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

Great. Good morning, everybody, and good afternoon for those in Europe. My name is Mike Zaremski, and it's my pleasure to introduce Chris Swift, Chairman and CEO of The Hartford; and Beth Costello, Chief Financial Officer. The format of today's presentation will be of a virtual fireside chat. I'll start off by quickly saying that it's been a roll in the past year for most everybody, to say the least. I've been making the case to investors that despite COVID-19 headwinds in parts of the business, the P&C industry fundamentals are sound, and there's actually underlying positive momentum in many areas. I was looking at The Hartford's 2022, for example, consensus earnings forecast, for example, and they've indeed increased 13% off the kind of June, July 2020 lows when COVID uncertainty was at its peak. So with that, why don't I pass it off to Chris to make some opening remarks as well, and then we'll get into the Q&A.

Thank you, Michael. It's great to be with -- Beth and I are -- great to be with you at your virtual conference here, and we look forward to our conversations. I just thought I'd summarize a couple of key facts about The Hartford that maybe your investors would find helpful. First, in spite of all the challenges in 2020, I thought the organization performed exceedingly well and persevered through a lot of challenge. In the end, we delivered over $2 billion of core earnings, the 12.7% core earnings ROE, and we are executing well on our key initiatives, including our expense savings program The Hartford way. The guidance we provided for 2020 from our core drivers perspective, I think, points to commercial lines' ability to expand margins and grow in the top line. For personal lines, I would say, I think margins will remain healthy there, while driving patterns begin to revert to normal means going forward. And as we discussed, group benefits, first half of the year is going to be significantly impacted by what we think is going to be continued excess mortality due to COVID, but the underlying fundamentals of group benefits remain very, very, very solid. So -- and then the last point is we have begun to execute our capital management program, which, as we described, is $1.5 billion of buybacks through the end of 2020. So we feel good about returning and buying back shares to investors and from investors. So overall -- my overall feeling that I would want investors to have is I feel very optimistic as we head into 2021 and our ability to perform, create value for shareholders and, ultimately, remain a top competitor in an environment where there's a lot of good competitors out there. But we're looking forward to competing every day for hearts and minds of agents, brokers and customers.

Okay. That's a great intro to kind of maybe set us up for some of the questions that I also -- we surveyed some investors over the last couple of weeks, too, so some of these questions are from them. Maybe Chris and Beth, I think most investors, at a high level, do understand that Hartford's growth trajectory, if we're thinking about kind of premium and top line growth, has been steadily improving along with GDP levels lately. Maybe you can kind of talk about some of the pluses and minuses you're seeing or thinking about in both maybe P&C and group benefits. I know there's nuances there, so we don't have to touch on every business line but maybe the main points you'd like to get across.

Sure. I think what we tried to say, particularly in our last investor call with fourth quarter earnings, Michael, was I think you got to put everything in context to where we are today. And first, I just think about what is the macro backdrop. One, we're still in a pandemic. We're approaching, hopefully, 15% of our population being inoculated with the vaccine, but there's still going to be some pressures in various sectors of our economy as we still deal with the pandemic broadly defined. Second, what I would say particularly is, for us, Beth and I have always talked about our firm being an employment-centric firm given our large presence in workers' comp and long-term disability. Those lines are still performing very well from an overall profitability perspective. But when unemployment really spiked as it did in the second quarter, and we're now just beginning to sort of build out. I mean there was a little top line pressure as people reduced payrolls as exposures shrank. But listen to the fed yesterday, I'm sure, like you, I mean if the economy really can grow 6% next year, I mean that is going to put a little bit of a lift, I would say a lot of lift, particularly on jobs and wages, which, again, exposures should come back into our premium base over -- building over the year. I think, again, most of this is probably the second half of the year, and that's why I think the first half of the year and the second half of the year in 2020 is going to be dramatically different. And then third, Hartford specific, I think you know more than most. I mean we've been hard at work in improving the franchise, making investments, doing M&A to add capabilities, building our own organic growth capabilities with new products and services. And I really feel like it's all coming together very beautifully next year where our agents and our brokers really know our expanded capabilities and are looking to use more of our products and solutions with our shared customers. So you think about the industry verticals, you think about global specialty, you think of some of the improvements that we've focused on in middle market, I think all that is coming together to have a margin improvement story and a top line growth story. One business I would call out just because I know it gets a lot of attention is Small Commercial. As you know, Small Commercial is a gem of a business for us. We've been at it for over 30 years making investments, and it's a marketplace we know very well. We know distribution very well in there. We know all the fintech start-ups very well and watch things closely. But I would say that business is starting to normalize, and we'll pivot again to top line growth as exposures and as payrolls come back on, particularly in the second half of the year. We're still seeing some minor exposure shrinkage through year-end. I think premiums were down about 1% in Small Commercial overall. Just -- again, not a bad outcome just given the environment, but I do feel that's going to pivot back to sort of modest growth going forward. And yes, workers' comp is still important there, but our growing -- our spectrum product, our business owners' product that we've totally revamped and we think is really, really innovative is -- has grown 12 -- almost 12%, 11% in the fourth quarter, and I expect that double-digit growth rate to continue because it's such a revolutionary product. So that's just one example in one of our businesses, Michael.

