The Hartford Financial Services Group Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 3, 2022

There are 10 speakers on the call.

Operator

Good morning and welcome to the Q4 2021 The Hartford Earnings Webcast. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Susan Spivak, Senior Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Andrew. Good morning and thank you for joining us today for our call and webcast on Q4 2021 earnings. Yesterday, we reported results and posted all of the earnings related materials on our website. For the call today, in order of speakers will be 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.

Speaker 1

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 and actual results Could materially differ. 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.

Speaker 1

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 supplements. Finally, please note that no portion of this conference call may be reproduced or rebroadcast in any form without The Hartford's prior written consent. Replays of this webcast and an official transcript Will be available on The Hartford's website for 1 year.

Speaker 1

I'll now turn the call over to Chris.

Speaker 2

Good morning and thank you for joining us today. In 2021, Hartford delivered strong financial performance across the organization as we continued to execute on our strategy We realize the growing benefits of investing in our businesses. At our Investor Day in November, we shared our roadmap for maximizing shareholder value and demonstrated how we are executing in a more consistent and sustainable way. Our targeted priorities will continue to produce results that drive profitable growth, enable market leading ROEs, And deliver consistent capital generation, while at the same time sustaining our top quartile ESG performance. As evidence of our ability to drive profitable growth, core earnings were up 10% in the 4th quarter to 697,000,000 In full year, core earnings grew to $2,200,000,000 Book value per diluted share, excluding AOCI, was up 8% from year end 2020 and the core earnings ROE of 12.7% $20,000,000 to shareholders through share repurchases and common dividends, bringing total capital return For 2021 to $2,200,000,000 These strong results are the product of an extremely attractive portfolio of businesses and targeted investments over the last several years to generate strong sustainable cash flow.

Speaker 2

Going forward, We will continue to prioritize investments for future organic growth along with dividends and share repurchases In our capital allocation decisions, the Hartford's businesses have distinct advantages of their own and complement each other extremely well, sharing deep underwriting and risk management expertise, Tools, insights and distribution. Across the portfolio of businesses, we will continue to invest in claims, analytics, Data science and digital capabilities to ensure superior performance. All the businesses possess exceptional talent that fully embrace The Hartford's winning behaviors and passion for execution. I am incredibly proud of the resiliency demonstrated by our team, especially over the last 2 years. This speaks to our character, focus on continuous improvement and commitment to all our stakeholders.

Speaker 2

Let's now turn to highlights from the quarter, which illustrate how our business strategy translates into financial performance. In Commercial Lines, the positive momentum continued with stellar margins and double digit top line growth, reflecting higher new business levels, continued strong retention and solid renewal price increases. Looking ahead to 2022, we expect strong growth and earned pricing to continue to exceed loss cost trends in most lines, Resulting in further margin improvement. Personal Lines delivered solid operating performance That provides a more contemporary experience to our unique AARP customers in the 50 plus age segments. We are closely watching the impact of inflation on loss costs and responding with underwriting and pricing actions.

Speaker 2

We anticipate slightly higher underlying combined ratio in 2022. Turning to Group Benefits, earnings continue to be impacted by the ongoing pandemic with elevated life and disability claims. Despite pandemic headwinds, performance across Group Benefits remains solid and key business metrics demonstrate Our market leadership position. Fully insured ongoing premium was up 5% in the quarter, reflecting increased sales As well as growth in new premium from existing customers, persistency was above 90% and increased 1 point over prior year. In 2021, our sales growth benefited from the initial expansion of paid family medical leave in several states.

Speaker 2

Adjusting for that one time lift, we are off to a good start with January 'twenty two sales being on par with prior year. For the full year, we are expecting premium growth in the 2% range compared to 2021. Within our long term disability book, claim recoveries remain strong. Claim incidents And short term disability is highly elevated due to COVID, while long term disability incidence rates Have shown modest signs of increases as we have been experiencing and in turn will be incorporated into future pricing assumptions. The omicron variant And driven the most recent surge in cases, initial effects of Omicron are more impactful for short term disability, But the lag between infection and end deaths makes it challenging to predict future mortality.

