The Hartford Financial Services Group Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 28, 2021

There are 16 speakers on the call.

Operator

Good day, and welcome to The Hartford Third Quarter 2021 Financial Results Webcast and Conference Call. Participants will be conducting a question. Please note this event is being recorded. I would now like to turn the conference over to Susan Spivak. Please go ahead.

Speaker 1

Thank you. Good morning and thank you all for joining us today for our call and webcast on Q3 2021 earnings. Yesterday, we reported results and posted all of the earnings related materials on our website. For the call today, our speakers are Chris Swift, are in the line with the Chairman and CEO of The Hartford Beth Costello, Chief Financial Officer and Doug Elliott, President. Following their prepared remarks, we will have a Q and A period.

Speaker 1

Just a few final 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 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.

Speaker 1

Our commentary today include non GAAP financial measures. Explanations and reconciliations of these measures to the 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 call will be available on The Hartford's website for 1 year. I'll now turn the call over to Chris.

Speaker 2

Thank you for joining us this morning. Once again, our outstanding underwriting capabilities and consistent execution on strategic initiatives becomes increasingly evident quarterly earnings report and reinforces my confidence about the future for The Hartford. In the 3rd quarter, We reported core earnings of $442,000,000 or $1.26 per diluted share, 8% growth in year over year diluted book value per share excluding AOCI and a trailing 12 month core earnings ROE of 12.5%. We returned $634,000,000 to shareholders in the quarter from share repurchases and common dividends are in the range of $1,600,000,000 for the 9 months ended September 30. The confidence we have in our business is also evidenced encouraged by the announcement that we have increased our share repurchase program by $500,000,000 bringing the total authorization to $3,000,000,000 through the end of 2022, and we increased our quarterly dividend by 10%, payable Q2 of 2019 in January of 2022.

Speaker 2

With strong cash flow generation, we will continue to have a balanced capital deployment approach in the range of $1,000,000 to support growth and investments in the businesses with capital return to shareholders. Looking through to the underlying results, the positive momentum continued with written premium growth, margin expansion, operating efficiencies will be conducting a significant return on alternative investments. However, results were impacted by Hurricane Ida, are

Speaker 3

participating in the Q4 of 2018.

Speaker 2

Commercial Lines reported have a strong quarter with an industry leading 87.2% underlying combined ratio and another double digit top line growth, Our teams continue to execute exceptionally well. In personal lines, We are in the midst of a transformation to provide a more contemporary experience in product. Through a modernized platform, In partnership with AARP, one of the largest affinity groups in America, we see the opportunity to capitalize on the growth in the are in the mature market segment as this demographic is expected to grow 3 times as fast as the rest of the U. S. Population I am pleased with the progress being made with the introduction of the new platform, and Doug will provide more commentary.

Speaker 2

Additionally, in the quarter, we entered into a new agreement in principle with the Boy Scouts of America. This agreement now includes not only the BSA, but local councils and representatives of the majority of sexual abuse claimants We have now been asked to officially vote on the BSA bankruptcy plan. The Hartford settlement becomes final upon the occurrence of certain conditions, which we expect to occur in early 2022. Now turning to Group Benefits. Core earnings for the quarter were $19,000,000 reflecting elevated life and short term disability claims, participants are in

Speaker 3

the range of

Speaker 2

$1,000,000 partially offset by strong investment returns, improved long term disability results and earned premium growth. Throughout the year, we have been reporting earned premium growth over prior year. In this quarter's positive trend continues. Fully insured ongoing premium is up 4%. This reflects growth in our in force book and continued strong sales and persistency.

Speaker 2

Persistency was above 90% and increased approximately 1 point over prior year. The group life industry has been impacted by excess mortality over the past 6 quarters. During our July earnings calls, we were optimistic that trends would lead to an improvement in COVID related mortality. Our optimism was short lived as the number of U. S.

Speaker 2

Deaths started increasing in August due to the Delta variant continue through September. As of this week, U. S. COVID deaths for the Q3 now exceed 112,000 And this number is likely to continue to increase in the weeks ahead due to reporting lags in the data. The rapid increase in COVID deaths in the 3rd quarter drove elevated mortality in our book of business and across the industry.

Speaker 2

Additionally, the mortality experienced from the delta surge has a higher percentage impact on the under-sixty five were of individuals under age 65 compared to approximately 20% of COVID deaths in December of 2020 January of 2021. Since younger age cohorts tend to carry higher face amounts,

Speaker 3

are in the range

Speaker 2

of $1,000,000,000 in the range of $1,000,000,000 in the range of $1,000,000,000 in the range of $1,000,000,000 in the range of $1,000,000 in

Speaker 3

the range of $1,000,000 in the range of $1,000,000 in the range of $1,000,000 in the range of $1,000,000 in the range

Speaker 2

of $1,000,000,000 in the range of mortality during the quarter, representing approximately 30% of reported excess mortality loss. This is directionally consistent with the broader U. S. Trends that saw elevated non mortality in the 3rd quarter. As we look to the Q4, forecasting excess mortality is a challenge.

Speaker 2

What we do know is that vaccinations are saving lives and higher levels of vaccination rates should help mitigate mortality claims. Bottom line, the fundamentals across the Group Benefits business remain solid and we are confident and optimistic about our performance in the future. Turning to the economic backdrop. While there are conflicting signals, I remain encouraged on the 2022 macroeconomic outlook and believe the environment will be one in which The Hartford's businesses perform well. Headline inflation remains elevated, but core inflation is on the decline.