Great. And I guess on the recent earnings call, an investor asked me, I think your colleague used a language and said transformed Middle & Large Commercial over the last year or 2. Maybe you can kind of touch on what that means.

Yes. I think the way I would describe it is I think we finished year 1 of a 3-year process, project plan to really transform Middle Market from, I'll call, a couple of dimensions. First, just how we underwrite product there; two, efficiency; and three, again, a little bit of growth in profitability. On the underwriting, the way to simply think of it is right now, it's a slow process for us. And I think most of the middle market players out there, a lot of manual activities and spreadsheets going back and forward. So we're really ultimately looking to simplify the underwriting process with advanced data analytics, prefill, using digital tools to ingest data, have more commonality in our processes from agent to agent, ultimately trying to reduce our speed and turnaround times because sometimes -- and very complicated lines what you're quoting, workers' comp and GL and property altogether, it could take 20, 25 days to get back to an agent. So we're really trying to get that down, and we've gotten most of our comp turnaround time down into that 4- to 5- to 6-day time period and speed counts in this business and ultimately efficiency. So that's the second thing is how can we be more efficient, how can we have a better customer experience for our internal employees and our agents. And then third, the profitability actions that Doug and Mo Tooker over -- took over the last 18 years to really tune some aspects of our Middle Market book. It was -- it's painful to do, right, shedding business or raising rates, but you have to if you're going to maintain or -- and try to grow your margins. So I would say we're largely done with that. There might be a couple little spots that we still need to tune a little bit in 2021, but that's what we mean holistically that we're trying to transform Middle Market in the way business gets done and, ultimately, our profitability and growth profile.

Just to be clear, Chris, you said 18 years. I think you meant 18 months. But...

Yes, 18 months. Yes.

And Chris, just a follow-up. The first part of kind of this transformation, to me it sounded kind of like the digitization of some of the business processes. Are you -- just curious because it's tougher for investors to get kind of under the hood and really understand how the brokers are transacting with the likes of Hartford. Would you say Hartford is kind of trying to be a first mover in this digitization process? Are you playing a little catch-up? I'm just trying to get a sense of where you feel you're positioned in that kind of Middle & Large Commercial space.

Yes. It's hard for -- it's really hard for me to sort of have a good picture on just how others compete, but I would say we're probably in the first-mover cohort. I mean there's others that I'm sure are working on things. Middle Market & Large Commercial is a very important segment to us. So as I said, over the last 18 months, not 18 years, we've been focused very, very keenly on improving the overall results and the business processes in that area, and we're going to continue to do that. We still got 2 more years to go but committed to fundamentally changing the way we interact with our agents and brokers.

Okay. Great. And I guess I asked because I sense from speaking to some brokers that with -- on the micro commercial, I call it a very Small Commercial, you guys are ahead of the pack, and it's an easy -- right, it's an easy process for them. So maybe switching gears to The Hartford expense initiatives that are well under way. Maybe you can kind of offer some insights into what are the -- it's a lot of savings. It's going to benefit investors. It is benefiting investors. Do you -- is there any cyclicality element to this where some of it, if we get into a soft market, can maybe go away or maybe even you want to give back some of these savings to the consumer to elevate the natural rate of growth?

Yes, I'm going to let Beth comment also, but I would just give you the context, Michael, of, yes, we've been at this, I would say, really hard for the last 5 quarters now and feel really good about where we're at. I think we said early on -- I mean we're trying to reduce expense ratios into the ranges that we've talked about. And if top line expands, that's great. That's additional lift that will probably drop. But if also top line gets a little soft, we still want to then extract the dollars that produces that expense ratio outcome. So we've geared it 2 ways to ultimately achieve dollars and expense ratio outcomes because that's important. We still feel, again, the investments that we've made over the years in our overall operation, whether it be technology, whether it be digital, whether it be advanced data and analytics, those will continue. But we wanted to drop the majority of the benefits in this program to the bottom line over '21, '22. And then we can recalibrate really where we're at from an overall run rate and overall investment need perspective in '23 and beyond. So I know that's looking out just probably quite a bit for some but just to tell you our mindset. So Beth, what would you add into your perspective of the program?