Speaker 2

Estimates of expected cases vary widely as do perspectives on the final resolution of COVID As an endemic virus, for 2022, we are estimating between 125,000,000 225,000,000 Our pretax losses due to the broad effects of the pandemic, including short term disability and excess mortality, which we expect to impact results primarily in the 1st part of the year. Our excess mortality estimates based on the best data we can gather regarding COVID trends and reflect our optimism for the remainder of the year. This optimism is principally due to the population continuing to get boosted and the omicron being less lethal. In addition, as advanced therapeutics make their way to the market and into the hands of the medical community, There is an expectation of fewer deaths for those who contract the virus. Though uncertainty remains, I am encouraged as we progress through 2022, the pandemic will shift to a regional pandemic state With more treatment options available.

Speaker 2

Excluding any pandemic related effects for both life and disability, We expect the core earning margins to be between 6% 7%, consistent with our long term margin outlook for this business. Turning to the macroeconomic environment for 2022, I am optimistic the business environment will be one in which The Hartford will prosper. We expect that consumer capacity to spend will remain strong, which will drive economic growth. The U. S.

Speaker 2

Unemployment rate has fallen to 3.9% and is likely to fall below Pre pandemic levels of 3.5% by year end and we are seeing signs of increases to workforce participation. In 2022, we expect inflation to be challenging in the first half of the year. However, as supply chains Gradually improve consumption transitions from goods to services and interest rates rise, We believe core inflation in the second half of the year will decline to the 3% range. Lower Unemployment and mid single digit GDP growth is supportive of our employment centric workers' compensation and group benefits businesses. An expanding economy is also a catalyst for growth across commercial lines, particularly in small commercial With higher new business formation, while monetary policy normalization may lead to volatility in the capital markets, Our well diversified and high quality investment portfolio is constructed to withstand this market dynamic.

Speaker 2

With a favorable macroeconomic backdrop, profitable growth, expanding margins in P&C and Group Benefits, In proactive capital management, we are well positioned based on our current pandemic assumptions to generate a 13% to 14% Core earnings ROE in 2022 and continuing into 2023. Before I close, I want to speak to our ESG achievements and our commitment going forward. We have been consistently recognized for our efforts and progress, Setting us apart from our competitors, most recently, The Hartford was named the number one insurer and 14th overall on America's Most Just Companies list. The recognition we continue to receive is a testament to our long standing commitment The sustainability and the dedication and hard work of our teams that make these priorities core to who we are. ESG leadership remains a critical component of our value creation strategy as we continue to deliver strong financial results Alongside positive outcomes for all stakeholders with sustainable advantages 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 and industry leading Digital capabilities complemented by a talented and dedicated employee base.

Speaker 2

We will continue investing for the long term to become an even more differentiated competitor, all while producing financial results. I am confident that The Hartford has never been in a better

Speaker 3

Thank you, Chris. Core earnings for the quarter of $697,000,000 or $2.02 per diluted share reflects strong P and C underwriting results A significant contribution from investments, partially offset by the continued impacts of the pandemic and Group Benefits. Commercial lines reported 14% written premium growth in the quarter, reflecting an increase in new business, strong policy retention and exposure growth. The underlying combined ratio of 88.9 improved 1.8 points from the Q4 of 2020 Due to lower COVID losses and improvement in the loss ratios in global specialty workers' compensation and property. In personal lines, the underlying combined ratio of 95.9 includes the effect of an increase in auto claims frequency and severity.

Speaker 3

New business premiums grew 16% with increases in both hot auto and homeowners. Catastrophes in 4th quarter were $22,000,000 before tax, which is net of reinsurance recoveries of $39,000,000 under our aggregate catastrophe cover. As a reminder, this cover attaches once qualifying cat losses exceed 700,000,000 As it relates to our cat reinsurance program, we renewed the program on January 1, 2022 at only a modest increase in cost with no changes in structure. We have included a summary of our program in the earnings slide presentation. P and C prior accident year reserve development within core earnings was a net favorable 144,000,000 driven by a decrease in reserves for workers' compensation, catastrophes, package business and personal auto liability, partially offset by at reserve development subject to the adverse development cover, of which $18,000,000 was ceded to the cover.

Speaker 3

We have cumulatively ceded $300,000,000 of losses, The coverage limit under the treaty. Outside of core earnings, we also recognized adverse development $155,000,000 before tax for asbestos and environmental with $106,000,000 for asbestos $49,000,000 for environmental. During this year's reserve study, we saw a decline in asbestos claim filing frequency, which was more than offset by an increase in defense costs And claim settlement rates and values. For environmental, the reserve increase was primarily due to the settlement, An increase in legal defense costs and higher site remediation costs. While the $155,000,000 of reserve development was economically seated under the adverse development We took a charge to debt income for the deferred gain on retroactive reinsurance.