Speaker 2

I do not expect inflationary pressures to go away overnight. The focus of global governments and the private sector on supply chain solutions as well as the normalization of hard hit pandemic sectors call the call to questions. Well, employment gains stalled in the last couple of months as the U. S. Was impacted by the delta surge.

Speaker 2

Vaccination rates, therapeutics and growing levels of natural immunity provide confidence that COVID will become less of a deterrent for individuals will be conducting a new quarterly financial results and return to the workforce. Unemployment is expected to continue a downward trend as borders increasingly reopen As I reflect on my tenure with The Hartford, I am extremely proud of the progress we've made Over the years, we fixed core businesses, exited underperforming or non core segments, successfully integrated will be participating in the Q1 of 2019. We will continue to see the progress we made in the Q1 of 2019. This is a direct result of our performance driven culture and the significant investments we have made to transform the organization into one with exceptional underwriting tools and expertise, expanded product depth and breadth in industry leading digital capabilities complemented by a talented and dedicated employee base. However, the journey is not complete.

Speaker 2

We will continue investing for the long term will be an even more differentiated competitor in the customer experience, all while producing superior financial results. At our November 16th Investor Conference, I look forward to sharing how the business is positioned for continued outperformance Strong margins, prudent capital management. I am very confident that The Hartford has never been better positioned to continue to deliver on our financial objectives and enhance value for all stakeholders. Now, I'll turn the call over to Beth.

Speaker 4

Thank you, Chris. Core earnings for the quarter of $442,000,000 or 1 point are in the range of $1,000,000,000 with a 40% annualized return on limited partnership investments and continued strong underlying results Offset by $300,000,000 of catastrophe losses of $200,000,000 from Hurricane Ida and excess mortality of $212,000,000 in group benefits. In P and C, the underlying combined ratio of 88.3 improved 2.3 points from the Q3 of 2020, Highlighted by excellent performance in our commercial lines segment. In commercial lines, we produced an underlying combined ratio of 87 point will be conducting a 6.5 point improvement from the Q3 of 2020 and 15% written premium growth for the 2nd consecutive quarter. In personal lines, an underlying combined ratio of 91.8 compares to 81.4 in the prior year quarter, which reflects Higher auto claim frequency from increased miles driven and higher severity.

Speaker 4

Doug will provide more detail on these results in commercial and personal lines in a moment. P and C prior accident year reserve development within core earnings was a net unfavorable 62,000,000 driven by the new settlement agreement with BSA, partially offset by reserve reduction in workers' compensation, personal participants are in the range of $1,000,000 in the quarter. In the quarter, we ceded an additional 28,000,000 recognized in the quarter.

Speaker 3

The reserve

Speaker 4

development resulted in a deferred gain representing are charged against net income in the quarter. Group Benefits core earnings of $19,000,000 decreased from $116,000,000 in Q3 2020 cause excess mortality in the quarter was 212,000,000 before tax, which includes $233,000,000 for 3rd quarter deaths, offset by 21,000,000 in

Speaker 5

the range of $1,000,000 of

Speaker 4

net favorable development from prior periods, predominantly from the Q2 of 2021. The percentage of excess mortality not specifically attributed to a COVID-nineteen cause of loss is more significant this quarter than it has been in the past. Losses from short term disability related to COVID-nineteen and excess mortality, the core earnings margin was 12.6%. The underlying trends in disability remain positive with lower long term disability claim incidents and stronger recoveries related to prior year reserves. The disability loss ratio in this year's quarter was 3.1 points higher as the prior year loss ratio benefited from favorable short term disability claim frequency Due to fewer elective medical procedures during the early stages of the pandemic.

Speaker 4

As Chris commented, the incidence in excess mortality claims going forward is hard to predict as it is dependent on a number of factors, including the vaccination rate, the potential spread of new COVID variants, The percentage of those infected who are in the workforce and the strain on the healthcare system impacting the treatment of non COVID related chronic illnesses. Improving operating efficiencies and a lower expense ratio from Hartford Next has contributed to margin expansion. The program delivered 306,000,000 in pre tax expense savings in the 9 months ended September 30, 2021 participating in the same period in 2019. We continue to expect full year pre tax savings of approximately $540,000,000 in 2022 are participating in 2020 prior year period reflecting the impact of daily average AUM increasing 27%. Total AUM at September 30th are participating in the Q3 of 2019.

Speaker 4

Mutual fund net inflows were approximately $300,000,000 compared with net outflows of $1,300,000,000 in Q3 are participating in 2020. Hartford Funds continues to produce excellent returns with growth in assets under management driven by net inflows and market appreciation. As a low capital business, its return on equity has been outstanding, consistently over 45% since 2018. The corporate core loss was lower at $47,000,000 compared to a loss of $57,000,000 in the prior year quarter, 20 21. Turning to investments, our investment portfolio delivered another outstanding quarter of results.