Yes. The only thing that I just would reemphasize is we were very intentional and not just talking about this as a dollar amount of savings but also what we expect to see from the expense ratio. Because I think sometimes for investors, it can be really hard to find the dollars of savings because there's other things that can be pluses and minuses. So we're really anchored on that overall expense ratio improvement, in P&C and then also in group benefits and a little bit on the loss side as well because a part of this initiative and the savings that we're generating is going to come from how we adjudicate claims and the expense associated with that. So it really is across all areas of the company, but the true proof as to whether or not we're making progress is going to be in that expense ratio because that is what we are focused on.

Understood. And a quick follow-up. Were there any kind of tough elements to this in terms of attrition and people? Or is this kind of a plan that was more on the digital kind of technology side that -- where tougher decisions didn't have to be made in terms of flattening the structural organization [ somewhere ]?

Yes. I mean it's a combination. I mean, obviously, to achieve the savings that we're talking about, there are people impacts. We are a service business, and so a lot of our costs are people. And so some aspects are just looking at the organization and how it's structured and so forth. But this is all about being sustained, and so to sustain thing is you have to change processes. You have to improve them. And so a component of this is doing that as well. That's why we were very clear in showing there's some invest dollars that are going into achieving this program because there are things that we need to invest in to -- as you commented on digitization and things of that sort that will get us to our ultimate goal. So it's always difficult when you go through these types of initiatives. But as we look at what we think it will do for us in the long run and improving our overall efficiency, improving customer experience because, again, we don't want to take any steps backwards in that area and really looking at this as a way to continue to improve that experience across all our businesses is top of mind as we look at executing across roughly over 600 individual initiatives that make up this program.

Yes. That's helpful. Maybe we can touch on -- Chris, you mentioned, I think, more than half of the people listening today follow you rather closely and understand that the drivers of the improved commercial P&C margin outlook. Maybe you can kind of talk to what's driving the improved outlook. I think some of it is what we just talked about. I think there's other elements as well.

Yes. I would -- I'd share, Michael, as you know, the guidance that we provided, particularly in commercial, I'll focus on commercial and we could talk about any other of the businesses. Almost 3 points of margin improvement as we measured it on an underlying basis ex COVID between years, which is pretty meaningful. If you really then peel that -- the first layer, I would say approximately 2 points of that is loss ratio improvement and 1 point is expense ratio. And if you peel it even more, I think the biggest contributors in sort of rank order are Global Specialty, Middle Market and Small. We've talked quite a bit that we have a large workers' comp book that is performing exceedingly well, but we don't expect -- we expect more of the same in 2021, maybe a little less negative on rate pressure in totality but not a huge turnaround in Small from a margin perspective. Middle could be flattish to maybe slightly up, just we have a little bit more freedom of rate in Middle, but I think the margin expansion is -- will be driven by, obviously, ex workers' comp but mostly coming from Global Specialty, our specialized industry verticals, some of our excess liability, our umbrella product lines and then the rest of Middle Market. So again, I think the rate environment we see is still going to be healthy. A lot of different reasons for that, which we've talked about, but I still think there is a lot of pressure on social inflation. The 10 years, people think it spiked, but you got to put it in context. It's still below 1.5%. So we're still going to be in a low environment, and I think that still points to a very friendly rate environment for carriers. I still continue to believe in the next 18 months, for sure.

Yes. That's helpful. Maybe let's switch gears then, Chris, to the group benefits. I think investors understand the mortality impacts you spoke to. And it -- is it fair for us to, unfortunately, look at kind of mortality rates on our -- on the screen to get a sense of when the -- when that impact can fall off a lot?

Yes, yes. When does it stop, right?

Yes.

Yes, you're right. I mean, what, we're over 500,000 deaths today estimated by CDC caused directly by COVID. But again, I think what we've -- all industry participants have talked about is the concept of excess mortality due to COVID and just people not taking care of themselves during the pandemic here and not doing the regular maintenance on a human body that is required so that you remain healthy and don't get sick, and you discover things more quickly. So we know where we're at. I think your question ultimately is, as you said, when does it stop. I think we were transparent and clear in our earnings call at year-end that I see this as more of a first quarter impact, first half of the year, but 75% of the impact in the first quarter and then continuing into the second quarter. The dollar amount that we gave on a point estimate of our excess mortality, which you know there's a range around but sometimes it's easier for investors just to anchor around a point estimate, is $160 million of excess mortality, again occurring mostly in the first half of '21. So I think that's where we're at. And all the data that I follow, and I'm sure you do too, is the vaccines are beginning to bend the curve of infections. Death rates will follow, but you could see them, particularly after the holiday season, and I consider holiday season basically November and December, there was a spike. And now that spike's starting to come down. So there's encouraging signs. But again, we still have to keep our guard up as a nation, as individuals and contribute to that overall healthy environment and recovery from COVID. The only watch item is the multi-variants that are coming out of the different parts of the world. And is there a second spike due to the variations of -- and the mutations on the virus? I don't know. But I still think this is a first half of the year -- or first half of '21 issue, and we should be in a much better position as we revert back to normal in the second half of '21, Michael.