Speaker 3

To date, we have ceded a little over $1,000,000,000 to the adverse development cover with $485,000,000 of limit remaining. Turning to Group Benefits, the core loss of $12,000,000 compares to core earnings of $49,000,000 in Q4 2020. The core loss reflects continued elevated excess mortality losses in group life, higher The reported U. S. COVID death rate has started to decline from the August surge.

Speaker 3

Unfortunately, the decline was short lived as the death rate ticked up again in December. Using CDC reported COVID deaths, we currently estimate U. S. Deaths for the Q4 will be about 126,000 just slightly higher than 124,000 deaths for 3rd quarter. The death rate for those under age 65 in the quarter is $161,000,000 before tax compared to $152,000,000 in the prior year quarter.

Speaker 3

The $161,000,000 included $176,000,000 with dates of loss in the 4th quarter or quarters. The disability loss ratio was elevated 6.5 points over the prior year due to higher claim incidence levels Additionally, short term disability plans in the quarter were decrease in non COVID claims as we did earlier in the pandemic. When adjusting for excess mortality and COVID related Lastly, the expense ratio for Group Benefits increased by 1.7 points compared to the prior 4th quarter. The expense ratio was impacted by higher compensation costs, an increase in technology costs and higher staffing costs to handle elevated claims. In addition, the Q4 of 2020 benefited from a reduction in the quarter.

Speaker 3

Partially offsetting these expense increases were incremental Hartford Next Expense savings and the effective earned premium growth period, reflecting the impact The daily average AUM increasing 20 percent $158,000,000,000 Mutual fund net inflows were positive for the 5th consecutive quarter at 358,000,000 The corporate core loss was $41,000,000 compared to a loss of $51,000,000 in the prior year quarter. The lower core loss was primarily due to an increase in net investment income related to a higher level of dividends received on equity funds. Across the enterprise, we continue to execute on our Hartford MAX operational transformation and cost reduction plan, Achieving $423,000,000 of expense in Q1. We remain on schedule to achieve savings of $1,000,000 in 2023. Turning to investments, our portfolio delivered another outstanding quarter.

Speaker 3

Net investment income was 573%, benefiting from very strong annualized limited partnership returns of 22%, mostly driven by private equity partnerships with 3.1% before tax for the Q4 and the full year. Looking forward to 2022, we would expect our total annualized portfolio yield portfolio and non routine income items such as make whole payments. The portfolio credit quality remains strong with no credit losses on fixed maturities. Gains on fixed maturities before tax were $2,100,000,000 at December 31, down from 2 point $5,000,000,000 at September 30 due to marginally higher interest rates and wider credit spreads

Speaker 1

to $50.86

Speaker 3

and the trailing 12 month Core earnings ROE was 12.7 percent. $620,000,000 to shareholders Purchase authorization remains for 2020. From January 1 through February 2nd, we repurchased approximately 2,500,000 common shares for 100 $80,000,000 Cash and investments at the holding company were $1,900,000,000 at year end. As a reminder, included in the holding company capital deployment of hybrid securities in April 20 Looking forward to 2022, our views for the financial outlook are largely unchanged from those we shared at Investor Day. We expect to generate profitable growth in both P and C Updating you on our progress.

Speaker 3

I'll now turn the call over to Doug.

Speaker 4

Thank you, Beth, and good morning, everyone. 2021 was an impressive year for The Hartford's Property and Casualty business. We achieved substantial progress on each of the 5 critical strategy drivers as Across the 5, our expanded product breadth is driving top line growth across each of our commercial businesses. Advancements in technology and data are fueling straight through processing in small commercial, speed to market improvements in middle and large commercial, and the launch of our new press lines product Prevail. Our distribution footprint is stronger than ever with expanded capabilities to meet Changing customer needs across multiple channels.

