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

All right. We'll go ahead and get this kicked off as people are still coming in. First, I'd like to say welcome, and thank you for being here. We have Chris Swift, CEO, The Hartford Group, and Beth Costello, CFO. So I'm very excited to jump into it.

I think from first question standpoint, I'm sensing a lot of anxiety from investors just around the P&C pricing cycle broadly. And so I wanted to see if you could discuss what you're seeing in Hartford's markets? And any views you might be able to offer up around softening and how will it play out, how impactful is it for your business versus some of the things you all are doing to compound book value in the meantime regardless.

Yes. Well, I'll just start off by saying, thank you for inviting Beth and I to be with you. We always enjoy being with you, Alex. And the environment, I just -- would still say is generally conducive. I mean, there's always sort of sub cycles in different product lines, particularly, and I think that's -- you might be referring to property, but if you look back and step back for us, particularly with our small to middle market enterprise orientation, we tend to operate from a sweet spot side at that middle market to lower end of the market. That doesn't mean we don't have national accounts and larger property writings. We're pretty well diversified, but our real bread and butter is that middle to small end of the market, which I think is holding up pretty well from a variety of different reasons, which we could talk about. But if I sort of go across the board, Alex, property is probably the one headline area that's softening. But as I said on the second quarter earnings call, large property for us and E&S property is only 10% of our book. And again, most of that book, 60-plus percent is in that small commercial or middle market line of business, which generally is holding up pretty well. And I would remind investors is that, given over the last 3, 4 years, I mean, the rate increases in property, in general, including home, have been quite substantial. So the starting point for any softening in property I think you got to put in context. And we still feel good about writing business in all types of property. And eyes wide open, we've got to make sure terms and conditions are right and things along those lines. But we're still bullish on being able to make money in property, particularly. And then we could talk about liability. We could talk about comps separately, E&O, cyber, some of our specialty lines. But you put it all together, and I'll just point to the evidence that through 6 months in 2025, our underlying combined ratio was 88.2%, which is generally consistent with last year, which we sort of guided to. And I don't really see anything as we sit here today that I think is going to disrupt that trend for the rest of '25. '26, we're not going to talk about here. We'll talk about '26 at the right time, but now is not the right time.

Understood. So I wanted to dig into the small commercial orientation that you all have. And just this dynamic where there's been a bit of a divergence between how stable pricing has been at the small end versus some of the things that have happened at the large end of the market. I wanted to see if you could dig into what is the dynamic that allows that to exist? And I think there's some concern that, well, maybe it's just lagged, like maybe it eventually does come to small commercial, like what are the moats that allow it to be more stable over time?

Yes. I think that stability for us is something Beth and I talk about quite a bit with our business leaders is it's really ease, accuracy, speed that people value in that side of the market because when you're dealing with, I'll call it, premiums, say, under $15,000, you don't have -- agents don't have a lot of time to touch the business, to shop it. They're looking for a quick, accurate, bindable quote and we're doing 70% of new business binding on the glass, which means there's no human touch. So all the data and analytics and AI investments that we've made in the organization over the past decade plus that it goes even back even further, I think it's generating real competitive advantage in a market where people want first dollar coverage. They want a fairly robust coverage, and they want to know that there's a good brand behind it with a good claims paying organization. And they're not going to, sort of my words, quibble over a couple of points of rate as long as you could give them finality quickly and accurately. Agents and customers will move on and bind it. And I think you could see that in our historic retention rates in small commercial, they're pretty strong, which is an indication that most people, once you sell them on our capabilities, they'll stick with this for a good number of years.

Next, can we talk about what you're seeing with loss cost trend, I guess, more broadly in the business. Maybe touching on casualty. I'd be interested in any update there on what you're seeing in some of those trends, but also just -- we have a little bit more of an uncertain environment in terms of inflation in the macro. So how do you navigate that and your approach to pricing?