Speaker 4

Net investment income was $650,000,000 up 32% from the prior year quarter benefiting from very strong annualized limited partnership earn of 40% driven by higher valuations and cash distributions within private equity funds and sales of underlying investments in real estate. Limited partnership returns continue to exceed expectations. We continue to manage the investment portfolio with a focus on high quality public investments while leveraging our capabilities to take advantage of attractive private market opportunities. The total annualized portfolio yield excluding limited partnerships was 3% before tax compared to 3.3% in the Q3 are in 2020 reflecting the lower interest rate environment. We expect pressure on the portfolio yield to continue in the 4th quarter.

Speaker 4

The portfolio credit quality remains strong with no credit losses on fixed maturities in the quarter. Net unrealized gains on fixed maturities before tax were $2,500,000,000 at September 30, down from 2.8 are participating in the Q1 of 2019. The company's earnings release was $1,000,000,000 at June 30 due to higher interest rates and wider credit spreads. Book value per diluted share excluding AOCI rose 8% since are in the range of $49.64 and our trailing 12 month core earnings ROE was 12.5 percent. During the quarter, The Hartford returned 634,000,000 to shareholders, including $511,000,000 of share repurchases and 123,000,000 in common dividends paid.

Speaker 4

Yesterday, the Board approved a 10% increase in the common dividend purchases completed through September 30th, there remains 1,800,000,000 of share repurchase authorization in effect through 2020 are welcome to the Q2. From October 1 through October 27, we repurchased approximately 1,500,000 common shares were $108,000,000 Cash and investments at the holding company were $2,100,000,000 as of September 30, which includes the proceeds from the September issuance of 600,000,000 of 2.9 percent senior notes. These proceeds will be used to repay our 600,000,000 are in the range of 7.875 percent junior subordinated debentures, which are redeemable at par on or after April 15, in

Speaker 3

2022.

Speaker 4

During the Q3, we received $443,000,000 in dividends from subsidiaries and expect approximately $445,000,000 in the 4th quarter. With top line growth, improving underlying margins, Operating efficiencies, strong cash flow and ongoing capital management, we are positioned to consistently generate market leading earn an enhanced value creation for shareholders. I'll now turn the call over to Doug.

Speaker 6

Thanks, Beth, and good morning, everyone. Across property and casualty, I continue to be extremely pleased with our execution and performance. In the

Speaker 7

quarter, we have an outstanding

Speaker 6

88.3. Commercial lines achieved double digit written premium growth for the 2nd consecutive quarter. Written pricing remains strong, largely consistent with 2nd quarter. And our new personal lines product launch is accelerating with 5 new states rolled out in October. As Beth mentioned, commercial lines produced a terrific underlying combined ratio of over 5 points of improvement coming from the loss ratio and another point from expenses.

Speaker 6

I've been doing these calls for a long time, and this is one of the stronger underlying quarters I have presented. Before providing more color on commercial pricing and loss trends, let me spend

Speaker 7

a few minutes detailing another quarter conducting a solid

Speaker 6

foundation of exceptional top line performance. Small commercial written premium of just over $1,000,000,000 was a 3rd quarter record, increasing 14% over prior year. Policy count retention was strong at 84% and in force policies grew 6% versus prior year. As anticipated, we participants continue to benefit from an improved economy with increases in payroll and wages contributing to the quarter's top line results. Small commercial new business of $165,000,000 was up 28%, the 4th consecutive quarter of double digit growth.

Speaker 6

Our workers' compensation and market leading BOP product spectrum contributed equally to the result. I'm particularly pleased with the growth we're achieving across each of our small commercial distribution channels. New business from agents, are in the range of $1,000,000,000 The breadth and depth of this distribution balance is unmatched by competitors. In middle and large commercial, we produced a second consecutive excellent quarter with written premium growth of 18%. Middle market new business of $139,000,000 was up 6% in the quarter, driven in large part by our industry verticals.

Speaker 6

Policy retention increased 8% or 8 points to 87%, one of the strongest retention quarters in quite some time. We continue to balance the rate and retention trade off while maintaining disciplined risk underwriting in the range of $1,000,000 and leveraging our segmentation tools to drive prompt premium growth of 14%. New business growth of 26% was equally Across our franchise, we continue to further develop our operating routines with broader risk solutions to meet customer needs. As a proof point, 3rd quarter cross sell new business premium between global specialty and middle and large commercial was 15,000,000 With this result, we have now exceeded our initial transaction goal of $200,000,000 more than a year early. After years of development, our product portfolio has become a competitive strength and our execution will only get stronger.

Speaker 6

Let's move to pricing metrics. U. S. Standard commercial lines pricing, excluding workers' compensation, were 6.5%, consistent with the 2nd quarter. Middle market ex workers' compensation price change of 8.1% were essentially flat to quarter 2 and personnel written pricing was in line with quarter 2 at 1.2%.

Speaker 6

Global Specialty Renault written price remained strong in the U. S. At at 10% and international at 17%. Turning to commercial loss trends. Our casualty current accident year loss ratios are in line with expectations.

Speaker 6

It was a pretty quiet non cat weather quarter in small commercial property. In addition, we continue to monitor the adverse disruptions on loss costs and expect property severity trends to be elevated for the rest of the year and into 2022. Earned pricing is still exceeding loss trends within most lines And we remain confident in our full year 2021 loss ratio expectations. Before I move to personal lines, let me comment on the commercial pricing environment over past 2 to 3 years. There's no question we've experienced a healthy pricing environment and in several lines one of the hardest markets I've experienced.

