The Hartford Financial Services Group Q1 2022 Earnings Call Transcript

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Provided by Quartr
April 29, 2022

There are 9 speakers on the call.

Operator

Hello, and welcome to today's The Hartford First Quarter 2022 Financial Results Webcast. My name is Bailey, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to Susan Stivak, Senior Vice President of Investor Relations. Susan, please go ahead.

Speaker 1

Good morning, and thank you for joining us today for our call and webcast on Q1 2022 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, 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. Just a few comments before Chris begins.

Speaker 1

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 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 the comparable GAAP measure are included in our SEC filings as well as in the news release and financial supplement. Finally, note that please that no portion of this conference call It will be available on The Hartford's website for 1 year.

Speaker 1

I'll now turn the call over to Chris.

Speaker 2

Good morning, and thank you for joining us today. Last April, on our Q1 earnings call, I had said I'd never been more Excited about the future of The Hartford and was extremely bullish about our prospects for growth and further margin expansion. Since then, we have demonstrated our ability to deliver on these commitments through exceptional execution quarter after quarter. We continued that momentum in the Q1 with core earnings of $561,000,000 or $1.66 per diluted share, Up from $203,000,000 or $0.56 per diluted share in the prior quarter, Book value per diluted share, excluding AOCI, was $51.42 and our 12 month core earnings ROE Our commitment to long term value creation through consistent profitable growth, continued investment in our business and return of capital to shareholders. We delivered these results during a very dynamic period, which is likely to continue With ongoing challenges from COVID, the secondary impacts of the Ukraine conflict and We anticipated Fed actions to raise interest rates while shrinking its balance sheet to address historically high levels of inflation.

Speaker 2

And yet there are reasons for optimism. Unemployment remains very low, 3.6% at the end of March. U. S. Consumers are historically holding low levels of debt with healthy savings.

Speaker 2

Home prices have appreciated 17% on average over the past year, providing a valuable source of equity for homeowners. Corporations have strong balance sheets and healthy earnings profiles, while new U. S. Business applications We're up 65% from the pre pandemic levels, a trend that is expected to continue. We view the economic environment as Favorable to our business, where growth is fueled by higher employment levels, rising wages, New business startups and commercial exposure expansion.

Speaker 2

I remain confident that The Hartford It is well positioned to perform across its portfolio of businesses to deliver on our goals, maximizing value for our stakeholders. Now let's turn to the highlights from the quarter, which illustrate how our strategy translates into consistent And sustainable financial performance. Overall, Commercial Lines results outperformed With double digit top line growth and expanding margins in all businesses. In Small Commercial, We hold a clear leadership position with our innovative products, digital platform and data and analytics setting us apart Last year, we delivered a record growth, eclipsing $4,000,000,000 in annual premium. And in the Q1, we continued this positive momentum with very strong new business and increased premium retention.

Speaker 2

Middle and large commercial results are benefiting from sustained investments in underwriting capabilities, broader product offerings, as well as innovative digital and data science tools. In Global Specialty, We continue to maximize our expertise to gain market share, while expanding margins with overall profitability improvement Of more than 10 points from the second half of twenty nineteen, as it relates to the Ukraine conflict, First, let me say, we share the world's outrage at the tragic and senseless death, suffering and destruction, And pray for an end to this needless violence. From the Hartford's perspective, We have very modest direct exposure within the region, which is meaningfully reinsured. We have a diminished amount of premium there And have actively controlled our exposure in the run up to the conflict and subsequent to the start of the hostilities. Patrick will cover the financial impacts to the quarter.

Speaker 2

In Personal Lines, results were in line with expectations And reflect our transformative work and unique AARP relationship. I am pleased with the progress we are making as we roll out Prevail, Our innovative and cloud based platform that provides a simplified digital customer experience And uses data science to drive new business growth in a profitable 50 plus age segment. Turning to Group Benefits. As expected, we continue to be impacted by the pandemic. However, our underlying performance was Solid.

Speaker 2

It continues to demonstrate our market leadership position. Fully insured ongoing premium was up 5% in the quarter And reflects both increased premium from existing customer and a full point improvement in persistency over the prior year. Favorable employment trends and rising wages also contributed to premium growth. Sales for the current quarter are down year over year as the Q1 of 2021 benefited From the expansion of paid family medical leave products in several states, adjusting for that one time lift, Sales are comparable to prior year across our life, disability and supplemental health products. Through the 1st 3 months of the year, our long term disability book is performing as expected With modestly higher disability incidence trends, a higher incident rate is reflected in our future pricing And was anticipated when we set forth our margin expectations for 2022.

Speaker 2

Modestly higher expenses in the quarter reflect higher staffing costs to manage elevated short term disability claims And accelerated investments in capabilities, including digital, claims automation and administrative platforms. We expect the full year 2022 expense ratio to be generally consistent with Q1 results. During the quarter, the number of U. S. COVID cases were at their highest levels of the pandemic And deaths were elevated.

