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

Thank you all for joining us for the Bank of America Financial Services Conference. This is the first session of the day after the preliminaries by Mr. Moynihan. And really, we couldn't be happier to have Hartford Financial being the first insurance company to present here. Unfortunately, we had both the CFO, Beth Costello; and the CEO, Chris Swift. He's under the weather today, and we wish him -- he's not really -- he's going to be fine. But in the end, he's not here. So we'll deal with it. I just want to make a few preliminaries. I had like a little biographical information. We'll not read Chris' biographical information. But Beth Costello was named CFO of Hartford in 2014. I mean, in terms of my sort of view, I mean, I look at Beth as the architect of the Talcott Resolution. That restructure made it possible for the company to exit the annuity space and really was the pivot into where Hartford is today. She joined The Hartford in 2004 from Deloitte & Touche. She's the executive sponsor of The Hartford’s Flex-Abilities Network, dedicated to advancing the philosophy that every person is capable of a full and productive work-life. She is on the Board of The Village for Families and Children in Hartford, Connecticut, dedicated to building strong families in the Greater Hartford area, including foster care and addiction services and whatnot. And we're really pleased to have Beth here. I want to make a point that the team of Swift and Costello assumed their current roles on July 1, 2014. In the nearly 9 years that have passed, Hartford shares have outperformed the S&P 500, the XLF and pretty much most of the closest peers. I'm certain of the closest peers, definitely. Obviously, there's idiosyncratic companies. But it's been a fantastic story. And the leadership is important to make that happen. And all the team at Hartford should be proud of its success. And so thank you for coming, Beth. You might have some preliminary remarks. And then we'll get into some Q&A.

Well, thank you for all of that. And I'm sure Chris is going to be really disappointed that he wasn't here to hear all of that. But I'm really excited to be here. Look, we were just talking about love that we're here in-person. The last 2 years, we've been virtual. So it's great. And I just wanted to start with saying that from The Hartford's perspective, we really feel that we had an outstanding 2022. When you look at our core earnings growth, 14%, core earnings per share growth of 23%. So again, really showing the leverage that we're getting from the shares that we've been repurchasing. Our Commercial Lines businesses performed very strongly with top line growth of 11% and an underlying combined ratio of 88.3%, which is just outstanding. Group Benefits also saw top line growth and their fully insured premiums are growing 6%. And we saw core earnings margin of 6.5% for the year. So just feel really good about how our businesses are performing. Our investment portfolio obviously contributing to that as well. Personal Lines, as we all know, is an area that is a focus. And we're restoring profitability, and we're on the track to do that. And we've been impacted by many of the same things that others in the industry have been. So I just feel really good how we ended '22 and our momentum going into '23. And as I said, really happy to be here. And as you said, Chris is very disappointed that he couldn't join us today.

Well, we're just happy to have you. And certainly, Chris is listening. So thanks, Chris. So Small Commercial, as a concept, it means different things to different companies. What is the ticket price of a Small Commercial policy? How big is the market share at The Hartford? What's the opportunity for having greater share of your choice markets where you want to go in?

It's a lot into your first question. But Small Commercial is an area that I think that undeniably we excel in. And if you look at the growth that, that business has been posting, and more importantly, just consistent and sustained profitability. It really has just been a growth engine for us. When we look at our new business last year, a little bit over $700 million, just a phenomenal result. And we, at The Hartford, we define small business as those businesses that have payroll less than $20 million, total revenue less than $50 million. And for like insured property, think of any one location as also being less than $20 million. And we size that market at being about $110 billion. And so when you look at what we posted in 2022, a little over $4.6 billion, we're obviously a significant player there. And I think our new business shows that we're continuing to take share. This is a team -- and I think many of you have had an opportunity to meet Stephanie Bush, who runs that organization. It's a team that does not sit still. So they have had great success over the years. But they're always looking for the next thing. And that momentum, we continue to see. So we see continued opportunity there. I know, for those that listen to our year-end earnings call, Chris talked about some of the things that we're doing in the E&S market in that space, which we also see as an area of growth. So I would just say investors should expect that Small Commercial is going to be -- continue to be an area that we excel in.