Speaker 4

The Hartford's strong focus on customer experience It is distinguishing our marketplace execution. Our small commercial digital experience was rated number 1 in the industry by Kienova, And net promoter scores have significantly improved in middle and large commercial, putting us in the top tier of national carriers. Finally, Talent Powers Our Critical Drivers has delivered full year 2021 property and casualty written premium growth of 9% and The underlying combined ratio was 3 points lower than 2020 and core earnings were 17% higher. Our momentum in the marketplace is evident with several consecutive quarters of strong top line growth and underlying margin improvement. Let me dive a bit deeper into each of our business line results before closing with several comments about 2022.

Speaker 4

The commercial lines underlying combined ratio was 89.1 for the year, 6.4 points lower than prior year, improving 3.6 points ex COVID. The margin improvement throughout the year was driven primarily by strong earned pricing, Outstanding underwriting execution and the impact of our Hereford Next expense program. Commercial line top line performance was also Growing 12% year over year and 14% in the Q4. Small commercial closed a year of record performance and continued market leadership With written premium eclipsing 4,000,000,000 an increase of 11%. 4th quarter written premium growth was even stronger at 17%.

Speaker 4

Policy count retention increased 2%, 2 points in the quarter, driven by consistent pricing and underwriting and in force policies grew 6.5% versus prior year. The continuing benefit from an improving economy, including rising The year was up 21%. 4th quarter new business was $162,000,000 with growth of 6%, An excellent result given the economic rebound during the last quarter of 2020. New written premium growth was significant across all In middle and large commercial, written premium increased 12% for the year and 14% in the 4th quarter. Middle market new business of $532,000,000 increased 11% for the year with significant contributions from our core general industry book as well as our specialized verticals.

Speaker 4

Quote and hit rates for the year both improved over 2 points from 2020, reflecting our growing momentum, deeper product suite and improving underwriting execution. We continue to balance the rate and retention trade off while maintaining disciplined underwriting and leveraging our risk segmentation tools to drive profitable growth. Global Specialty produced a strong year with annual written premium growth of 13% and 11% in the quarter. New business of 912,000,000 for the year or growth of 21% was equally impressive and policy retention remained strong throughout the year in the mid-80s. The breadth of our written premium growth continued to be led by wholesale, U.

Speaker 4

S. Financial Lines and Environmental. Global REIT also had an excellent year with written premium growth of metrics and loss trends. U. S.

Speaker 4

Standard commercial lines Renewal written pricing was in line with the prior two quarters and continues to exceed loss trend across most products. Ex workers' compensation Within middle market, ex comp pricing also remained sequentially consistent at 8%. In global specialty, U. S. Pricing in the quarter was still quite good at 9%.

Speaker 4

U. S. Wholesale achieved 12.7% and Ocean Marine 13.5. 4th quarter pricing gains in the international portfolio of 11.6 remain strong. Across commercial lines, loss trends and loss ratios for the year were largely in line with expectations.

Speaker 4

For the year, the current ex year loss ratio improved 4.9 points with a 4th quarter reduction of 190 basis benefiting in part from lower COVID losses for the year and 60 basis points for the quarter. Loss ratio improvement in the Q4 was driven by strong earned pricing and favorable property frequency, partially offset by a few large property losses across our book. Shifting over to personal lines, the underlying combined ratio for the year increased 6.8 points to 89.9. Auto results were impacted by increasing vehicle trips and miles traveled. Liability frequency in the quarter continued to run favorable to In Home, full year and 4th quarter frequency was better than our expectations.

Speaker 4

However, higher claims severity from elevated building material and labor costs drove the underlying loss ratio up over 3 points for the year and the Q4. Written premiums declined 1% for both the year and the 4th quarter. However, I am encouraged by the improving growth profile in the second half of twenty twenty one. We see positive signs with rising conversion rates, Steady retention and slightly improved industry shopping for our 50 plus cohort as included in J. D.

Speaker 4

Power's reported data. And Prevail, our new product is now available in 8 states with the rollout significantly expanding in 2022. Before I turn the call back to Susan for Q and A, I'd like to share a few thoughts about 2022. Consistent with Investor Day, we continue to project 2022 commercial lines written premium growth between 4% 5% with an underlying combined ratio between 86.5% and 88.5%. Coming off significant 2021 growth of 12%, 4% to 5% is a strong target for this year.

Speaker 4

We expect to return to more historical patterns of workers' compensation exposure growth. Counterbalance the projected underlying combined ratio is Approximately 2 thirds of the gross margin loss ratio and 1 third expense. Renal written pricing in commercial lines, Excluding workers' compensation is expected to run-in the mid single digits with certain global specialty lines such as wholesale and U. S. Ocean marine closer to double digits.