Well, I could say flippantly very carefully. But I would say thoughtfully with deep analytics and data that help guide us. And I'll ask Beth to add her point given that the actuarial reserving and pricing function reports to her. But I do really believe that competitive advantage with data, with listening posts does help us make sure we're staying on top of trend, right? Because trend then dictates what you do with pricing and sort of the cycle goes from there. So I feel good about what we do. We're not immune from obviously, some of those conditions that existed in prior years, and we've had to make some adjustments in our reserving. But all the adjustments we made, I think, are holding up well. I think we hit the ground running and executing on a higher level of price in '25 than we sort of maybe anticipated last year at this time. But again, performing well and feeling good about getting our arms around all our loss cost trends.

Yes. And what I would just add to that is, Chris touched on it is the feedback mechanism that we have within the organization so that what we're seeing on the claims side is real time being discussed with our pricing actuaries, our reserving actuaries, our underwriters so that we can respond accordingly if we start to see trends. And that's, I think, really important especially on some of the lines that you mentioned, especially as we start to think about inflationary pressures, regardless of where they might be coming from. So those quick feedback loops so that we can react because you're reacting on all fronts, right? You're reacting to the current business you're writing, you're reacting to looking at what it means for reserves on the balance sheet. And as Chris said, it's just so important that we get that trend right.

That's very helpful. So next, I want to move to workers' comp, similar kind of question, but the trends there have been a bit different over the last 10 years. There's some signs of medical inflation that we see at a high level with the health insurers, but it doesn't always correlate to worker's comp. And I always struggle to figure out exactly how to interpret some of the things we see from health insurers and what that means for workers' comp. So maybe you could touch on that. And this is also an important time of year for pricing for '26, so if you're seeing anything there, I'd be interested in an update as well.

Well, I think the context for workers' comp this year for us, it's basically right on where we thought it would be. From a high level, frequency continues to behave I think medical severity, I think we've been pretty clear for a long, long time that we price and reserve for a 5% medical trend and the actual emerged trend line is well below that. So we feel good about that, which means we feel good about very prudent reserves that we have up for our workers' comp line. Where we've been able to release reserves pretty consistently over the last 2-plus years, 3 years. That feels good. I think what you're really -- your point on where is trend going, particularly given maybe tangential information or noise coming out of the medical community is a question mark. As we sit here today, I still think that is contained within the medical community or the hospital community principally because the utilization of medical services feels to me to be elevated. And just because utilization is elevated in that segment of the market, that's not a translate into our market. We're -- really, we're trying to get working age people back healthy after an accident or an incident and direct medical reimburse for any medical cost and get people working again. So I know intellectually, you know it's different, but I'm confirming, it is different. And we got to be always watchful and thoughtful as we are. But as I said, the trend line for us is still well below that 5% trend line, which I think is sort of the so what of everything when you put it together. Where '26 pricing is going to come out, it's still a little bit of unknown. You're right, sort of third and fourth quarter when rate filings get updated and you have a better indication of where things are going to be in '26. But as I would sit here to say, I don't see anything dramatically different one way or the other. I don't see another leg down in rates but I don't see a leg up in rates because if you really look at sort of the emerged accident year trends over the last 6, 7 years, I mean, they've still been pretty solid, and that will put a natural governor on rate action. But there could be states like California, which has its own unique ecosystem where I think they got about 8.7 into an approved rate through the commissioner. So that's healthy. But on the other hand, it's because they need it and sort of the uniqueness of particularly the cumulative trauma claims that California is dealing with. So we'll have to see how the rest of the market plays out.

That's helpful. So before we move off to Business Insurance, I have to ask about social inflation. Hopefully, at some point over the next few years or so come -- a topic that doesn't come up as much in these conversations. But what are you seeing from this verdict and settlement inflation? You guys had what I would consider to be a pretty modest adjustment in 4Q, and it seems like we've moved on from that, but I would be interested to know just how things have played out relative to your assumptions following that as well.