Speaker 6

The combination of these rate actions and disciplined underwriting decisions are central drivers of our strong performance. Continued pressure from weather, supply chain and inflation lead me to believe that the current pricing environment will remain healthy well into 2022. Moving to personal lines, the 3rd quarter underlying combined ratio rose 10.4 points to 91.8. Auto frequency is up with increasing vehicle trips and miles traveled, but still modestly below pre pandemic levels. Auto severity is elevated, driven in part by the rising cost of used cars, parts and labor.

Speaker 6

These inflationary factors will continue to be an industry headwind as we expect them to persist into 2022. In home, we continue to experience favorable frequency versus our initial expectations, more than offsetting higher claims severity from elevated building material and labor costs. Turning to the top line, written premium declined 2%. Power up 64% and new business premium was up 6% in the quarter. This new business uptick occurred same period despite J.

Speaker 6

D. Power survey results concluding that Auto insurance shopping rates among the 50 plus age segment remained 6% below a year ago. Our new business growth was driven by higher marketing spend and improved conversion rates. I'm pleased with this quarter's momentum. We're also encouraged by the early results from the launch of our new contemporary personal lines auto and home product, Prevail.

Speaker 6

Through the Q3, written premium participants and issue counts are exceeding expectations. Both products are now available in 7 states. With our latest launch in early October, we also enhanced our auto and home bundling and telematics capabilities. On the latter, we're excited to be partnering with the industry leader Cambridge Mobile Telematics. This is an important change as we continue to augment our models based on driving good behavior.

Speaker 6

The Prevail product will be in 2 more states over the next 90 days.

Speaker 2

Before turning the call back

Speaker 6

to Susan for Q and A, let me include strong pricing is earning into the book, driving lower current accident year loss ratios. Global Specialty is delivering strong execution and underwriting performance,

Speaker 8

in line with

Speaker 6

our expectations and our outlook for 2019. We are clearly seeing the positive results of our multiyear roadmap with deeper and broader products, improved risk selection are in

Speaker 3

the range of $1,000,000

Speaker 2

and $1,000,000,000 and

Speaker 6

$1,000,000,000 This quarter is another demonstration of those capabilities. Our technology invest agenda has been significant and the results are clear and sustainable. I'm thrilled with our continued progress and look forward to sharing more details discussion with our business heads in November at Investor Day. Let me now turn the call back over to Susan.

Speaker 1

Thank you. We'll now

Speaker 3

take questions.

Operator

We will now begin the question and answer session. Our first question will come from Elyse Greenspan with Wells Fargo. Please go ahead.

Speaker 9

Hi, thanks. Good morning. My first question is on the incremental $500,000,000 of buyback. I know it's a 2 year capital plan. So is that expected to come this year or next year?

Speaker 9

And then is that being funded just with Higher dividends, the holdco or are you holding a little bit less of a buffer or maybe a combination of both?

Speaker 2

Elyse, I'll start and then I'll ask Beth to add her commentary. So Yes. As we sit here today, it's a sign of obviously increased confidence in our business performance, our cash generation capabilities coming out of our OpCos That will eventually flow to the holding company. We haven't relaxed any of our standards As far as holdco liquidity, we still want to hold generally 1x interest in the future interest in dividends. But it's more as we highly confident in their performance and we took the action we did.

Speaker 2

But Beth, what would you add?

Speaker 4

Yes. So what I would add is, as we think About the timing of the share repurchases, if you recall, under the $2,500,000,000 authorization, we had said that we anticipated $1,500,000,000 in are in 2021 with $1,000,000,000 in 2022. So increasing by $500,000,000 gives us the opportunity in 2022 to be are relatively consistent with 2021. So not looking to significantly change the timing of what we had already laid out for 2021. But again, as Chris said, as we look at Underlying business performance and levels of capital at the holding company, we felt this was the appropriate action.

Speaker 9

Thanks. And then my second question, within your accident year underlying loss ratio improvement within commercial, how much So how much paid from rate over trend within your commercial book? And then can you update us on what you're assuming for loss trend

Speaker 6

Sure, Elyse. Let me start and Beth will fill around the edges for sure. So as I mentioned, over 5 points of commercial loss improvement. You've got to adjust for COVID, right? So COVID is Earning in positive rate.

Speaker 6

And so as I think about that, the adjustments and the variables that drive those changes All coming from that positive earn rate change. So I think it's sustainable as we look into the Q4. We had a little bit of good news on non cat weather property, primarily in small commercial, but the other lines, comp GL, are specialty lines. It's basically earn rate driving the improvement.

Speaker 9

Okay. Thanks for the color.

Operator

Our next question will come from Derek Hahn with KBW. Please go ahead.

Speaker 10

Good morning. Thanks. My first question is on workers' comp. 1 of your competitors talked about the competitive environment, kind of driving rates to not really inflect until year end 2022. Can you just talk about What kind of frequency and severity trends that you're seeing with wage inflation and the potential for medical inflation to pick up as well?

Speaker 6

Yes. A few pieces to that question. I'd start by saying that the competitive environment to us in quarter 3 into 4, Not a lot different than what we saw earlier parts of the year. So I think a fairly consistent competitive environment. The comment about The 'twenty two extension toward the end of the year, I think, is a fair comment that we see, based on the filings that are moving through state regulatory bodies now, participants continue to perform.