Speaker 4

Workers' compensation pricing is projected to remain competitive, especially in small commercial. Renewal written pricing is projected to be flat to slightly negative. Across commercial lines, we expect earned pricing will continue exceed loss trend in most lines except workers' compensation. In personal lines, we expect auto frequency to modestly increase but remain below pre pandemic trajectory. Persistent building and material inflation, increasing labor costs and supply chain disruptions throughout 'twenty two will continue to impact severity.

Speaker 4

As a result of these trends, Our auto and home regulatory filings have ramped up significantly over the last 90 days. I expect this elevated filing activity to continue throughout the first half of the year. To ensure our initial price points reflect our most current view of loss trends, we have been deliberate and thoughtful with an adjusted Prevail state launch schedule. All in, we expect 2022 personal lines underlying combined ratio of 90 to 92. In closing, 2021 was an outstanding year for our property and casualty business and a strong validation of our multiyear roadmap.

Speaker 4

Our commercial lines business buoyed by the improving economy grew at a double digit clip. Strong pricing earned into the commercial book driving lower current accident year loss ratios. Each commercial business delivered strong execution and improved Axneur performance and early results from the launch of I look forward to updating you all on our 2022 performance with our Q1 call. Let me now I'll turn the call back to Susan.

Speaker 3

Andrew, we're ready to take questions.

Operator

We will now begin the question and answer session. The first question comes from Andrew Figurman with Credit Please go ahead.

Speaker 2

Hey, thanks a lot.

Speaker 5

So just taking a deeper look at the personal lines area. Looks like you came in at an auto combined ratio of 105 point for and you're in the midst of rolling out the Prevail program. So I'm wondering how long It takes to kind of get those rate increases in place and When do you think you could get to a loss ratio in an attractive range and where that might be?

Speaker 4

So a few different questions inside. Let me see if I can uncouple and answer them. First point I'd make is that from a seasonal perspective, our 4th quarter loss ratio is our highest quarter in the year. And consistent with our planning And history and also performance in 2021, I just want to note that, right? It runs 3 to 5 points on average per year higher than our number for the year.

Speaker 4

So that is inside the Q4. Secondly, as I said in my remarks, We have rolled out 8 states by the end of 2020 on our rework around supply chain. We are actively working 45 states right now from a filing perspective. I think you've seen our pricing progress over the last couple of years. We In the supplement, relatively steady over that period of time.

Speaker 4

So, our rate need 9 months ago was relatively small. That has changed as we've watched supply chain. And Andrew, we're reacting to that on a weekly basis. So aggressive approach to what we're doing with filings Happening by the week, by the month, aggressive in Q1, Q2. I expect over the next 5 months will be largely through that effort.

Speaker 4

And you'll continue to see as we work our way through 2022, the results in our written pricing as demonstrated in our

Speaker 5

Thanks for that. I mean, it sounds like you're very confident in trajectory. As I think about personal lines in general fitting in with the property casualty business, do you see that as a fit, as a core fit and is that a business that you feel is necessary to be in over the long haul?

Speaker 2

Yes. Andrew, it's Chris. I would say, yes, we see it as a fit. We like the business. Obviously, over the years, we've It improved our contractual relationship with ARP and extended it for 10 years.

Speaker 2

So I think of it as primarily an affinity Direct marketing business with 2 great brands, meaning ARP and The Hartford. So And then particularly with the modernized product, the platform, our digital emphasis, I think we can really make something happen here that we hadn't been able to do before just given some of the contractual arrangements. It's a preferred segment we like and I think we got a good brand in there and it's not unusual for Commercial line carriers have personal lines operations and we think it contributes to our overall Profile and our overall earnings and ROE components.

Operator

The next question comes from Tracy Banghigian with Barclays. Please go ahead.

Speaker 6

Thank you. Good morning. Just maybe a quick follow-up on what you were just talking about. You mentioned some contract changes. I guess I'm wondering the last time industry had to correct pricing on auto back in 2015 2017, You may not have been able to be as agile.

Speaker 6

And I'm wondering how the playbook may change now because I believe now you have more 6 month policies 12 month policies or

Speaker 3

were there any other structural changes

Speaker 6

that would make you more agile this go around?