Yes, Beth, if we tag team. All I would say from a context side is, yes, the legal system abuse continues. And obviously, that's my perspective, but it's mine. I own it. I see it in the data. I see it in the settlements. I see it in the nuclear verdicts. I see it in some of the games that various participants play like time-limited demands where they're trying to jam someone. So all those trends still continue.

Yes...

So I better stop before I get too agitated.

Yes. No, I'd agree. I mean, those are the things that we're looking at and monitoring. And continue to see attorney rep rates and as Chris said, time limit demands and so forth. And we watch all those trends very carefully. As you pointed out, we made adjustments last year to increase the loss trend that we saw and that increased sort of our jumping off point going into '25, and we'll continue to monitor those trends. Responding in pricing, as Chris indicated, when you look at the book and we look at those lines, we're very good about the pricing that we're getting to cover those loss trends, but it will continue to be an area of focus for us.

Yes. I would just expand just on 2 points. The trend that we're observing and then obviously, the pricing increase that will go, we said in our first -- our second quarter earnings call, all general liabilities in that 9% to 10% range with primary casualty in the 9-ish and then you work into your umbrella and excess coverages in sort of the mid-teens range, and that's evidence of the need to continue to stay ahead. Second, I'm an optimist at heart and always will be. I do think the industry broadly defined as underwriters, carriers, insurance brokers and other interested constituencies are -- have more of a -- national awareness of what's happening with some of these trends. And it's not going to change overnight, but I think there's more coalition building that has happened to try to make real change at the state level or federal level, particularly as it relates to disclosure, transparency into funding sources, maybe even limits on demands, maybe changing tax rules on how these settlements get taxed for the capital providers. So there's an array of exploration on what could be done to help improve the environment, but it's not going to change overnight, Alex.

I mentioned with Business Insurance, I do have one more question. You mentioned some of the tech investments that you've made, the artificial intelligence. I just want to see if you could dig into that a bit. And I'm particularly interested in, in your market, it's a small commercial end of the market where maybe the volume submission is higher, you got to be able to handle a bit more. What have you done to separate yourself there in terms of helping distributors?

Yes. Again, context, I think you go back 15 years when Beth and I started working together, we had some major investments to make in just our core platforms. And I start there because those are building blocks for future AI. I mean I think everything we're doing nowadays, just the context of AIs probably in the data science area. But there are some early use cases that we're using, really the cutting edge of AI today. But the foundational elements were really administrative platforms. I always like to tell the story that when we arrived, we had 8 or 9 claims systems. So we consolidated all our claims systems into Guidewire. We had numerous administrative platforms that administer policy issuance, but there's also a heavy layer of data within those policy admin systems. And I think we had a lot of green screens as we like to say at that time. And so we needed to modernize that, went to Guidewire. And then the other big modernization that we needed to do was in our personal lines business. So we made our investments in platforms, which we call Prevail, which is also a product. So it's sort of dual added. But we went to Duck Creek there and sort of built out a world-class chassis to administer all our personal lines. So that's a lot of work over many years, and there's other things that we did with our data, and we're 4 years into a 7-year project to take all our data and applications to the cloud now. And so we're at that phase of really being able to leverage a lot of those investments and be sort of cloud native with a lot of our activities and thinking. But you're right, the next phase of AI could be very, very, very powerful for the industry, and we think it will have a huge impact for us. But again, the focus of AI for us is ultimately augmenting human talent, improving our customer centricity and improving our agent speed and interaction and be able to get back to them in a very rapid time compared to where we are today. And those are the sort of the focal points or the outcomes that we want and as you would expect, the 3 big areas for us that we're deploying AI today is claims, operations and underwriting. So we can go more into it, but I'm going to be a little bit limited on what I say in certain areas here just to protect some of the trade secrets that we think we're building and really be able to be a first mover and take advantage of the opportunity. So we know there's a lot of other companies that are working on it and all sides of financial services, including insurance. But I'm pretty pleased with what our focus is over the next 3 to 4 years where we're going to invest heavily in AI.