Speaker 6

And then relative to trends, yes, favorable variances,

Speaker 3

a little bit of

Speaker 6

a period that will be unlike any other period prior because of pandemic. And yes, medical inflation has been rather tame the last couple of years, but have not come off, right, which are in that 5 plus range for medical inflation. We see that long term,

Speaker 10

Okay. That's really helpful. And then my second question is on the reserves. How are you feeling about the Navigators reserves given that you're a quarter away from maybe blowing through the top of the adverse cover?

Speaker 2

Derek, I'll start and just remind you that we purchased that have a number of questions about the company's comments. Adverse loss to cover for a reason. And it was part of our views of how we're going to finance the acquisition that, again, I think turns out to be an absolute home improvement in our combined shows the improvement in product, the ability to cross sell all those participants are part of how we viewed that we were going to finance it and obviously take some tail risk off. But Beth, what would you add?

Speaker 4

Yes. So as I mentioned, the changes that we made this quarter were in wholesale are in the middle of the tail factors that we had in that book. And overall, when I think about and even think of the action that we took this quarter with or without the ADC, relatively small movement when you think about the

Operator

Our next question will come from Gary Ransom with Dowling and Partners. Please go ahead.

Speaker 11

Good morning. Regarding the aggregate cat reinsurance cover, I was wondering if you help us understand where you are in terms of reaching the attachment point

Operator

and how that might affect

Speaker 11

the Q4 foreign limits for the quarter?

Speaker 4

Yes. So Gary, great question. So yes, we do have an aggregate cover that kicks in when losses that get ceded that cover exceeds $700,000,000 and provides $200,000,000 of protection. And so when you look at the cat losses that we've had through September 30th, We probably have about a little less than $50,000,000 to go before we would start to hit that $700,000,000 attachment point.

Speaker 11

All right. Thank you very much. And then I believe this is probably for Doug on The tone of the market and how rates are more or less stabilizing, If I compare how I was thinking about it and maybe even you were thinking about

Speaker 2

it earlier in the year, that

Speaker 11

participants involved in that, but do you have a view on 2022?

Speaker 6

Gary, I agree with you, right? So if we're Looking at the core of our guarantee cost non specialty book, I would describe Q3 as very stable compared to earlier in the year and Within our expectations for the reasons you suggest, we look at property drivers and the weather. We think about Inflation risk, supply chain, I mentioned them in my script. I think that those types of factors will be further drivers to make sure that we as underwriters are covering our cost of risk. And so That would be my commentary around the core guarantee costs, non specialty book.

Speaker 6

And then in the specialty area where we've seen rather dramatic changes in the pricing the last couple of years dramatic in the sense of positive. Yes, there's been some moderation, but I think as correlating to improve price adequacy in those books of business So I think in total, not major surprises, but I do think these threat factors relative to particularly weather in the property area and supply chain and others will keep prices kind of where they are. We see a steady as you go for a period of time now.

Speaker 11

All right. That's helpful. Thank you.

Speaker 6

Thank you.

Operator

Our next question will come from Josh Shanker with Bank of America. Please go ahead.

Speaker 11

Thank you very much. So I'm looking at the growth rate in Global REIT and International. When you talk about the Navigators acquisition, You want to increase your shelf space in a lot of your producing agents and whatnot, but international and global REIT kind of fall out of the Having a complete shelf of products, what are the strategies in those 2 subsegments? What do you hope to achieve and how How do they fit in with your business model?

Speaker 6

I'd start with Global Re. It's really a niche segment for us. It's a small group of are very seasoned thoughtful underwriters, selective in their portfolio matching. This is a smaller quarter for them. So the 39 you have to put in context, but it's been a successful group.

Speaker 6

They have added to our risk expertise here within the place, in the range of $1,000,000 and we're very pleased about their approach and their success. So I see them very much a part of our strategy, but a little bit separate from our primary focus on Global Re. And then relative to international, our stated mission the 1st couple of years was absolutely to regain are contributing to shareholder success, if you will, right? We had had a very disappointing couple of years of performance internationally, not unlike others in the Lloyd's marketplace. As we've worked hard at that and now feel much better about our financial performance.

Speaker 6

And as we look forward, we're exploring and debating amongst ourselves about how we grow that portfolio. So I'm bullish about the future, really pleased that we have the past behind us and think we have a very solid platform to work from. And obviously, it is Not unlike most of our competitors in the Lloyd's marketplace, but we were talking across our product families about what we can do there. And I think an area that we'll talk more to you about over time.

Speaker 11

All right. And then on personal lines, obviously, it's a real tough period auto right now with the reopening in the used car prices. How should I think about the loss ratio content on new business being written under the new underwriting model where you're not as stuck with the business

Speaker 6

Well, I would start by answering your question saying we have spent a lot of time with our pricing approach state by state as we Launch these new products and probably slightly different answers by state based on where we are and what we see as the opportunities in the given states. So I would not jump to the fact that we see and expect lower loss ratios in the New than we do in our current book. We have a very solid are in a position to be a significant contributor to our earnings. But we're excited about what we can do with this new product platform. It is much more contemporary.