Speaker 4

I guess a few things, Tracey, I would point out. You're right. Our Prevail product is a 6 month product for auto. So that Changes the dynamics of how we'll manage the product, the speed and our flexibility around that. There's also a feature of lifetime continuation in the old product that Now it's not with the new product going forward essentially across the country.

Speaker 4

So, yeah, we think we have a much more nimble approach, a contemporary product and excited about the early results, but we have a of work in front of us in 2022 to get it rolled out across the country.

Speaker 6

Okay. Great. Just to be clear, that's just in Prevail and not in

Speaker 4

6 months has prevailed, correct?

Speaker 6

Yes. Okay. Got it.

Speaker 2

Tracy. It looks like Tracy, it's Chris. Just one point of emphasis. Doug, obviously, is thinking about Prevail And then our existing in force book and all the work that we have to do. But even in our existing 12 month policy, New business only does not have a lifetime continuity agreement.

Speaker 2

So we have the ability Over the last 18 months or so, 12 months, when we're writing new business with ARP, even in the non prevail product, We are not writing new business with lifetime continuity agreements. So but the vast majority of the in force Yes, still obviously has lifetime continuity. So just one just little nuance.

Speaker 6

Okay. Thank you for jumping in. That's really helpful. Maybe shifting gears, I noticed the Hartford loss OCI during 2021 and it looks like that may happen given higher interest rates, but I also noticed at the same time You're shortening the duration of European sea assets from 5 years back in September 2020 to 4.3 years now at year end. Is that something we could expect to continue?

Speaker 6

And I'm just wondering how important AOCI is in the way you manage capital.

Speaker 3

Yes, Tracy, I'll take that. I don't see that as a significant change. Some of that is also related to just the change in the duration of The liabilities, but we did shorten duration in what we would refer to as our surplus Assets just given our views of what's happening with interest rates. So some of the sales that we did in the 4th quarter We're on the longer end, but I would say that it's not a significant change, but again, just our way of positioning the portfolio. We do look at AOCI in total.

Speaker 3

But again, I wouldn't characterize some of the changes we've made in anything all that significant.

Operator

The next question comes from Elyse Greenspan with Wells Fargo. Please go ahead.

Speaker 6

Thanks. Good morning. My first question is on the capital side. So you bought back $1,700,000,000 in 2021. That's ahead of kind of The $1,500,000,000 that you had pointed to for 2021 and then also for 2022.

Speaker 6

And given the dividends that you laid out with your outlook from the subs Over the coming year, I mean, it seems like you could probably finance more than $1,300,000,000 So is there some upside to the 2022 capital return plan? And how should we think about the timing of getting the shared data and perhaps

Speaker 2

Felicia, I would start and then Beth can add her commentary. Yes. We're pleased with our capital management actions over the last years and equally what we We believe we're going to continue to do going forward. But it's premature right now to start to speculate what are we going to For the rest of the year and into 'twenty three, I think we've always been clear with you when we change our views and Have additional excess capital to allocate. We'll communicate with you.

Speaker 2

But right now, we want to finish our existing program, Obviously, see how the year plays out, make sure we're funding all our internal growth opportunities. And then, Yes, Buff.

Speaker 3

Can I really look at the additional amount that we did in 2021 as just an acceleration of what our plans were for 2022? I mean, as you know, we typically do look to execute our capital management plans ratably Over the periods, but we're not agnostic to share price and our program does provide us flexibility to react When movements in share price make it attractive for us to maybe repurchase a bit more than we had originally planned. And as Chris said, We're executing on the total authorization of $3,000,000,000 and very pleased with that.

Speaker 6

Thanks. And then my follow-up Is on loss trend within commercial lines. So when you set your underlying margin guide For 'twenty two and also when you make the comment, Mike, did you expect pricing to continue to exceed loss trend? What do you guys See, in the loss trend environment and how what's embedded there within your 2022 guidance?

Speaker 4

Elyse, I would say that largely 'twenty two loss trend picks are consistent with 'twenty one. Comp is certainly consistent visavisboth Sequentially severity, we've talked about medical severity up over mid single digits and then the Higher middle digits and frequency has been pretty favorable. The one tweak we have made in the last couple of years, I guess 2 tweaks. 1 is We're aware of and focused building construction, property, etcetera. We've bumped up that trend a little bit and we continue to watch We've been in the high single digits and remain there for 'twenty two.