Speaker 2

However, both cases and deaths have rapidly declined in March April. Clearly, the past 2 years have shown that predicting the pandemic impacts is impossible, But with cases and deaths at their current levels, we are cautiously optimistic about the remaining quarters of 2022. In conclusion, The Hartford is off to a strong start in 2022. We are Optimistic about macro factors impacting our business, including improving pandemic outcomes and the potential for Easing of inflationary pressures. We continue to manage our investment portfolio prudently and expect the portfolio yield to benefit rising interest rate environment over time, and we are continuing to proactively manage our capital.

Speaker 2

All these factors underpin my confidence that we will generate a 13% to 14% core earnings ROE in 20222023. Our strategy and the investments we've made in our business Have established The Hartford as a proven performer with consistent results. We are competitively positioned with a complementary And a well performing portfolio of businesses and a winning formula to consistently achieve superior risk adjusted returns. Now I'll turn the call over

Speaker 3

to Beth. Thank you, Chris. Core earnings for the quarter of $561,000,000 or 1.6 dollars per diluted share reflect excellent P and C underwriting results, a significant contribution from the investment portfolio And reduced pandemic related impacts and group benefits. As Chris commented, business written related to Russia Ukraine exposure had a modest impact on results. We recorded $27,000,000 of net catastrophe losses primarily related to political violence and terrorism, including aviation war And credit and political risk insurance.

Speaker 3

As a result of incurred losses covered by our reinsurance treaties, we recorded a provision Seated reinstatement premium of $11,000,000 The company's direct investment exposure is limited to corporate bonds by Russian entities with an amortized cost of $16,000,000 and we recorded an allowance for credit losses of $9,000,000 in the quarter. We do not have any investments in Belarus or Ukraine. Moving on to the business line results. In Commercial Lines, Core earnings were $456,000,000 up $351,000,000 from the prior Driven by the reserve increase in the 2021 period for Boy Scouts and a stronger top line and lower catastrophes in the current period. Commercial Lines reported 12% written premium growth, reflecting an increase in new business and small commercial, strong policy retention, Written pricing increases and exposure growth.

Speaker 3

The underlying combined ratio of 88.3 improved 2 Margins across several product lines in 2022. In Personal Lines, core earnings were $84,000,000 and the underlying combined ratio of 88 Point 5 reflects increased auto loss costs as anticipated. I would note that from a seasonality perspective, the Q1 typically has lower loss And the balance of the year. As Doug will comment upon, we are making progress in getting more rate into the book given the impact of inflation on loss costs. Although our view of inflation impact is a bit higher than where we were a quarter ago, we expect to be within the underlying combined guidance of 90 to 92 for the full year, albeit at the high end.

Speaker 4

P and

Speaker 3

C Current accident year catastrophes in the Q1 were $98,000,000 before tax, which included the $27,000,000 related to Russia, Ukraine exposures that I just mentioned. P and C prior accident year reserve development was a net favorable $36,000,000 with workers' compensation being the largest contributor. Turning to Group Benefits. Core earnings of $8,000,000 compares to a core loss of $3,000,000 in Q1 2021. Core earnings reflect a lower level of excess mortality losses in Group Life, partially offset by a higher disability loss ratio and an increase in the expense ratio.

Speaker 3

All cause excess mortality in the quarter was $96,000,000 before tax compared to $185,000,000 in the The $96,000,000 included $122,000,000 with days of loss in the 1st quarter, which was partially offset by favorable development on prior quarters. The disability loss ratio increased 4.8 points over the prior year Period. Primarily due to less favorable prior and which included an assumption for increased incidents relative to the past couple of years. Long term disability claim recoveries remain strong And are consistent with prior year. Lastly, the expense ratio for Group Benefits increased by 0.6 points.

Speaker 3

Consistent with expectations, the expense ratio was impacted by higher staffing costs to handle elevated short term disability claims And increased investments in technology, partially offset by incremental Hartford Next expense savings and the effect of earned premium growth. Before excess mortality and COVID short term disability losses, the Group Benefits core earnings margin was 5.7%. From a seasonality perspective, we experienced higher underlying loss costs in the Q1, we would expect the margin to be lower than our full year estimate. We remain confident in our guidance of a 6% to 7% core earnings margin for full year 2022 excluding COVID impacts. Turning to Hartford Funds, due to equity market declines and higher interest rates, AUM decreased during the quarter to $148,000,000,000 resulting in a sequential quarterly decrease in core earnings, though core earnings were up 11% compared to Our investment portfolio delivered another strong quarter.