Speaker 6

It's got features as underwriters we like a lot. And Obviously, I've talked to you about what we're doing with the auto space with our telematics program. So as I think about the new launch of Prevail, in time, that will continue to be a key driver of our profits that will be increasing as we roll through the rest of the country in 2022 with rollouts. At the moment, it's rather immature and we're watching the early stage. And so I think it's too early to call, but excited about early progress.

Speaker 2

And that's the direct part. Again, Doug described it well. I would just add, again, remember, part of the inherent strategy there is to serve more ARP members in the Particularly in the 50 to 65 year old. So our base plans, our base rates in the various states that we do expect have a broader population set to underwrite. But again, given the flexibility we have with 6 months policies, Lifetime continuity agreements, meaning they're not guaranteed renewable.

Speaker 2

It does give us, I think added flexibility to experiment in various states. And is

Speaker 11

the new product direct or multi

Speaker 2

It's direct right now, AARP dedicated. I mean, you've seen our agency business. It's very small compared to where it was years ago, but this is our direct to consumer channel. Thank you.

Operator

Our next question will come from Mike Zaremski with Wolfe Research. Please go ahead.

Speaker 12

Great. Happy Friday. Good morning. I guess just sticking as a follow-up to Josh's questions. Since your portfolio mix is still is a little different than many of the peers we follow in terms of demographics.

Speaker 12

And your results in auto are still Good. Just curious, are you looking to push a lot more right there? Or is it given kind of the inflationary trends? Or just how should we kind of think about kind of rate versus potential loss trend over the coming year or so? I think in your commentary, it sounded like we should be kind of baking in some continued pressure.

Speaker 6

Mike, that's fair, right? I would say that are strong across the board, but we're not immune from the risks and supply chain and used auto prices, etcetera, that the industry is facing. So We are active on the pricing front. We are working state by state across the country, have more flexibility as Chris enumerated relative to Prevail, but even in our current product construct, I would say it's an active product area upstairs working What we think are the supply chain issues that we're going to be facing into 2022 as we work through that year. So yes, active on the EXPAREL front.

Speaker 12

Okay, great. Switching gears, maybe just kind of to workers' comp and maybe stepping back to see the forest for the trees a bit, because I know some some investors have focused on kind of the soft pricing environment for a while, which might be improving. But I guess workers' comp results have really been excellent. It looks like much better than expected for years now despite the pricing. Maybe you can kind of talk to What's been driving the loss cost trends?

Speaker 12

What specifically has been much better than expected over the recent years, especially for some of the older vintages.

Speaker 6

Yeah. I can't give you all of our secret sauce away. That It will be a good day for other people listening, but I will share this with you, right? We have a very sophisticated series of pricing modules across our markets. Think we work workers' compensation and think about strategy and think about segmentation in deep Geographic sales, industry sales, etcetera.

Speaker 6

So what we do down in the trends have been rather moderate over the past 5 to 6 years, right? So understanding that, as we talked before, medical severity has been Pretty moderate these last 3 to 5 years. Generally, the long term frequency numbers are in good shape. But our performance has, I would say exceeded those tailwinds. And when I think about our execution on the front lines and the combination of data science, data analytics inside this company, the use of third party data, There are just a lot of competitive strengths that we think drive our success in workers' comp, and I think those are here for the long term and getting better every quarter.

Speaker 2

Doug, again, I know we talk about it internally. I would just add, Mike, our ability to interface with our agents and brokers in just a more efficient way these days, given our digital capabilities that we've built, I think does provide a competitive advantage for agents or other forms of distributions to interact with us On an easier basis with great data, fast turnaround time. So the competitive advantage that Doug talked about from the analytical side,

Operator

Our next question will come from Tracy to Angie with Barclays. Please go ahead.

Speaker 8

Thank you. Good morning. Your underlying margin expansion in Commercial Lines is quite impressive and I Appreciate the color of earned rate ahead of trend. Just another question there. Could you comment on the direction of your 2021

Speaker 6

So Tracy, let me start. When we think about current accident year picks And maybe I'll just refer you to the supplement because we've got a year to date in the supplement. Our numbers underlying on the loss side are really strong. So if you look at 9 months of 'twenty one versus 9 months of 'twenty, I think they're very healthy and that really does guide back to the thoughts that Beth and I shared a bit ago about Stronger in pricing as a result of written pricing participating in 2020 2021. So we're encouraged.

Speaker 6

The other thing that we have not talked about on the call this morning is there's still a number of actions contributing to that number. So I know in our middle and large commercial book, Moe Tooker and his team have a number of initiatives that participants are also drivers of improving performance. So lots happening in the core underwriting, but some of those drivers are in addition to what I would describe have very positive pricing trends.

Speaker 2

Look, I would add just to Tracy's comment. There's nothing fundamentally that's changed in our philosophy in line with the expectations of how we'd like to be thoughtful, predictable, consistent with loss picks, with Anything related to our business. So, Tracy, I mean, we have a great deal of pride in being very consistent and predictable. So that's The only color I would add.

Speaker 6

Yes. I would agree with that, Chris. And maybe just as a closer, in 2 weeks when we're together on Investor Day, one of the initiatives of that day is to take you inside of our competing engine is today than it was 5 years ago. And there are a lot of things we've done organic. Are interested

Speaker 3

in the

Speaker 6

with you folks. We're going to attempt to spend some time on 16th to look back and give you a sense of participants are in line with our company going forward.