And what's the future of Small Commercial? I mean, Travelers bought Simply Business. Berkshire has developed their Berkshire THREE program. NEXT Insurance is a darling of the fintech world. I mean, I call it small biz book. So I go try and buy a direct policy from Hartford, it sends me the small biz book. Is that an experiment at this point in time? Is that the future? How should we think about the role of the direct-to-consumer small business policy?

That's a great question and one that we talk a lot about. We've been investing in our direct platform for many years. So I'd call it more than an experiment at this point. I would say the volume still predominantly comes in through agents. So we also have been investing in our agency platform as well. We talk a lot about the fact that for new business, oftentimes, new business can go straight through on the glass over 70% of the time. So we've made it really easy for agents to do business with us. And we continue to enhance those capabilities. People talk about questions and how many questions to ask. We look at the same things. It's all about when you think about an agent trying to place a piece of business, to the question you asked which I didn't answer, average size premium is small, right? And so the more volume they can do, the quicker they can do it. And the fact that they can go back to their customer and say, "Here's a quote from The Hartford and The Hartford is going to stand by it," not go back and re-underwrite it or anything like that, that's really impactful. And so we've invested a lot in that. But we also see the opportunity in the future for more direct-to-consumer. And so we've also invested in that platform as well. And there are things that we do to look at ways to drive business to the sites, paid search and things like that. But where we sit right now, I would say the majority of customers still come to us through an agent. When that will change is to be debated. But when it does change, we're ready for that. And I think we will equally be as successful.

Well, let's pivot into some basic questions, market conditions right now. On the one hand, we've just been through a couple of years of elevated pricing. Reinsurance prices are suddenly up again, which probably will cause pricing to go up again. Where is the equilibrium in the market on the pricing in your core lines of business? And are we in a new phase of the market? Are we still in continuation to what we've experienced in the last couple of years?

Yes. So as we look at the momentum going into '23, we'd say for the most part, conditions are kind of the same. So lines like property and auto, GL, we're continuing to see very healthy price increases, keeping up with and, to some extent, exceeding loss trend, which is important. You've heard us say that our view going into '23 is that we're really looking to maintain the slightly improving margins. And when we look at the momentum in those areas, we see that continuing. Some of the areas that we've talked about that maybe feel a little bit more pressure is there's been a lot of discussion about D&O and public company D&O. I'd say for us, if you look at our financial lines in general, gross premium is about $1 billion. And the public D&O portion of that is about $200 million. So it's not a big area for us. But that is an area where we have seen pricing momentum change. And we are seeing significant rate decreases in that line. And then the other line that we talk about is workers' comp, obviously, a big line for us, a very profitable line for us, a line that we feel that we're very uniquely positioned to continue to perform very well. Obviously, rates have, from a pricing perspective, felt pressure there, although we have seen a lift from average wage growth, which has obviously added to the overall premium that we've seen there. So that is an area that when we talked about our view for 2023, and we provided outlook as to what we expected from an underlying combined ratio perspective in Commercial Lines, we said an 87 to 89. But within that, we said that we're probably feeling like about 0.5 point of pressure from workers' comp. And even with that 0.5 point, again very profitable, continues to be a growth area for us, not a significant change that we're seeing at this point.

So making predictions is really hard to do. And so when you think about workers' comp, I think that there's a general sense that despite it being very profitable, that one's very profitable and underpriced simultaneously. There's been no rate increases in a long time, decreases mostly. And obviously, macro conditions have helped the profitability of workers' comp. If we look 5 years into the future and think about the regulators and then -- and their role in establishing the price, when the macro conditions ameliorate that might make it less profitable, what recourses Hartford have to maintain the profitability of that line over the years to come?