Speaker 3

Net investment income was 509000000 Benefiting from very strong annualized limited partnership return of 14.6%, driven by relatively balanced contributions From our private equity and real estate equity investments. Total annualized portfolio yield, excluding limited partnerships, was 2.9% before tax. With the increase in interest rates and wider credit spreads, the portfolio's reinvestment rate was 3.3%, which compared favorably to the Sales maturity yield of 3%. Not surprisingly, the portfolio value was also impacted by higher interest rates and wider Credit spreads. The portfolio moved from an unrealized gain position of $2,100,000,000 at year end to an unrealized loss of approximately 300,000,000 Additionally, the portfolio had a net realized loss of $145,000,000 which includes $107,000,000 of mark to mark losses on the public equity portfolio reflecting the decline in equity markets in the quarter.

Speaker 3

While it is still early, as we look ahead to the Q2, we anticipate the limited to our LP return, and this diversification has proven to be beneficial. So while interest rates and capital markets may remain volatile, we are confident that High quality and well diversified portfolio will continue to support our financial goals and objectives. The confidence we have in our business is also evidenced by our As of March 31, approximately $900,000,000 of share repurchase authorization remains for 2022. From April 1 through April 27, we repurchased approximately 1,900,000 common shares for $139,000,000 On April 15, we redeemed $600,000,000 of hybrid securities with a rate of 7.875%. We had prefunded Redemption was the issuance of $600,000,000 of 2.9 percent senior notes last September, which will result In net annual after tax savings of approximately $24,000,000 In summary, our Q1 financial performance Demonstrates the positive results that building and investing in our businesses have yielded.

Speaker 3

Combined with prudent capital management, we are positioned to deliver on I will now turn the call over to Doug.

Speaker 5

Thanks, Beth, and good morning, everyone. The Hartford Property and Casualty's strong Q1 results are evidence of the substantial progress achieved to expand product breadth, advance technology and data science, Deepen our distribution footprint and differentiate the customer experience. These accomplishments are powered by our skilled talent base, Positioning us well for profitable growth. Starting with Commercial Lines, I'm pleased with the underwriting performance across product lines And the improving expense leverage. Written premium growth was strong in the quarter, sustaining the top line momentum achieved last year.

Speaker 5

With the acceleration of growth during 2021, the year over year compares will get more challenging in subsequent quarters, We're confident there is upside to our initial target of 4% to 5%. Starting with pricing, in January, we shared with you our 2022 commercial lines guidance, which contemplated moderated renewal pricing and first quarter was largely in line with those expectations. Commercial written pricing, excluding workers' compensation, was 7.1%, moderating about a point From the Q4, but continuing to exceed loss cost trends across most products. This moderation was largely experienced in middle market And Global Specialty. Workers' compensation pricing declined slightly from the 4th quarter as expected.

Speaker 5

The dynamic of higher average wages, Partially offset by negative filed rates will likely persist throughout 2022. New written premium and small commercial was up 6% driven by spectrum and retention improved 2 points from last year. Our number 1 rated digital customer Outstanding product capabilities and rising no touch findability levels are driving business to The Hartford As customers continue to embrace our consistent pricing and underwriting approach, leading to higher sales and excellent retention. Middle market pricing, excluding workers' compensation, was 6.5%, a very solid start to the year. Retention was up 4 points from the Q1 of 2021, While new business premium was essentially flat.

Speaker 5

Robust exposure growth also contributed to our quarterly top line increase of 10%. Pricing remains strong in global specialty at 8.3% with U. S. Wholesale pricing just over 9%. Premium retention was steady And growth from our reinsurance business was significant.

Speaker 5

We continue to be pleased with our growing momentum, deeper product suite Turning to loss costs. Our 2022 guidance also reflected our disciplined and long term consistent approach The loss trend selection, including the expected impact of supply chain inflationary pressures in our auto and property books, Along with social and economic headwinds in other lines, overall loss trends and loss ratios for the quarter were in line with a few puts and takes. In summary, for commercial, I'm very pleased with the continued excellent performance of each of our businesses, And I expect to achieve our underlying full year guidance of 86.5 percent to 88.5 percent. Small commercial delivered yet another sub-ninety underlying combined ratio quarter and our best first quarter since 2014. At 91.5, Middle and Large Commercial has now achieved 4 straight quarters of strong underlying performance, and this quarter's result is the best first quarter in over a decade.

Speaker 5

And Global Specialty's underlying combined ratio of 88.2% is equally impressive, Reflecting the recent strong pricing environment, improved underwriting execution and significant underwriting actions taken since the acquisition. As these results demonstrate, we are effectively balancing the rate and retention trade off while maintaining disciplined underwriting And leveraging risk segmentation tools to continue driving profitable growth. Flipping over to personal lines, we're very pleased with the first Quarter underlying combined ratio of 88.5, acknowledging the typical Q1 seasonality benefit And industry loss cost headwinds. Maintaining profitability of the legacy book has been a primary focus while developing our new product, Prevail. Consequently, over the past several years, we continued to selectively tune pricing.