So I won't ask you for any details. I would be interested in just your reaction to I think one of your competitors actually mentioned that they could see it making the underwriting decisions in the next 5 years, which I was a little surprised at the speed that, that could have. I mean, would be interested in just how you view that and...

Well, that's not too far fetched in that, as I said, our small business franchise today, 70% is machine-based decisions. Now that's at the smaller end of the market. As I said, usually, policy is less than $15,000 in premium. So yes, and there's a lot of homogeneity in some of those risks that allows that. But could you see AI advancing to the future where it is making recommendations? Maybe. I can see recommendations, particularly in middle and large exposures as opposed to just letting that go by itself. But I think that's the power of data and how it can be brought together in a way that could analyze and make recommendations. Yes. I could see that.

The only thing I'd add to that, just as a proof point because oftentimes, people ask well, how will we know if it's working. But going back to the example that Chris gave on Small Commercial, where again, 75% of all quotes are bindable on the glass. But the proof point that we know what we're doing and can make the right decisions is that small commercial consistently delivers underlying combined ratio is below 90%. You can do a lot of quoting straight through, but if it doesn't show up with profitable business, that's on a good equation. So I think that proof point and being able to build on those expertise that's a lot, I think what Chris is talking about.

I'll break my rule for you just because I like you. I'll give you 2 examples in, I'll call it, our operations area and then our claims areas. We are -- we have rolled out AWS Connect, which is really a state-of-an-art customer contact center type of information compared to an old, old antiquated system that we have that will really actually, again, augment human talent as we interface with customers that have questions on billings, have questions on renewals. We could do sentiment analysis to recommend a different line of questioning, maybe to some of our handlers. It will help with workflows, it will help with containing things in a digital channel versus a voice channel. So you might say, well, that's not AI. I think it is. I think anything that really augments human talent and coaches them and provides them real-time feedback or data or information at their fingertips is really what we're going to try to do. And then I would say in the claims area, we're the second largest player in workers' comp. So what happens in workers' comp, we have the ability to sort of direct and guide medical treatment. Obviously, the doctors and clinical staff administer it, but -- so we need to understand medical histories and how you do that is through medical records. And depending on a person's medical history, I mean, you could have a 1,000-page medical document history that you need to understand and make sure you're paying only for the compensation related to the injury at hand. So documents could be a 1,000 pages, 1,500. And again, with AI and the summary functions that we've built and train models, we could summarize a 1,000-page medical record in basically 2 or 3 hours. Old days, that was 2 weeks of claim handler work to really get your arms around that. So yes, it's -- AI is real. And again, augmenting human talent, making the customer experience better, making our agents more productive and doing things more quickly for them, that's our mission.

Great. So moving over to Personal Lines. I know you guys have a strategy to sort of pivot a little bit more to higher growth. And I wanted to see if you outline some of the initiatives there. Would also just be interested if you're changing risk appetite or anything like that to try to spur some of it. I think there's been a lot of I guess, moving out of certain cat areas and so forth as reinsurance costs were high. So are you able to use lower reinsurance costs to help aid some of that expansion?

You want to tag team? I would say, again, context, we made our investment in Prevail, the product and the chassis, primarily for our AARP direct channel, where we have a contractual relationship through 2033 now. That was sort of the recommitment to that channel for us and AARP made certain commitments we did, and one of it was building a more modern platform. So that platform for the direct channel of home and auto through AARP on a direct basis is up and running and performing well. We've done a lot of work, obviously, to improve the auto components. But home has been a steady contributor and a steady grower of our capabilities in that area. So we had always thought that if we do that well and can get AARP growing again, we might have the opportunity to take the Prevail chassis, modify it for the independent agent channel, which is really commissions and maybe a couple of other tweaks. But use the sophistication in that chassis, which is multi-variant pricing, detailed segmentation like you never had before and apply it to the independent agent channel. And our view right now is we're operating in 2 states or testing it and the demand for a high-quality brand as ours with a fairly robust policy coverage, meaning not sort of cheap bare bones, but meaningful coverage targeted at the mature market that might have useful drivers and maybe a larger home size is the sweet spot that we're going to try to grow in going forward. And the principal reason that I think we're going to be successful is because our distribution wants us. We have rich distribution relationships already. And a lot of our distribution partners obviously have business insurance more and more are having benefit insurance. And there's a certain segmentation of agents, even national brokers that are focused on Personal Lines, and they want us to reenter the market with our brand and capabilities, given that they're selling our benefits and business insurance products. So we're quite excited. I think we believe we could be in 6 states by the end of the year. So that's 3, 4 months from now, and that's realistic, and we could be in 30 states by the end of 2026. And yes, we want to grow. And I know a lot of other carriers are turned to growth after multiple years of trying to fix the auto line, but ours is fixed, where [we're at] our targeted margins. Home has always been a profitable component for us. And we're appointing some new agents. We're refreshing some agent relationships that might have go on stale in Personal Lines. And actually, we're quite excited about the opportunity.