Yes. So I'm not going to make a prediction per se on what will happen in 5 years. I will say though that we have navigated through market conditions on workers' comp for years. And if you look at our performance over a period of time, we've outperformed from a loss ratio perspective by about 5 points. So I do think, and we've talked about this, that as we look at some of the COVID years starting to fall off, where some of the experience was maybe very favorable from a frequency perspective, that will start to work into rate filings. And we do expect at some point to see a pivot there. Obviously, interest rates can be a component of that as well. But I'll point out that as interest rates went down, it wasn't as if pricing was going up significantly to compensate for that. So there's a lot of components that go into managing a workers' comp book. We also are very selective in what business we're putting on, what classes of business, where we see growth. In our Middle Market business, we've actually seen our workers' comp margins improve over this period because we've been doing a lot to re-underwrite the book. And that business where you really are underwriting account-by-account and looking at loss experience and taking that into consideration, we'll be able to manage through that. So it's a long way of saying, Josh, I can't predict exactly when things might turn. But from where we sit, it continues to be a line that we know how to manage, that we can maintain profitability and the returns are very strong. If that starts to pivot at some point, that will go into our view as to what new business we want to put on, how we think about renewals and all that. Because we are a company that is focused on underlying margins at the end of the day.

And if we think about the trends underlying the success in workers' comp, part of it is this fantastic job market we're in right now. To the extent that unemployment retreats back from all-time lows, is that an issue? I mean, clearly there's a premium issue. But do we notice over time that increasing unemployment leads to higher claims? And as an aside, is there any correlation with the claims experience from the disability book during those periods of retrenchment of the economy?

Yes. So I'll cover each separately because it's a little bit different, the experience that we see when we look back. When we start with workers' comp, unemployment going up in and of itself, we don't see as a significant trigger to additional loss activity. Again, at the end of the day, someone being injured on the job still has to prove that they were injured. And so yes, you can have maybe some things on the margin. But it's not as if you'd expect to see a huge influx of claims just because unemployment was going up. What we actually monitor more closely is the opposite, which is when unemployment starts to go down, having been up, and employers are hiring new employees. Because our data would suggest that a high percentage of workers' comp claims come from workers who are injured their first year on the job. So we watch more very closely is how those cycles are going, what industries that we might want to be more careful about. So think construction, an industry where people don't know exactly what they're doing, it could result in injury. So we see again more the area for us to watch is when we start to see kind of coming out of a slowdown in activity. On the disability side, a little different. I would say that in recessionary environments, you can see some uptick. And again, someone has to prove that they're disabled. It's not as if just because unemployment is different, has changed that it makes it easier for someone to be approved for disability. But one of the things that we do see that happens sometimes in a more constrained job environment is what we refer to as recoveries, kind of getting people back to work. Because sometimes it will just be a little extended. Now the counter to that and something that we talk a lot about is it's important to remember that a disability claim, you're getting a percentage of your income and you're not getting 100%. And in an area where you have high inflation, there's an aspect of just what someone needs to sort of cover their costs. So those are trends again that we watch very carefully. Our claims department is very focused on looking at duration of claims, where we might start to see some durations extending and again a lot of very active outreach to claimants to work with them to get them off of disability. So yes, we could see a little bit of movement there. But even if I go back and think about previous recessionary environments, our data, the way our claims department is organized now, coming out of the last recession, our claims and Group Benefits -- our workers' comp and Group Benefits claims organizations were not together. They're tied very closely together, looking at trends and so forth. So I feel we're very -- we're positioned very differently going into whatever environment we might be seeing as we head into '23 and '24.

I have a lot of questions. But if I ask them all, I imagine there will be no time for the audience to ask any questions. So I want to pause, and you can raise your hand any time and we can stop. But if somebody does want to ask a question, that's a possibility, just -- and I'll continue. But let me know by raising your hand, and we'll get to that. All right. So one of the things that's -- I feel is unique at The Hartford -- not completely unique but compared to a lot of peer companies, CAT volatility over the years has been remarkably low relative to what we've seen. Some of that is reinsurance planning. Some of that is exposure management. Can you talk a little bit about: a, Hartford's success in managing that volatility; and b, what higher catastrophe reinsurance pricing means for The Hartford in this new 2023 cycle twist?