Speaker 5

In first lines auto, loss Costs were elevated primarily due to higher than expected severity, particularly in physical damage. We have not been immune to supply chain and inflation pressures. And in response, over the past several months, we have completed over 50 auto filings with an average rate increase of 6.2%. These filings were across multiple class plans and will impact approximately half of our book going forward. In addition, we continue to re I'll elaborate Prevail pricing to reflect these elevated loss trends.

Speaker 5

We're confident our filing execution combined with prudent rate increases taken During the past few years, we'll continue to position our auto book for profitable growth. In home, overall loss costs were in line with quarter 1 of 2021. Non cap weather frequency continues to run favorable to long term averages, while material and labor costs remain at historically high levels, Putting pressure on severity. We're similarly taking pricing actions in home. All in, our current accident year Home loss ratio of 47.3 is very healthy.

Speaker 5

Turning to personal lines production. Retention remained steady while we generated new business growth in the quarter. Responses and conversion rates are in line with expectations. In addition, Prevail is now available in 13 states, including the launch of Florida in January and Texas in April, a couple of our larger states. We're actively managing our new business flow through an accelerated view of key metrics and enhanced analytics.

Speaker 5

To date, we're pleased with the quality of the new business we're writing. In closing, the Q1 was a very strong start to 2022 across property casualty and represents mounting evidence That we have and will continue to deliver on our critical strategic goals. Our commercial lines business grew at a double digit clip with exceptional operating margins. And in personal lines, pricing actions are taking hold while new business growth is emerging with increasing contributions from Prevail. The seamless integration of our product portfolio, technology and analytics, distribution and talent continue to drive our success in the marketplace.

Speaker 5

The momentum is clear. The results are strong and our future is bright. I look forward to our next update in 90 days. Let me now turn the call back to Susan.

Speaker 6

Thank you. We have about 30 minutes for Operator, could

Speaker 1

you please repeat the instructions for asking a question?

Operator

Thank you. Our first question today comes from Brian Meredith from UBS. Brian, please go ahead. Your line is now open.

Speaker 5

Yes, thank you. A couple of questions here. First, Beth, I'm just curious, could you give us what the current New money yield that you're actually getting or new money rate that you're getting right now in your portfolio. And how does that compare to what your book yield is? And then How much of your portfolio kind of turns every 12 months?

Speaker 5

And then on that also, Chris, why

Speaker 3

Yes. As we look today, the new money rate is probably closer to 3.8% compared The 3.3 average that we had for the quarter, so obviously, this compares very favorable to the overall portfolio yield. So You may recall a quarter ago when we were talking about our expectations for yield for 2022, I had said that we expected see a slight decline from where we were in 2021. Given where we are today, we'd expect 2022 to be relatively consistent with 2021 and You'll see increases as we go into 2023.

Speaker 2

Yes. And Brian, on the range question, 13% to 14% is Obviously, what we've been talking about for the last year, as you heard my confidence and optimism today, I believe We will achieve that in both those years, and you should not view the 14 as a limit. We will try to achieve it if the conditions are appropriate, particularly, as Beth said, we'll have to see how the portfolio lift Really plays out over a longer period of time, but that can be meaningful, particularly as you get into 2023.

Speaker 5

Got you. And Then my second question is, I guess, more Doug and Chris. Russia Ukraine, what was your gross loss? Seems like you had a fairly the reinstatement premium, obviously, you had some reinsurance recoveries. And then also on that topic, Russia Ukraine, maybe a little more kind of details as far as Where your exposures are, and where could there potentially be some more losses coming from Russia, Ukraine?

Speaker 2

Sure. So I would double add his commentary. I would say that most of the exposures that we have obviously have come through our syndicate In London, primarily through the political violence and credit and political risk book, We have about $45,000,000 of net written premium in those lines. And as we said in our prepared remarks, it is heavily reinsured. So clearly, the war is still evolving.

Speaker 2

And the loss picks that we made, I think, are very prudent and thoughtful About the, I'll call it exposures that we have, I will give you a little insight. We've only had 2 notices of loss and one we denied. So the entirety is nearly just all IBNR at this point in time. So I think that's all I'd just prefer to share with you right now given it's a live event. But we used a lot of Data and intel, including satellite imagery to look at properties that were exposed and feel really good about the picks that we made at this point.

Speaker 2

But Doug, would you add anything else?

Speaker 5

No. I think you nailed it, Chris. We, Brian, have a very good handle on the risks Located in those countries, I think we understand our book well. And this process has been deliberate and prudent. And I

Operator

Thank you. The next question today comes from Elyse Greenspan from Wells Fargo. Elyse, please go ahead. Your line is now open.

