The Hartford Financial Services Group, Inc. (NYSE:HIG) Q2 2023 Earnings Call Transcript

The Hartford Financial Services Group, Inc. (NYSE:HIG) Q2 2023 Earnings Call Transcript July 28, 2023

Operator: Good morning, and welcome to The Hartford Second Quarter 2023 Financial Results Conference Call and Webcast. All participants are in a listen-only mode. After the speakers’ presentation, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Susan Spivak Bernstein. Thank you. Please go ahead, ma’am.

Susan Spivak Bernstein: Good morning and thank you for joining us today for our call and webcast on second quarter 2023 earnings. Yesterday, we reported results and posted all the earnings-related materials on our website. For the call today, our participants are Chris Swift, Chairman and CEO of The Hartford; Beth Costello, Chief Financial Officer; Jonathan Bennett, Group Benefits; Stephanie Bush, Small Commercial and Personal Lines; and Mo Tooker, Middle and Large Commercial and Global Specialty. A few comments before Chris begins. Today’s call includes forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and actual results could be materially different.

We do not assume any obligation to update information or forward-looking statements provided on this call. Investors should also consider the risks and uncertainties that could cause actual results to differ from these statements. A detailed description of those risks and uncertainties can be found in our SEC filings. Our commentary today include non-GAAP financial measures. Explanations and reconciliations of these measures to comparable GAAP measure are included in our SEC filings as well as in the news release and financial supplement. Finally, please note that no portion of this conference call may be reproduced or rebroadcast in any form without The Hartford’s prior written consent. Replays of this webcast and an official transcript will be available on The Hartford’s website for one year.

I’ll now turn the call over to Chris.

Chris Swift: Good morning and thank you for joining us. Last night, we reported strong financial and operational performance for the second quarter, completing a successful first half of the year. While we and the industry continue to navigate a dynamic market environment including elevated catastrophe losses and persistent inflationary pressure in personal auto, once again, we achieved exceptional results in Commercial Lines and outstanding performance in Group Benefits. Highlights of the second quarter include top line growth in Commercial Lines of 12%, including double-digit contributions from each business with an underlying combined ratio of 88.3. Group Benefits fully insured premium growth of 7%, with a core earnings margin of 7.6%.

Strong investment performance with increasing fixed income portfolio yields and a trailing 12-month core earnings ROE of 13.6%, while returning $484 million of capital to shareholders. These results only strengthen my confidence in our ability to deliver a 2023 core earnings ROE in the range of 14% to 15%. Now let me dive deeper into our second quarter performance for each of our businesses. Momentum is strong in Commercial Lines. I expect continued top line growth at highly profitable margins during the second half of 2023, with full year underlying combined ratio targets unchanged. In Small Commercial, written premium of $1.3 billion and new business of $237 million continue near record high levels. Our best-in-class package product, which we call Spectrum, continues to outperform in a competitive marketplace.

Spectrum new business premium of over $100 million was up 23% over prior year. Our unmatched ease of doing business with agents and customers and our unrivaled pricing accuracy and consistency remain important drivers as demonstrated by strong sales and retention and a 6% year-over-year increase in policies in force. In addition, written premium for our excess and surplus lines binding product eclipsed $50 million in the quarter, up nearly 60% from a year ago, with new business growth of just over 85%. Our expanding wholesale broker relationships are expected to drive continued robust growth and profitability for this important line. In short, Small Commercial continues to deliver outstanding results with industry-leading products and digital capabilities and is on track to exceed $5 billion of annual written premium in the near-term.

Middle and Large commercial had an exceptional quarter. Written premiums were at their highest levels ever, up 12% in the quarter, driven by strong momentum in new business with elevated submissions and hit rates along with increasing average account premium. Cross-sell activities remain in full force and are helping to drive new business results. Written premium grew across almost all lines with excellent growth in our construction, energy, and entertainment verticals. In addition, we are particularly pleased by the 24% top line growth in middle-market property lines, which remains a key area of focus and accretive part of this business. Looking across the enterprise, as discussed in prior quarters, we are taking thoughtful and disciplined steps using industry-leading tools to grow our property book within favorable market conditions.

These efforts should put us in a position to expand commercial property written premium to approximately $2.5 billion or up 25% by year-end. Underlying margins in Middle and Large Commercial were also at record levels, reflecting advancements in data science capabilities, industry-leading pricing and underwriting tools and exceptional talent, all of which position us well to maintain profitable growth in this business. Global Specialty continues to deliver outstanding results with net written premium growth of 15% in the quarter. New business growth and improving renewal written pricing were important contributors. In addition, we remain excited about our position in the wholesale market and the ongoing benefits to the top line from our broadened product portfolio, U.S. Ocean Marine, Environmental, International, and Global Reinsurance all achieved double-digit top line increases.