Operator

The next question comes from Greg Peters with Raymond James. Please go ahead.

Speaker 7

Good morning, everyone. I'm going to My first question is going to focus on the growth outlook for Commercial Lines that you reiterated in Slide 9 of your investor deck. And I guess what I'm trying to do is we're looking at the pieces here, the strong result, continuing positive trend of rate. And it's just sitting back here from the cheap seats, it looks like the 4% to 5% targeted growth for a rate environment that continues to be favorably as it relates to price over loss cost trends. So I thought maybe you could give some additional

Speaker 4

Yes. So let me try, Greg. I'd start with across commercial, our 3 big businesses. As we've mentioned, there's been a little bit of tailwind behind us from economic growth, right, coming through exposure And premium audits primarily in the workers' comp area. So when you think about as an example, small commercial, which is up over 10% for 2021 in the 12% range.

Speaker 4

We share with you PIF, PIF change in the supplement. PIF is running in policies in force at 6.5. Right. So customer count is up. The rest of that is roughly exposure plus or minus, and it It varies by line of business, but it gives you a sense that we see quite a bit of tailwind, more tailwind in 'twenty one from exposure than we had seen prior, certainly relative to 'twenty when the market went the other way, and it's even historically.

Speaker 4

Same thing in middle, that when we look at our business, up small teens, there's a fair amount of that coming from what I would say elevated Exposure growth bouncing back over 2020. So when you pull some of that abnormal growth out, you get more a mid single digit run rate, and we think that's still a strong run rate. Now, yes, we expect pricing to be strong. And yes, I'd like to see our PIF growth continue to grow. But I have to suggest to you that when we look at these growth rates, a good percentage, 50% to 60% Some of those growth numbers are driven by exposure change that we expect will slow down quite a bit in 2022.

Speaker 4

Does that help a little?

Speaker 7

Yes, it does. It's yes, that makes sense. Just trying to parse out what is due to economic rebound versus The rest of the ordinary business, a little hard for us sitting on the outside to figure out, if that makes sense to you.

Speaker 4

The other last point I would share, Greg, is You also have to do a compare, right? So the compare against 'twenty for our 'twenty one performance was an easier compare because of what happened in the Q2 of 2020. We had a terrific year this year. Essentially, we wrote through in terms of new business as much as we had expected 9 months ago for In 18, 24 month period. So now all of a sudden, the 'twenty two compare will become more challenging just because of the success we had in 'twenty one.

Speaker 7

Yes, that makes sense.

Speaker 2

Chris, just make no mistake. I mean, we are focused on growth, right? We think it's a great time to grow given the environment. But you also know that a lot of our competitors think it's a good time to grow too. So there is still a discipline that we still want The teams that have, we want them to be orientated to growth and taking risk and using all the sophisticated tools we have on our underwriting side, but It's not growth at all cost.

Speaker 7

That makes sense. The other question I had On Slide 18, and this isn't necessarily particular to you. It's an industry phenomenon. But the returns from LPs in 2021 have been outstanding. And it doesn't seem like that's a sustainable result.

Speaker 7

And I guess what I'm getting at is, what's the normalized long term expected return on your piece. And is that sort of the number we should be using as we think about the contribution from that in 2022 and beyond?

Speaker 2

Greg, I'm going to ask Beth to add her color, but you're right. I mean we've enjoyed 2 years of returns, however you want to look at it, either from a mark to market side or a cash realization side. Some of our real estate investments have than just home runs across the board in addition to our private equity capabilities. So you're right, That can't continue at the same rate. And Beth, What would you add?

Speaker 3

Yes. What I would add is, as we think about the asset class and over the long term, we think about a Turn more in sort of the 8% to 10% range is how we think about what this asset class can deliver to us. Obviously, very pleased with the results we had This year and as Chris indicated, a portion of the gains that we had were actual realizations of Asset sales and so forth in the underlying funds. So all in all, great performance, but I'd how do you think about kind of 8% to 10%.

Speaker 7

Got it. Thank you for the answers.

Speaker 5

Maybe a first question on Global Specialty. Any color on what's driving the reserve developments, especially now given that the ADC cover from Navigators, I believe, is exhausted.