Speaker 3

Thanks. Good morning. My first question, I noticed in your prepared remarks, you gave us a sense of where you might fall within that personal lines underlying margin guide. But what about within commercial, right, 86.5% to 88.5%. I know we're only 1 quarter in, but given how things have come together in the quarter as well as Your view on pricing and loss trends for the balance of the year, do you have a sense of where you might fall within that range within commercial lines?

Speaker 5

Elyse, we haven't changed our view. So as I said, we expect to be inside that range, but there's no nuance there. I don't think our view is any different than it was 90 days ago. So we clearly have our sights set and believe we'll achieve inside that range.

Speaker 3

Okay. And then my second question is on the group business. I'm just looking to get some more color on how you think disability trends, Especially within your long term disability book could be impacted as we potentially enter into recession and how that's kind of embedded within The guide for this year has given perhaps thoughts beyond this year into 2023?

Speaker 2

Yes. I have to try to give you color, Elyse, I would share with you, first off, our base case of economic activities is not a recession in 2022. 2023, obviously, there's still a lot of question marks, but we think the Fed will try to prudently balance Growth and inflation and come to hopefully a good spot. As it relates to our, I'll call it, disability What I would share with you is, last year at this time, we just had more favorable development, Particularly from the initial COVID year of 2020 than we are having this year. Also, I think in our prepared remarks, we talked about seasonality.

Speaker 2

So long term disability claims are seasonally higher in normal conditions In the Q1, now living through 2 years of pandemic is anything but normal, but those are still the underlying Trends that we see. As we sit here today, we still feel very confident of achieving our 6% to 7% Margin during the year and as I said, we are both in our life book and disability book putting additional price Into our pricing models that we're going to try to achieve, obviously, as we go forward. Price, particularly in the life side, is probably going up 2% to 3%, and then roughly 1% to 2% for disability. So our incident trends, I would say, as we sit here today, have stabilized. There was a little concern that we had in the 4th quarter heading into quarter that they might be rising faster than we expected.

Speaker 2

That is not the case. So I think that's the color I can try to give you right now, Elyse.

Speaker 3

Okay. That's helpful. Thanks for the color.

Operator

Thank you. The next question today comes from Greg Peters of Raymond James. Greg, please go ahead. Your line is now open.

Speaker 7

Great. Good morning, everyone. So the first question I wanted to ask was around employee retention and recruiting. 1 of the other publicly traded brokers had mentioned on their call that they were seeing turnover of underwriters at the carrier level. And I'm just curious about what The Hartford is seeing And what their perspective is around recruiting and retention in very difficult employment markets?

Speaker 2

Yes. I'll start and then I'll ask Doug to add his color, Greg. So thank you for joining us today. Yes. Talent retention is obviously key to most of any businesses, right?

Speaker 2

I mean, you got to put a high quality Team on the field every day and compete, which I think we've done extremely well over an extended period of time. That said, we haven't been immune to, I'll call it, elevated people movement, particularly In an environment where a lot of organizations were allowing employees to work from home or just work from Just about anywhere. So I would say for calendar year 2021, our I'll call it, turnover rates were probably elevated in the 3 to 4 to 5 point range depending on business unit or function. I would say though that they've stabilized here in the Q1. We I thought took an appropriate thoughtful Point of view on bonuses and salary increases.

Speaker 2

So we're working hard at it. And the best way that we can combat Their career goals and objectives, giving them clear feedback and having that sense of belonging that were invested in their career. And I think that's part of our cultural advantage that we have. But Doug, what would you say on the specifics of Underwriters that are distributed throughout the country.

Speaker 5

The area is a top three item for us across our leadership ranks. We're talking about it. We're working on it. And the other thing I would share, Chris, is we've had some very significant hires ourselves in the past 90 days. So I feel really good about some of the talent that Joined The Hartford.

Speaker 5

I like where we are. We've worked hard at it, and I think it will continue to be an asset for us as we compete forward.

Speaker 7

Got it. And the second question, I wanted to pivot. Doug, I think in your comments, you talked About how in the commercial lines area, your reserving has contemplated the loss cost trends, The social inflation, the supply chain issues, etcetera. And there's Rhetoric in the marketplace right now, I'm not sure if it's going to come to pass, but there could be further disruptions in supply chain as we move through the balance of the year. And I'm just curious from your perspective how you look at data as you see that.

Speaker 7

And do you make changes now? Or do you wait So it materializes. Just some granularity with respect to your approach on that.

Speaker 2

Greg, let me just start and then I'll ask Doug. So as I tried to say in my commentary, we're optimistic that some of the Supply chain shock due to demand. The demand side of the equation is starting to ease, particularly as we head into the second half of the year. Now the other shock, obviously, on the supply chain, from manufacturing and The war in Ukraine and China's lockdown are new factors that will continue to impact Just our overall view of cost of goods sold through our supply chain. So those are the dynamics.

Speaker 2

But at least from what we could see right now, there's a level of optimism that a lot of this is going to work through the system, Maybe not as quick as we initially expected, but I think beginning in the Q4 heading in 'twenty three, we could be in a different position, Doug.