Our underwriting discipline, along with enhanced capabilities developed over the past few years are driving targeted market share gains with a stellar underlying combined ratio that has hovered in the mid-80s for the past five quarters. In short, our execution has never been stronger. Turning to pricing. Commercial Lines renewal pricing of 5.2% compared to 4.5% in the first quarter. Excluding workers’ compensation, renewal pricing rose to 7.5%, up eight-tenths sequentially with accelerating pricing in property and auto. Across commercial, property pricing is well into the double-digits with auto in the high single-digits, pricing in other liability and casualty lines also remained strong, while public D&O pricing remains challenged. In addition, workers’ compensation pricing remained slightly positive.

All-in, our strong written pricing performance in Commercial Lines, combined with stable loss cost trends, bolsters my confidence in our ability to maintain or slightly improve margins going forward. Moving to Personal Lines. Persistent severity loss increases in auto have had a meaningful influence on overall industry results. We continue to respond with significant pricing actions. During the quarter, we achieved renewal written price increases of 13.8% and expect acceleration to above 20% by the fourth quarter. As loss cost trends emerge, we will aggressively push for appropriate rate actions. In homeowners, renewal written pricing of 14.4% in the quarter comprised of net rate and insured value increases outpaced underlying loss cost trends.

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We are very selective and actively manage our homeowners’ book at a state and territory level, diligently managing risk and growth with sophisticated underwriting capabilities that allow us to effectively manage new business risk selection. A few examples of our risk management include the action we took many years ago to stop writing new homeowners business in Florida, a conservative stance on coastal CAT risk and wildfire mitigation efforts that have yielded strong outcomes. We are on the right path in personal lines, driving towards appropriate pricing and managing exposure and growth while continuing to serve our customers with award-winning service. In Group Benefits, I am pleased with both top line and bottom line performance, including an outstanding core earnings margin of 7.6%.

Group disability continues to post strong results driven by favorable long-term disability incidence trends and claim recoveries. In Group Life, the loss ratio was up versus prior year. Mortality losses in the second quarter continued to run above pre-pandemic levels, but improved sequentially. Looking at the top line, growth was driven by book persistency above 90% plus strong year-to-date new sales. Overall, the strength of our diversified product portfolio as well as our commitment to outstanding customer experience through the use of data and technology resonates in this marketplace, giving us a leadership position. Moving now to investments. I want to highlight another quarter of strong performance as fixed income yields continue to trend higher with solid credit results.

Beth will provide further details. Before concluding, I would like to comment on the advances we continue to make in technology and the competitive advantage it brings to our businesses and distribution partners, along with a superior customer experience. At our Investor Day in November of 2021, I highlighted the significant investments we had made in our core technology platforms which were allowing us to extend our digital and data capabilities. Back then, we were already focused on leveraging artificial intelligence to enhance execution, and today, AI is mainstream at The Hartford. The breadth and depth of our data and analytics and AI has grown into all parts of our business, and is enabling greater agility and faster decision-making while improving and streamlining the experiences of our customers and distribution partners.

While some organizations talk about what they expect to do in the future, we are already doing this at scale. With several hundred AI models in production and driving business results, we believe our capabilities are leading-edge. Let me give you just one example of how we are already using what we call our information advantage, fueled by advanced analytics and AI to drive results. We developed an award-winning medical record digestion and extraction tool that has transformed the way we conduct our workers’ compensation business. This tool ingest and translates medical records into digital content, characterizes the data and highlights relevant information. In workers’ compensation, we are streamlining the adjudication process by suppressing 30% of the extraneous information contained in medical records that otherwise results in significant distraction or lost time to our claim handlers.

Since inception of this tool, we have processed more than 500 million pages of medical records, and perhaps more importantly established a foundation for next level AI use cases across our business. When it comes to generative AI, we are actively experimenting with this technology in a highly controlled environment. Now, Hartford understands the potential of this technology and we believe we’re at the forefront in piloting use cases that will augment the capabilities of our employees. All the transformational work we have done over the past three years or four years has put us in a strong position to accelerate our market leading competitive advantage driven by technology, data science, in our experienced workforce. In closing, we have a unique portfolio of diverse yet complementary businesses that contribute to our industry-leading returns.