Speaker 8

Yes. I'm looking forward to seeing that participating in Investor Day. I also have a follow-up on the auto pricing front comment. I guess in those efforts

Speaker 5

with ready

Speaker 3

to take

Speaker 8

a look at the rate filing. I just wanted to get a better sense of when you think earn rates will be meeting higher loss are in those efforts. Would you see that inflection point?

Speaker 2

Thanks. Is that a commercial participants are in the line of the line of the line of the line

Operator

of the

Speaker 9

line of the

Speaker 3

line of the line of the line of the line of

Speaker 8

the line of the line of

Speaker 3

the line of the line of the line of the line of the line of the line of the line of the line of the line of the line of the line

Speaker 8

of the line of the

Speaker 3

line of the line of the line of the line

Speaker 8

of the line of actually getting those filings through since it wasn't that long ago, they were thinking about rebates. So just that process of getting have a great time.

Speaker 9

You just have accumulation of loss trends.

Speaker 8

So I just wanted to know when you think that will all come together.

Speaker 6

Yes. So the exact data is going to be hard to predict, but let me just start with where we were in the range of 15 months ago. One of the things we did not do was to tinker with our new business pricing in the Q2 of 2020. So went kind of an in force rate of return and did not change our Pricing on new going forward, I think that has provided a much more stable, profitable base that has not changed a little bit. We obviously, because of driving habits changing radically in the Q2 of 2020.

Speaker 6

We return monies appropriately given that. But I'd start with The premise that our book remains intact and feeling very healthy about it. 2nd point I'd make is that To answer that question, you'd have to talk about and predict the supply chain dynamic. And that is very difficult to do. We're feeling the labor dynamic, unemployment, etcetera, We think those trends will continue into 'twenty two.

Speaker 6

I hope they will ease as we get into the middle part of 'twenty two, but that is an ongoing component, suggest we look across our states. There's some states that we're filing in, in the next 30 days. There's some states we have filed in the last 100 days that we won't be filing for another 3, 6 months. So we do think supply chain will ease

Speaker 3

range of $1,000,000,000 in the quarter.

Speaker 6

So we expect to kind of live on through the current conditions as we see them and as we move into the latter half of 'twenty two.

Speaker 8

Thank you. Appreciate it.

Operator

Our next question will come from Andrew Kligerman with Credit Suisse. Please go ahead.

Speaker 13

Good morning. Question around well, first, great to see the repurchase authorization go up. But also curious with the M and A environment, are you seeing any opportunities, any areas where you'd like to get bigger? Could that eventually preclude some of this upward authorization? What are you thinking about M today in how that might play out over the next 2 years.

Speaker 2

Andrew, thanks for the question. Yes, we've I think ready to take questions. It's just a low priority principally because I think our portfolio of participants are focused and we want to mature that, grow it organically and focus on the activities more from an organic mindset as opposed to participants are

Speaker 3

in the process of making sure that we're in the process of implementing the

Speaker 2

right to do M and A. So I just consistently shared with you and others, it's just a low priorities, so and that's appropriate to make a repurchase commitment through the end of 'twenty two with that $500,000,000 increase.

Speaker 13

Thanks, Chris. And then just moving over to the Group Benefits business, It looks like you had a real solid ongoing premiums growth of 4% in the Q3. It seems to be are generally moving up, products are driving that. You're seeing movement in voluntary products. And Can you sustain that growth rate because it's very compelling if we could just kind of get out of the COVID and just continue to see these really nice underlying ratios?

Speaker 2

Yes. I believe we can, Andrew. We've, I think, demonstrated that consistently during the year as we have been recovering from COVID. So I think the opportunity, particularly as more people come back into full time employment or part time employment with a little wage inflation in the industry, I think that sets up

Speaker 3

the

Speaker 2

that's broadly defined is very healthy. So it is our voluntary products that we've built over the last 5 years. So really pleased with all the critical that is a deep growth area. And then I would just give you one last point, Andrew. I think people's attitudes, meaning employees' attitudes to benefits has changed.

Speaker 2

I think they're more focused on it, given what we're living through. I think they're more thoughtful about thinking about risk and protection they need for themselves or their families. So I think there's a broad way to look at that is occurring across America. Excellent. Thank you.

Operator

Our next question will come from Jamie Buehler with JPMorgan. Please go

Speaker 14

ahead. And I think first on pricing and workers' comp. Everyone's sort of been are expecting prices to go up next year for the last couple of years, but hasn't happened yet. So I'm wondering if you could comment on if that's

Speaker 3

the competitive

Speaker 14

environment because of competitive behavior or is it because of pushback from the states? And what gives you the confidence that

Speaker 6

That would be my place to start. Secondly, in most states, a 3 year experience period. So is now becoming part of the experience period and

Speaker 3

participants

Speaker 6

are very favorable. So with that interested in the execution of the market and the market is going to be in the

Speaker 7

market. The later in 2020 going to do for the end of

Speaker 6

the year into 'twenty three. We're going to feel those headwinds. We've talked about it, but it's just that we have here to be thoughtful about our underwriting and risk taking throughout 'twenty two.

Speaker 14

Okay. And then as you think about margins in workers' comp, I think in the past participants have been cases, Wendell, sometimes it doesn't seem like that's happened this time around. But if you could comment on what you've seen in that respect and looking at the economy overall.