And the only thing I'll add is that from a risk appetite perspective, I would say nothing has really changed for us. And part of what we've seen over the last several years is, as Chris said, has been more reaction to just a lot of rate that had to go into the auto book more than a change in view of risk appetite. So your question on reinsurance availability that has not been a factor as we thought about Personal Lines where we want to grow and how we think about it. For the 2 areas that we've said that we don't have appetite for and that hasn't changed is new homeowners in Florida and new homeowners in California. And reinsurance strategy for us is not going to change that view. It really needs to be around the core economics of those states and those products. So as Chris said, I think that we're poised well from having returned the book to profitability on the auto side, home in good shape. We launched Prevail with agents, we see that as the mechanism for growth.

Maybe one more on Personal Lines. Broadly, how are you seeing the competitive environment? I mean, it's obviously been very disciplined in getting margin back into the product over the last few years. Is that -- is it going to be a more violent pivot towards a bunch of the industry trying to grow? Or are you seeing more discipline just given the experience that we've had over the last several years?

Yes, I would say, I think, as I said, the market is competitive. Everyone knows it's a good time to grow because of the profitability embedded in their books. My sense though is that, well, you could compete, no one wants to go back to where we were coming out of COVID and sort of the shock to the system there. So I believe there will be an element of discipline, but margins are pretty good right now. And being able to sort of capture some market share is on a lot of people's mind from the mass market to specialty markets along those lines. But we're equally committed to at least trying to compete with some of our larger players. Again, with our brand, with our capability, with distribution relationships that are already strong and active and we really want to expand to another line of business with them.

Great. Moving on to Group Benefits. This year, I think you've produced some really nice margins. How are you viewing the sustainability of that? And what do you see in terms of the growth as you sort of move through some of these investments you've been making in the business?

Well, I won't put words in your mouth, but I think that was a compliment that we're producing strong margins through 6 months. Is that what you mean?

I said that pretty explicitly.

Okay. All right. I want to make sure I heard it correctly. Yes. It's above our 6% to 7% long-term target. That's the way we price product, obviously, with a view of we're making multiyear rate guarantees. So I always like to say is we just need to be really thoughtful about where we see trend going. So we always have a mean reversion to incidences and terminations, which, again, over the last 2, 3 years, we've been outperforming, which feels good. But even at the 6% to 7% margin, I always like to remind people, 6% to 7% margin and benefit translates roughly into a 14%, 15% tangible ROE for that business, which I think is healthy. It's accretive to us over a long term. And obviously, we always play to outperform that those targets in the medium term. I think benefits -- I would make 2 points, Alex. One, coming out of the pandemic, we had a certain view on mortality trends that would be -- remain elevated. That turned out not to be the case. And really what happened there was we weren't that competitive in life insurance. And you could see that in our trends. So the good news is we made the adjustments. We no longer see an endemic state for mortality, and I think we're going to be more competitive, particularly with 1/1/26, which is happening right now and then into the rest of 2026. I think the investments that you're referring to, I would refer you back to what I said on group Business Insurance, meaning sort of a platform refresh. We're in the final phases of platform refresh in group benefits, mostly sort of our homegrown technology where we've had strong claims systems that we're really proud of. And then we needed to tidy up a little bit some of our administration capabilities and our data sets there. But from there, I would say we're focused on our down market, we call it there, say under 500 lives. 67%, 70% of our business is in the 5,000 in lives up. So it's like really national account, jumbo type of accounts. And we feel like there's an opportunity for us and our brand to be more competitive in the below 500 lives. To do that, we've partnered with a company called Beam in Columbus, Ohio to use their administrative platform, their technology with our products and then with their dental and vision products, and we're going to go to market that way. So excited about that. So we're going to continue to invest in that benefits experience, but I'm pleased with where we stand from a digital side, from an employer side, getting them data. We have some products called Leave Lens. We're making big investments in absence management, which is to help administer all the leave programs that these various states have out there. So benefits is becoming sort of table stakes. How can you help me manage absence, give me data, help me administratively and then you wrap around your risk products. And we feel, particularly in the above 500 lives. I mean we are poised to compete there very, very well.