As we have reached the mid-point of 2023, it’s a good time to reiterate our strategic priorities that we believe will continue to drive our success. First, leveraging our product breadth and competitive advantage across the P&C and group benefits platforms will drive profitable organic growth. Second, underwriting discipline will guide a balanced risk profile supporting long-term book value growth. Third, we will continue to prioritize digital, analytics, and data science investments and enhance the customer and agent experience to improve underwriting and claims decision making. Finally, we believe ROE is the ultimate measure of quality underwriting, execution on priorities, and prudent capital deployment. As such, we’ll continue to focus on exceptional ROE performance.

We will continue to deploy excess capital in a thoughtful manner, prioritizing shareholder return and investments in future growth. Results over several successive quarters affirm that this strategy is working. With our strong track record, we are confident in our ability to deliver core earnings ROE in the 14% to 15% range. Now, I’ll turn it over to Beth to provide more detailed commentary on the quarter.

Beth Costello: Thank you, Chris. Core earnings for the quarter were $588 million or $1.88 per diluted share. In Commercial Lines, core earnings were $493 million. Our commercial book posted a very strong quarter and first half of 2023 with an underlying combined ratio of 88.3 and 88.4, respectively. Small Commercial continues to deliver excellent results with premium growth of 11% and an underlying combined ratio of 89.7. The quarter included higher non-CAT property losses within our package product as compared to the prior year quarter. Overall, we are pleased with the performance of the entire book evidenced by the 12th straight quarter of an underlying combined ratio of below 90. Middle & Large Commercial delivered both a record for written premium of $1 billion and an underlying combined ratio of 88.7. This was a 4.2 point improvement from the prior year, including favorable non-CAT property losses and expense ratio improvement.

Global Specialty’s underwriting margin was a strong 85, a 1.9 point increase from a year ago, primarily due to slightly elevated losses in a runoff line with our international book and a higher expense ratio due to a business mix in Global Re and higher underwriting and technology costs. In Personal Lines, core loss for the quarter was $57 million with an underlying combined ratio of 101.7. Homeowners underlying combined ratio of 79.6 was in line with expectations. Auto results reflected continued liability and physical damage severity pressure. The auto underlying combined ratio was an 111.8 for the quarter, which is 11.8 points higher than the prior year quarter, and is 5 points above a revised expectations from April and includes 3 points related to losses in the first quarter.

This increase to our expectations is attributable primarily to a higher than anticipated number of large bodily injury and uninsured motorist claims. For auto liability, we recorded no net increase in prior year reserves as increases of about $60 million for accident year 2022 was offset by improvement primarily in accident years 2019 to 2021. As Chris indicated, we continue to pursue rate increases to offset the lost cost trends we are experiencing. Written premium in Personal Lines increased 6% over the prior year, driven by steady and successful rate actions. In auto, we achieved written pricing increases of 13.8% and earned pricing increases of 8.5%. In homeowners, we achieved our highest written and earned pricing increases in over a decade of 14.4% written and 12.7% earned with the second quarter.

The expense ratio decrease of 2.7 points was primarily driven by lower marketing spend. With respect to CAT, the industry experienced another quarter of elevated losses resulting in our Property & Casualty current accident year CAT losses of $226 million, which includes the impact from tornado, wind, and hail events across several regions of the United States. And while catastrophe losses were significantly elevated for the industry, our results were only slightly higher than expectations. Our effective aggregation management and underwriting discipline, especially in certain higher risk dates, helped limit our losses from confected [ph] storms in the quarter. Total net favorable P&C prior acting or development was $39 million with $38 million in Commercial Lines as reserve reductions in workers’ compensation and catastrophes were partially offset by modest reserve increases in general liability, assumed reinsurance and bond.

In Group Benefits, core earnings in the second quarter were $133 million with a core earnings margin of 7.6%, reflecting strong premium growth and long-term disability results. The year-to-date margin of 6.4% is at the mid-point of our full year range of 6% to 7%. The group life loss ratio of 84.1% increased 5.5 points versus prior year. Approximately 4 points of that increase is due to favorable prior period reserve development recorded in second quarter 2022. The remainder of the increase is primarily due to higher severity in the current quarter. Group disability continues to deliver strong results with a loss ratio of 67% for the quarter. The expense ratio improves 70 basis points and reflects strong top line performance and expense reductions related to the Hartford Next initiative somewhat offset by the continued investment in new capabilities to meet our customer’s evolving needs and drive greater efficiency.

Fully insured ongoing sales in the quarter of $151 million contributed to a year-to-date sales total of $625 million. This combined with the excellent persistency Chris noted in his comments resulted in fully insured ongoing premium growth of 7% per second quarter. The economy remains quite resilient with solid employment levels and wage growth both of which continue to have positive effects on the business. Our diversified investment portfolio produced strong results. For the quarter, net investment income was $540 million. Our fixed income portfolio is continuing to benefit from higher interest rates. The total annualized portfolio yield excluding limited partnerships was 4% before tax modestly higher than the first quarter. Our annualized limited partnership returns were 2.9% in the quarter.