Sure. So as it relates to managing catastrophe risk, we have been very focused on that for many, many years, so looking very closely at our concentrations in coastal areas as we think about hurricane. We've been very focused on tornado, hail events because we've obviously seen increases in that type of activity. So it really has been around exposure management, working with our risk management groups to understand where we have concentrations, how we look at those concentrations across our businesses. Another example is wildfires in California. If you go back a few years, we did have some concentrations in some of the areas that were hit. And we've done a lot where we can to prune that exposure. So I would say it has been more about exposure management than relying on reinsurance. When you look at our catastrophe reinsurance programs, we've got a per occurrence set of treaties, which is really there to manage a large event. And other than -- for the most part, it attaches at around $350 million. We do have a sublayer that covers things that are non-named tropical storms and earthquake, which we have tapped into occasionally. And actually, it's been the winter storms where we've seen that activity. And then we have an aggregate treaty, which is really provided for protection, just a series of small events. And so we really look to manage it both ways. We -- and both of those treaties, we have not tapped into them very significantly over the last several years. Again, on that underlier treaty that we have, the two winter storms that we had, we saw a potential for some recovery. Obviously, you have to pay the claims out to see if we actually will have a recovery. But based on our estimates, we had booked some offset. And then on our aggregate treaty, I think we had 1 year where we hit it. And actually, our CAT estimates had come down since that initial year, so a very small amount. So it hasn't been a big part of how we manage catastrophe risk. We did see increases in the cost of those programs this year. But again, stepping back and looking at the broader markets and what others experienced, given our experience, very manageable increases. The total premium for both of those programs in 2022 was slightly under $100 million. And the cost went up roughly 20%. So it's not a significant driver of impacting our profitability. And part of what's been happening in the reinsurance market is a reaction to what's been happening in property markets in general. And that's been continuing to fuel the price increases that we've seen. And we knew going into this season that we were expecting price increases at this level. And so our pricing models were already incorporating those costs as we looked at what we needed to get from a pricing perspective to maintain targeted returns. So that's how I would kind of characterize the various ways that we're looking at managing CAT risk.

So if I look at a number of things, so look at lower CAT volatility, noncorrelation between the workers' comp side of the book and the commercial side of the book, small claims in general for the company overall, diversified stream, whether it be from the Group Benefits business, Personal Lines business, the commercial business or the mutual fund business, all of these things have very diverse nonvolatile source of income. The financial leverage at Hartford isn't materially different from a lot of its large-cap peers. Is there room for Hartford to be -- to have a higher debt load and better financial leverage? Does all this diversity and lack of volatility in the results, is there the possibility of Hartford having more financial flexibility?

Yes. So managing our financial leverage and our debt leverage, we've been on a path -- I mean, you at the beginning talked about the journey that we've been on. And we have been reducing our financial leverage over several years. Because it was very high. And I feel like where we've gotten ourselves to now is really in the targeted range that we wanted to be and feel very good about how we think about managing that debt load, so not looking to increase that leverage. I wouldn't say that, that's necessarily a rating agency restriction. It's just how we think about managing our balance sheet and the financial flexibility that we want to have. And when I step back and look at the excess capital that we're generating, the amount of capital that we're taking out of our subsidiaries, that has been increasing as their underlying income has increased. Group Benefits had a little bit of a divot, given some of the impacts that it felt from COVID but sort of back on a nice trajectory. I think overall, it puts us in a really good position.

All right. Let's pivot to Personal Lines a little bit. If I go back 15 years ago, I think Hartford probably had a margin of around 4% in Personal Lines. And now it's, I mean, about 2.25%. I mean, I don't know exactly what is it. Is there an economies of scale requirement for you to be successful? Can you be -- and obviously, you want to grow that business, and we'll get to that possibility in a second. But does the current scale of the company inhibit its success in any way?