Speaker 6

We're certainly watching that carefully. We're watching frequency because just

Operator

as you described, looking at the economy overall.

Speaker 6

We're certainly watching that carefully. We're watching frequency because just as you described, sometimes when you see a pickup in the economy, You'll have less experienced workers on the job that may lead

Speaker 3

participants are

Speaker 6

subject to injuries and injuries obviously are a driver in workers' compensation. So as I reflected both in the Q2 and Q3, our frequent users are in healthy shape, but it is a high watch item for us. And if we see something, we will share that with you and deal with that in our numbers. But right now, are fairly

Speaker 14

quiet. On COVID mortality being high, if you could talk about whether you think that's more of an anomaly or could that be a trend given that more younger people are being affected overall, which obviously affects your book more so than was the case initially.

Speaker 2

Yes, Jimmy, the non COVID mortality has been very bouncy over the last 6 quarters. So I don't see A trend per se just given what we've seen in the data. I think the anecdotal view is During COVID, particularly the early days, there might have been lack of People seeing their health care providers for routine health care, whether it be annual physicals, Normal checks and screenings. So we have seen, particularly in this quarter, with that elevated non COVID mortality, A little bit more heart stroke, cancer causes of death that seem to indicate maybe a second order effect with COVID and people not taking care of themselves. But beyond that, I don't It's been very bouncy.

Speaker 2

That's all I'll say. So I don't think it's trendable at this point.

Speaker 14

Okay. Thank you.

Operator

Our next question will come from David Motomatun with Evercore ISI. Please go ahead.

Speaker 15

Hi, thanks. Good morning. Thanks for taking my question and letting the call go a little longer. I wanted to also just ask about the Group Benefits, The adverse mortality this quarter, I was wondering if you could just give a breakdown how much of it was IBNR participating in the Q3. And then relatedly, And I know there's a lot of uncertainty here.

Speaker 15

It's hard to predict. But as of now, the IHME estimates that total COVID mortality will remain near a 1,000 deaths in the 4th quarter, if it does in fact stay that high, would you expect similar sensitivity As in 3Q or, I guess, how should we think about the puts and takes there?

Speaker 2

Yes. Happy to take your question, David. It's important to get you and Tom some answers. So let me just give you a context. On On sort of mortality here, how we approach it is, obviously, we have a great deal of data in history in this area that sort of complete our lag studies to make an estimate of sort of incurred but not reported deaths during the quarter.

Speaker 2

Obviously, with the COVID We've overlaid CDC data into our analysis to obviously see their trends both on a COVID and non COVID factor. So that's the blending of those 2 came up in essence with our conclusions for this quarter. At the end of the quarter, I would share with you, July was fairly developed, Meaning, you could have a higher degree of confidence on the ultimates that we see in July, a little less so in August. And September is sort of the freshest month and it's the one that's the most challenge to sort of predict the future. When you put it all together though for the quarter Of the incurred losses that we have, 53% of it is still held in IBNR.

Speaker 2

So if that's the data point you're looking for. I think the other point that you referenced is I would share with you the more deaths in under 65 year olds is really driving up our severity. If you look at severity on a 9 month basis this year compared to 9 month basis last year, Our severities are up 49%, which tells us, again, younger age cohorts, higher insured value active lives at work. When we look at sort of regions, the region that sort of stands out for us is the Southeast. And as you say that the years in the Life business, It's been most difficult to get our arms around a model that really effectively predicts this.

Speaker 2

Some models are high, some are low. You've seen our experience even this year where Q1, we were significantly overestimated on our So I'm going to refrain from making any predictions both on frequency have a wide range of outcomes. What I would share though is that we do have some FD

Speaker 5

friendly available on the call to

Speaker 2

discuss the events coming up in December, and we'll provide our in the Q2. What about 2022? 2022 is even harder to predict. So when we're back together in February, As we sit here today, I think these next two quarters could still have some lingering COVID effects that will emerge in

Speaker 6

Thanks, Chris. I appreciate that detail

Speaker 15

and totally understand there is a lot of on the call and you're not aware

Speaker 11

of the uncertainty and you're not

Speaker 5

aware of

Speaker 3

the fact that you're

Speaker 15

not aware of, you know, predicting If I could just switch gears and sneak one more in for Doug. I just wanted to ask, It looked like in Small Commercial, you talked about underlying loss ratios ex COVID. Could you talk about the drivers there? Because I had thought that was a place where pricing was under a little bit more pressure. So is that more a benefit of just wage inflation coming through

Speaker 12

or something

Speaker 6

Yes. When I think about small commercial year over year in the quarter, I mentioned we had a pretty good non cat quarter, weather quarter. So we have some good news in loss ratio there. And then yes, to your question and work our expectations around pricing in small, so that's against our in the Q3. Obviously, that's in the books right still feel good about our calls.

Speaker 6

We've not come off our severity calls, our indemnity calls and encouraged by what we see in the participants are in the line. So I don't think there's a major story there, but it's just another really solid performance by our small commercial comp team.

Operator

I would like to turn the conference back over to Susan Spivak for any closing remarks.

Speaker 1

Thank you, Matt. We appreciate you all As a reminder, our virtual event to 4 pm and you can register. Thank you.

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Earnings Conference Call
The Hartford Financial Services Group Q3 2021
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