Speaker 5

The only other item I would add is that I did comment that we had adjusted primarily in auto physical damage our supply chain Loss trends around severity. So our expectation in December and our reality in March were slightly different. We made those adjustments. Lastly, I'd point out, we make very specific quarterly calls in both our planning and our reserving. So No, this is a quarterly March.

Speaker 5

Every 90 days, as we close our books, we make sure that everything we can see in our results and anticipate in the risks around this, We've built into those calls, but the machine is finally tuned to have a 90 day period by period March. And so, yes, as we if we feel more pressure in the back We will deal with it. But right now, we're hoping for some easing as we move July through December.

Speaker 7

Got it. Thank you for the answers.

Operator

Thank you, Greg. The next question today

Speaker 7

It's sort of a related question for Doug. Just a question on the loss cost trends. Doug, you had mentioned Some puts and some takes, but net net came in, in line with your expectations. Wondering if you could just elaborate a bit

Speaker 5

Well, I'd start with just my last comments, which is one of those puts was a little bit more pressure in Autophysand, so we adjusted for supply chain. Generally, Our frequency is holding. So I feel good about our frequency calls and what we're seeing with experience. And we're watching medical Carefully, but so far, we feel pretty good about what we're seeing in the medical front. So all in, as we go through, and you know, we've got probably close to Forty lines that we're looking on a quarterly basis.

Speaker 5

I'd say largely our calls are holding and other than a few adjustments, Q1 came in as expected.

Speaker 7

Got it. Okay. And then switching gears to the benefits business. Chris, here are your comments, expense ratio coming in around 26% for the year. I guess I'm wondering within that, it sounds like you're having higher staffing for the short term disability Claims, is there a rule of thumb that you can give us, for example, for every $10,000,000 of short term disability claims, it's an 1,000,000 or 2,000,000 in extra claims handling expenses.

Speaker 7

And I guess how should we think about that as we enter into a more endemic state of With COVID.

Speaker 2

Yes. I don't have a metric that I can give you today. I think the surge that we really felt beginning in late Q3 into the Q4 and then early 2,000, which is sort of unprecedented as far as volume. We did build some new digital claim intake tools that Helped, it relieves some of the call center pressure, but you still had to process 1,000 and 1,000 and 1,000 So just know though that we as much as we had some elevation of expenses, Our Hartford next objectives for this business are still being met. We did, as I said in my prepared remarks, take the opportunity To look at investing maybe a little faster than we thought, so that is part of what's And as I said, that's mostly in the digital area and continuing in claims.

Speaker 2

So but all that is still contemplated, David, in achieving our 6% to 7% margin for the year, so top line is growing a little Faster now than we thought after a little slow start. So when you put the overall equation together of top line Loss cost trends, you know, coming down, particularly as the pandemic, in the second half of the year here seems to be less severe on mortality. In achieving a 6% to 7%, which translates into strong ROEs on our capital, I think that equation is somewhat is what we'd like. And your expense ratio point, expense ratio will come down just a little longer. It'll take just a little longer than we initially thought.

Speaker 7

Got it. And appreciate the investments in capabilities, the accelerated investments You had mentioned,

Speaker 5

so if I could just follow-up

Speaker 7

on your comments there. Could you size how much that was during the quarter? And so we could Sort of think about and I guess maybe think about how much more on the come on those accelerated investments we should think about?

Speaker 2

Well, look, I tried to guide you a little bit for the full year. So just think of the full year expense ratio guide that I gave you, And we'll talk about 2023 and beyond at the right time, but that's not we're not ready to do that right here today, David.

Speaker 6

Okay. Thank you.

Operator

Thank you. The next question today comes from Michael Phillips from Morgan Stanley. Michael, please go ahead. Your line is now open.

Speaker 5

Thanks. Good morning, everybody. Doug, you mentioned in Personal Auto, a 6.2 rate and I I think you said about half your book. I'm wondering is what's needed from here in auto just taking rates in the other half or is there more needed on top What you want to take in that current half of 6.2? Mike, it's an ongoing Matt, right.

Speaker 5

So we're continuing to assess loss costs and assess our rate adequacy state by state. As you know, this is a rolling state Program. So as I mentioned, about half our book now has achieved filed increases over the past 3 or 4 months. We've got 2nd quarter Rolling right now. So I've got expectations of 2nd quarter.

Speaker 5

I've got expectations for 3rd quarter. I can tell you that based on the loss cost coming in, in the We probably adjusted our Q3 view in the last 7 days. So it is active, real time, and we will continue to manage To make sure we've got enough rate in that book based on all the tools available to us. Okay, thanks. And then just a quick one here.

Speaker 5

You had some favorable development in small commercial. I'm wondering if you

Speaker 2

can talk about what drove that?