Results within the first half of 2023 were stronger than expected given the resiliency of private equity returns and we remain on track to achieve our expected full year 2023 target of 4% to 6%. The overall credit quality of the portfolio remains high with an average credit rating of A+. Given the interest in the real estate sector, we wanted to provide an update regarding that portion of our investment portfolio, which remains consistent with what we discussed in our first quarter earnings report. As we mentioned, less than 10% of our commercial mortgage loan portfolio is in office exposures, all of which we view to be top tier properties. During the quarter, two loans were fully repaid for approximately $90 million and manageable maturities are expected in the second half of 2023 and 2024.

All loans remain current with respect to principal and interest payments with no delinquencies. CMBS holdings and credit quality are also largely unchanged given lower new issuance and limited trading activity. Our high quality non-agency CMBS portfolio is primarily conduit focused and has limited exposure to office loans. Holdings are supported by diversified underlying pools of property and have significant credit support to absorb individual loan losses with manageable near-term maturities. Turning to capital management. During the quarter, we repurchased 5 million shares for $350 million. At the end of the quarter, we have $2 billion remaining on our share repurchase authorization through December 31, 2024. Our second quarter results demonstrate that our franchise is well-positioned to deliver consistent, sustained, industry-leading results.

We believe that we have the strategies, talent, and technology in place to continue to succeed. I will now turn the call back to Susan.

Susan Spivak Bernstein: Thank you, Beth. Operator, we have about 30 minutes for questions and we will take our first question.

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Q&A Session

Operator: Thank you. [Operator Instructions] Thank you. Our first question comes from Alex Scott from Goldman Sachs. Please go ahead. Your line is open.

Alex Scott: Hi, good morning. First one I had is just on the comments you made on property growth earlier in the commentary and I was just interested in, how your catastrophe budget and what you’d expect from CAT loss as a shift over the next year. Certainly, the CAT performance this quarter is quite good, so I’m just trying to get a feel for how that’s shifting, if at all.

Chris Swift: Yes. Alex, thanks for joining us. As we talked about improving and growing our property book and capabilities was paramount and I’m pleased to report on a quarter-over-quarter basis, our property totals are up about 23% on a written premium basis. Pricing for the portfolio is up 15%, a couple standout data points there, large property is up almost 70%, with 18 points a rate, wholesale properties up 25% with 29 points a rate, and then our global reinsurance business is up about 50% of – with its property component and 30 points of rate. So you can see, I think we’re executing well in an attractive marketplace and we feel good about what we’re producing. I would just share with you that, we’re not taking on consciously sort of CAT exposed property.

I mean, we want broad-based property coverages, primarily the fire peril, and if it comes along with some incremental or limited CAT exposure, what will take it and price the CAT risk appropriately. So you should not think that this is a CAT play for us, but rather a broad-based property approach. And every year, we provide our CAT loads to you, we feel good about our CAT loads for this year, even with some slight elevation in the first half of the year. But that’s what I would share with you, Alex.

Alex Scott: Got it. That’s helpful. And then in commercial on underline, anything you’d call out in terms of like normalizing items. I mean, I guess pretty squarely in your range that you guided to, but just trying to think through where our baseline is and how the acceleration in pricing can benefit underlying from here.

Chris Swift: Yes, I will share with you and sort of reprise what we talked about in the first quarter, but at a high level summary, nothing’s really changed from what we’ve talked about in the first quarter. We still feel good about the guidance that we put out, we’re executing well. And remember, the fundamental thesis of the improvement between years was loss ratio improvement, expense ratio improvement. And we were going to fight some headwinds in our workers’ comp business. So all three of those components are playing out almost exactly as we’ve foreseen. There’s also – remember, we talked about an earned premium impact that it was slightly more leveraged on the second half of the year. So earned premiums will continue to increase through the compounding effect of rates.

So I still see that and expect that in the second half of the year. The second point we talked about was a mix more towards property and other lines that have just lower loss ratios that would mix in – to help improvement. And the third thing that, again, we see every month when we review results with the team. Our underwriting initiatives and how we’re looking at terms and conditions in a thoughtful way continue to produce a loss ratio benefit. So you put all that together, it is still what we believe will emerge on a full year basis. To your specific point, Alex, on any unusual items in the quarter, I would say, there’s probably five-tenths – excuse me, five-tenths of a point or a half a point in total headwinds, primarily from the non-CAT property losses that Beth talked about.