year.

Okay. Just because a lot of the dialogue on pricing has to do with this perception of loss cost trends. I guess in prior cycles, it was really -- the impetus was replenishment of capital. So staying on that theme, if we're in a race track, who is ahead, pricing or loss trend? And I'm thinking about social inflation in COVID, in particular.

Well, we're very bullish about what we've been able to achieve on the pricing with our casualty lines. And I'll start with our Global Specialty segment with our excess umbrella and other casualty lines. I really believe that we are on top of loss trends. Our pricing is exceeding loss trend by several hundred basis points. It's a long duration line. So we will watch experience over a period of time, but I'm very confident today that we're in a good spot on pricing, and we are now on the positive side of improving our performance. As you move down to the primary casualty lines, I think that is an area that continues to need rate. As I mentioned on the second quarter call, we're encouraged by the achievement in Middle & Large Commercial of improved higher single-digit pricing in casualty. So I still think that's on top of trend, but I'd like to see that continue for a series of quarters, and that's in our objectives as we kind of march through the latter half of 2020.

Okay. So in other words, are you optimistic that you will see underwriting margins expand?

I think across the board, I would say to you that our pricing is on top of our loss trend. And we feel very encouraged by that because it's been a while since I could say that across the casualty line. And obviously, drivers on the property side are more involved with weather and other events. But across casualty, I think we, as a company, are making a good stride across those lines of business.

Okay. Great. And I guess just talking about pricing as too one dimensional. What about terms and conditions? Any comments there on the strength of that?

Yes. Equally important to our journey, particularly, with our Global Specialty book. I've talked about what we're doing with our lender profiles, clearly constraining limits and looking carefully at attachment points across our book of business, across lines, financial lines, D&O, across our excess casualty books of business. So it's a more difficult improvement item to predict, but one that we -- based on all the signals we watch, headed in a good direction. And we're getting more price per pound of product we're putting on the street. And that will lead to better outcomes in the financial results over time.

Okay. And you mentioned in some of your earlier comments about general liability. Just tying this into limits or terms and conditions, it seems like the $1 million/$2 million limit profile hasn't changed since the mid '80s. There may even be some risk appetite, somewhere we saw commercial auto to take that limit profile up given it's really hard to place that risk at that working layer. Would you have any appetite to expand that limit profile?

Yes. I guess I would suggest that when I think about your question, I'm thinking it more in terms of specialty. I would remind you that we also have a big book of core main street Middle Market that we write the casualty. We underwrite aggressively the casualty and we have seen an improvement in pricing in terms in that core casualty Middle Market segment, not as robust pricing as we've seen in the upper end of Global Specialty but clearly strong single digits. So pleased about our progress there. And then obviously, in the Specialty segment, which is where you're driving a significant advancement in price, a very different marketplace, both on the underlying piece and also in the excess layer towers.

Okay. Great. So let's see how that all plays into the audience's view of your underwriting performance. So the next polling question is my expectation for Hartford's underlying combined ratio, excluding catastrophe losses and prior year reserve development, which was 95.1% in the first half of the year. For 2021, is -- and the -- I guess, the choices are -- oh, gosh, my screen just went a little crazy here. Modest improvement, significant improvement, no change, modest deterioration or significant deterioration. So the leading, I guess, response is, there's some optimism, significant improvements, followed by modest improvements. Maybe I'll get your reaction there on the polling results and kind of tying into your earlier comments about underwriting expansion.

I guess I'd start with the fact that we feel we've made significant strides in our overall profitability over the last 5 years. So I think we start from an excellent spot when I put our margins up against others in the top quartile. Secondly, I appreciate the optimism. We're equally optimistic about our book of business, and we feel good leading into the second half of the year. As I mentioned, pricing momentum continues. We're working hard on the underwriting side. So I'm bullish, too. This also is a different world, right? We're operating in a COVID-19 economy that we haven't seen in a long time. So yes, I'm thoughtful. I'm optimistic. But I'm also careful as the world is presenting challenges daily that we need to make sure we're thoughtful about.

Okay.

Beth, do you want to go and talk on anything?

No, I think you captured it really well.

Okay. Great. We'll have to talk about cats. I mean third quarter has always been a very active quarter for cats, but what's interesting is this quarter seems to be active -- more active than usual, both on a number-wise and dollar-wise. Do you have any early insights of your cat experience so far?

Yes. So obviously, Q3 has been a little bit busy. And when we look at July and August combined and what -- where we were impacted by various events and we look at what we posted last Q3 for cats, which was about $106 million pretax kind of for the whole quarter, we're probably running through August just a bit above that. So you think we still have September to go. And obviously, there's been some activity. We're watching the fire activity, obviously, out West very closely and would expect to have some exposure there right now, not near the levels that we saw in some of the wildfires in '17 and '18. But as you know, those things can change. And then obviously watching what's happening in the Gulf and all of those impacts. So yes, definitely a busy Q3 based on where we stand today.

Okay. Great. Doug, I've heard earlier commentary from you that you're a little bit skeptical on workers' comp reaching a pricing tipping point since there's some downward pressure by states. But I guess what's encouraging is the latest CIAB data showing that rates have flipped and now slightly positive. So even so, I'm curious if workers' comp pricing rationalization is less orderly, and we will ultimately see a meaningful catch-up period. And I guess my reference for a catch-up period because it seems like the NCCI had a memorandum out on July 16, which would limit, I guess, a company's ability to really consider COVID-19 within their rate filings. So how do you kind of tie that all up together? And do you have an updated view of where we are on workers' comp in the pricing cycle?