Speaker 5

The favorable development was primarily workers' comp, and it was primarily in accident year 2017 and prior 2018 and prior, I guess. So We've left the last couple of accident years alone, wanting them to mature. But our book continues to look very healthy in those overall accident years, and our actuaries made a call. And so yes, we did release a fair amount in the workers' comp area. Okay.

Speaker 5

And just to confirm, as you said you're just holding steady on the 2020 2021? Correct. Workers' comp, right?

Speaker 4

Yes. Thanks.

Operator

Thank you. The next question today comes from Alex Scott from Goldman Sachs. Alex, please go ahead. Your line is now open.

Speaker 6

Hey, thanks. First one I had is just on the P and C side. I guess in small commercial, there is I think favorable non cat weather called out a little bit in home too it sounded like. I think marine was called out in global specialty. I was just wondering if you could help us quantify Some of those items to help us think through the impact on the loss ratios.

Speaker 5

When you roll it up, Alex, at a commercial level, the non cat inside commercial is probably about a point. So the good weather non cat. The other lines, a little pressure on a marine loss, but the other lines are 10ths of points that add up So good news. So in general, on commercial, when we started the year, we forecasted a couple of points of underlying improvement, about half of that coming from loss and the other half coming from expense. 90 days in, basically right on that.

Speaker 5

So feel good about the start to the year and I think it's right on our expectations.

Speaker 6

Got it. Thanks for that. And then maybe one more question on group for you. I guess when we think about COVID hospitalizations declining and as you've sort of seen that progress through the Q1 and April, are there lagged impacts that we should consider for disability or Should those claims come down pretty real time with what's going on in the environment for COVID?

Speaker 2

Yes. I don't know, Alex, if you're referring to short term disability, long term, Long COVID, but I will make the assumption that you're talking about more long COVID, which is significantly lagged. And I think we've talked about it in prior settings. I mean, we are seeing a modest amount of claims coming in from long COVID that You meet the definition of a long term disability, and that obviously is dictating some of the pricing Expectations are changing to get more rate in the book to cover some of that. So yes, long COVID It is real and we're trying to manage it the best we can from a claim side and then also from an economic side.

Speaker 6

Got it. Okay. Thank you.

Operator

Thank you. The next question today comes from Andrew Klintman from Credit Suisse. Andrew, please go ahead. Your line is now open.

Speaker 8

Hey, good morning. I just want to get a little more granular on some of the earlier questions. Doug, on the personal lines, You talked about half the book having achieved filing and that your real time on rates. I'm just kind of interested particularly in the auto line with a 2.9% Rate increase in the quarter, that's about 70% of the premium that you write in Personal Lines. Do you need that kind of 2.9% the next few quarters as you look out, and again, I understand it's real time, but to stay in that 90% to 92% underlying, Is it going to be a while before you can take your foot off the pedal?

Speaker 5

Andrew, I would suggest that our rate need is more aligned with the rate achieved in the Q1. So we're headed toward 6% to 7%, so that's what 6.2% is what I shared in my script. I expect the 2nd quarter rate to be in the 5 to 6 range, and we'll talk more in 90 days about the Q3. But so when I step back, no, the 2.9 is not going to be adequate to Cover where we are with loss costs now, which is why our filings are in excess of 5.

Speaker 8

Got it. Very helpful. And then with regard Doug, you mentioned a slight decrease in pricing. I'm going to assume that means 1% or less. And then with that, Could you give a little color on the loss costs in that particular line?

Speaker 8

How much are they up?

Speaker 5

Well, workers' comp is a line that's gone through a lot in the last 3 years with the pandemic. As we look at it today, No question that we are focused on filings as we work our way into this year and anticipate another round For 2023, there is headwind in the filing space. As you know, we essentially have negative filed rates Across the marketplace that we are working to selectively underwrite our way through, very pleased with what we've done to date, but Yes. I can't argue that there aren't headwinds in front of us. I think we'll be effective as we work our way through.

Speaker 5

Our signs relative to loss Trends right now, we're still sitting on our long term trends, right? So we still look at medical in that mid single digit range and indemnity a little bit less than Frequency, as I mentioned before, has been largely in check. And then I would add to you that we're getting a little bit of benefit From wages. So we're seeing increased wages in our payroll. And as I've noted before, increased wages is a positive force as we think about Our roll forward loss ratio.

Speaker 5

So a lot of work to be done, continued progress on the audit premium front, so positive audit. So yes, there are some puts and takes in workers' comp. I think our performance in the quarter was outstanding, and we'll manage our way through the headwinds as they come out of us over the next 18 months.

Operator

Great. Thanks for that. And if I could

Speaker 8

just sneak one quick one in on group, 5.7 percent core margin, Excluding pandemic related, being a little beneath that 6% to 7%, is there any Non COVID mortality that's exceeding your expectation, are you seeing any pressures there from a mortality standpoint, non COVID?