Great. On capital management, could you discuss your current capital position, how you're approaching redeployment of capital as we think through the next few years?

You want me to take that?

Yes. It's your balance sheet?

What I would say on that is consistent with where we've been. I mean, obviously, we first start with making sure that we have well-capitalized operating companies and really pleased with some of the ratings progress that we've seen from rating agencies in that regard, which I think speaks to the fact that we do have well-capitalized operating companies, allows them to invest in the various businesses and some of the things that Chris discussed. We're always focused on maintaining a healthy dividend. And been steadily increasing our dividend as our earnings per share has also been growing. And then we still see share repurchases as a good use of excess capital. Even though our valuation has improved, we still think that it is -- has further improvement to go. And so buying our shares at these levels, we still see as providing us a good return. We've talked about M&A in the past. And again, it's a low priority. It's not to say that we're not always wanting to understand what's going on within the marketplace. But if we decided to deploy capital in M&A, it would have to be something that obviously strategically made sense but also hit a high financial hurdle for us as well. So overall, I would say, sort of kind of steady deployment of capital across all of those areas.

I want to give a shout out to Kate Jorens, our Treasurer and Head of IR, who for the last 6 years, has worked tirelessly to convince the rating agencies, we should be a AA company. Thank you, Kate.

So I had one more for you just as we have a few minutes left. Reinsurance, we're hearing about price going down. What kind of an impact does that have at the Hartford? Will it be a noticeable impact as we look at the financials and business insurance, you have that? And does it impact at all the small amount of reinsurance business that you have is...

Yes. I think those are the 2 points of how much reinsurance do we purchase, and what is it due to our small reinsurance operation. I don't think the amount of reinsurance we purchased, whether prices go up or prices go down is a material effect on our overall core earnings or bottom line or anything to do with our strategic product orientation. It's just not that big. Now every penny matters from an EPS side. So we always will try to maximize our reinsurance purchase. But as we sit here today, it's not top of mind to do something differently if prices decrease. I would say from our reinsurance business, which is almost is going to be $1 billion premium operation by the end of this year. It's a little bit of a forecast. Likewise, it is a diversified small to midsized reinsurer that focus on property, casualty and sort of specialty lines. The property book we'd like to do on a proportional basis. The casualty book, we tend to do on an excess basis. And then some of the specialty coverages for surety, terrorism, trade credit, we do on a proportional basis also. So again, good diversification in there. I wouldn't expect us to -- it wouldn't have a material impact on our returns or earnings again because I don't really see a rapid decline or a material step change in prices downward. I see this continuing drift just a little lower. But I don't have to tell anyone in this crowd. It's September 9, and we still got 6 weeks, 8 weeks to go on hurricane season.

Yes. Well, thank you very much for being here. Very much appreciate it. Thank you to the audience. It's a great conversation.

All right. Thank you.

Thank you .

Appreciate it. Thank you.

Thank you.

Yes. Thanks.