Speaker 2

Andrew, first point, 6% to 7%, we will achieve that this year. So As we said in our prepared remarks and as we address one question, there is a little bit of seasonality in our LTD picks in the Q1 Generally normalized, you'd be able to see that. So I think that's impacting the 5.7. I would also say though that we probably had on a pretax basis $15,000,000 to $20,000,000 of elevated Mortality claims in our AD and D book and waiver book, that were just Random events, accidents are up, particularly motor vehicle accidents. Unfortunately, there's a number of other accidents that So I would say those two things probably put the most pressure on that 5.7% number, but we're still confident In the 6% to 7% range for the full year.

Speaker 8

Great. Thanks a lot.

Operator

Thank you. The next question today comes from Derek Hahn from KBW. Derek, please go ahead. Your line is now open.

Speaker 4

Good morning. Thanks. I had a question on the commercial premium growth. Obviously, it was strong in the quarter. The new business premiums are in the middle market of Global Specialty segment slowed a little bit.

Speaker 4

Is there anything meaningful in that? I'm just kind of curious if there was any cross sell impact within those segments.

Speaker 5

I would characterize the quarters as reasonably strong for both Global Specialty and Middle and Large Commercial. Although flat in middle and large, still a very strong quarter. And we're being thoughtful about workers' comp and our line product strategy. So I look at our bottom and top line performance across all of our markets and feel really good about the start to the year.

Speaker 4

Got it. That's helpful. And then my second question goes probably goes to Doug. You said that personal auto frequency is holding up pretty well. If you look at the underlying factors kind of driving that, are you seeing any increases in distracted driving?

Speaker 4

I know your customer mix is kind of unique from your peers, but Just curious if you're seeing any of that impact?

Speaker 5

We have statistics and we've read statistics. So Our numbers concur with that, but I can't suggest to you that our book on its own would drive all those statistics. So I'm not going to sit here and say that our telematics data is robust enough to kind of jump in the way or Suggest otherwise. We are watching driving, we're watching speed, we're watching time of day, all the factors that are important to our loss calls. And I think we made appropriate provisions in the quarter.

Speaker 4

Okay. Thank you.

Operator

Thank you. The next question today comes from Tracy Banqui from Barclays. Please go ahead.

Speaker 3

Policies in force just for your small commercial segment, but it will be a good to get a more general sense of the Contribution from audit premium, you did mention wage inflation or any other type of linkage to GDP type of growth and where I'm going with it. And I just want to better understand the contribution of exposure growth to overall commercial premium. And I'm also curious if you think there's a component

Speaker 5

So let me tackle the first Question. In our growth for middle and large and small commercial, I would suggest about half of that is coming from audit premium growth. So very strong audit premium Off our workers' compensation book in both those books of business. As you know, we have no workers' compensation in Global Specialty. So those are the books that are impacted by that.

Speaker 5

Relative to the 7.1%, Tracy, I quoted in my script, which was our pricing in the quarter, all commercial ex workers' Tom, 0.5 of that, plus or minus, coming from exposure. So the rest of that would be underlying performance Great. Beth, anything you want to add?

Speaker 3

Okay. I'm sure if Dustin is going to Chime in. Okay. So my second question is, how would you describe your annual portfolio turnover rate? So just looking at your 4.4 year asset duration, do you think something like 12% makes sense?

Speaker 3

I'm just trying to get a better And when you'll start earning

Speaker 1

in the higher new money yield?

Speaker 3

Yes, Tracy, it's probably in that 10% to 15 So what you're quoting is a reasonable estimate there, as we look at it across the year. Okay, cool. And just staying on that, and we did touch upon this last quarter, but I noticed that you were suddenly Shortening your duration of your assets, it was 5 years back in September 2020. It looks like this quarter, you Actually extended it just slightly. So should we think about the 4.4 year duration taking from here?

Speaker 3

Yes. I mean, as we talked about last quarter, we had seen the duration of the portfolio shorten. Some of that was in response to the liabilities and also And as we looked at our surplus assets, our view on interest rates, we did shorten a bit, anticipating a rise. Where we are today, I think, It is appropriate when we kind of look at, again, our liabilities and so forth. And we're kind of consistently Looking at that to determine if we need to make any changes as our liabilities move, but I wouldn't point you to any anticipation of significant Changes, but it can definitely move a bit quarter to quarter.

Speaker 3

Thank you.

Operator

Thank you. There are no additional questions waiting at this time. So I'd like to pass the conference over to Susan Spivak for closing remarks. Please go ahead.

Speaker 6

Thank you very much for joining us today.

Speaker 1

As always, please reach out with any follow-up questions.

Operator

That concludes The Hartford's Q1 2022 financial results webcast. Thank you for your participation. You may now disconnect your

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Earnings Conference Call
The Hartford Financial Services Group Q1 2022
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