Speaker 2

Yes. Mike, I would share with you just a context on the ADC, why we put it into place. 1st It was really the strategic opportunity to acquire the old navigators and Add to our capabilities. I think we've picked up a wonderful team Culturally aligned with us and really doing great things in the marketplace. Our Global Specialty book today, as you could see in the supplement, is 2,600,000,000 and is running strong overall profitability that we've worked hard to improve, particularly Yes, Doug and the Global Specialty Leadership team had really put our fingerprint on that business.

Speaker 2

But back to the ADC, We put it in place because we knew they had some issues on their balance sheet. And the way we thought about financing with cash and Using an ADC, I think, was the right decision. Obviously, we needed it, and we are where we are today. But I would say going forward, it's completely different just given our fingerprints are all over. And if when I look at their reserve positions and balance sheets Right now, I'm really pleased where the Global Specialty balance sheet is in total for the future.

Speaker 2

So that's what I would say. Beth, what would you add?

Speaker 3

Yes, I agree on the comments on the overall balance sheet. And as it relates to the FERC, it was primarily in financial lines And a little bit in life sciences and really just a reaction to Experiencing and went to make our year end picks took all of that into consideration.

Speaker 5

Okay, great. Yes. And I Overall reserve development was very healthy. I didn't mean to pick on it. I just know it's been recurring.

Speaker 5

Felt like it was worth asking. Follow-up, just want to be clear on personal lines. Giveers, I'll take many others in that should improve the loss ratio in auto. But In

Speaker 4

terms of cadence, should we

Speaker 5

be thinking it's more kind of second half of the year loaded in terms of the improvement?

Speaker 4

So as our written pricing goes in, obviously, we'll be earning that heavier element second half of the year. Our loss trend picks though are spread throughout the year as we deem appropriate. And as I mentioned, although We think frequency will be just up slightly. We have leaned into supply chain on the severity side. So that is a part of our Overall assumption.

Speaker 4

And I think on top of the trends we experienced this year, which are we all can see as you look at loss ratio performance 'twenty versus 'twenty one. I think the combination of both those years and our expectations for increased severity next year Our reasonable selections that we made inside our business plan.

Speaker 3

The only thing that I'll just add to that as it relates The trend and I know Doug commented on this before is just keep in mind that 4th quarter is always a high auto Quarter for us from a seasonality perspective. And I think to the point as we look to Get right into the book as we think about increases in supply chain. I think when you look at the first half of the year in 2022 compared to the first Half of the year in 2021, I'd expect to see things a bit elevated from there, because we really started to feel supply chain in the latter part of Of 'twenty two, just from a compare perspective, if that's helpful.

Speaker 4

Mike, maybe one other thought too. I don't think it's well known, but when you look at loss costs Inside First Lines Auto, the significant component of that auto loss cost piece is liability. Supply chain is impacting FizzDAM differently than liability. And not to be Underestimated. Liability has been performing for us.

Speaker 4

So knock on wood, we still have to watch and we have to perform through 2022. But more of that supply chain And it's sitting on top of physical damage and physical damage is not 100% of the loss

Operator

The next question comes from Gary Ransom with Dowling and Partners. Please go ahead.

Speaker 8

Good morning. Yes, I wanted to ask in Commercial Lines whether there were Any segments or lines where you were doing any meaningful true ups at the end of the year? And in the back of my mind is just the Casualty trends and the distortions that we've had, whether how you might have incorporated that into your final loss picks for 2021.

Speaker 4

Gary, when I think about accident year 'twenty one to start, I would say, Beth, that Very quiet activity. I mean, Gary, we had leaned into our loss trend selections in planning out the 2021 year. And as you know, on those casualty lines, unless there's some reason, real big reason, we don't come off those trend lines for multiple years. And then as we always do, every time we close the books, we're looking back on all the prior accident years. We had some pluses and minuses.

Speaker 4

The net of all that was Generally, a pretty favorable quarter relative to that, and we've talked about Navigator. So I feel really solid about our balance sheet. Think we work hard at it. We assess it. And 'twenty one performed basically in line with expectations with the exception of some of the pressures we saw from COVID in

Speaker 8

Is there anything that I should read into the Small commercial year over year comparison that was underlying was up a little bit.

Speaker 4

Love that question. What I want you to read into small commercial is 88% 17% growth in 4th quarter and over 11% in the year, right? So That business is hitting on all cylinders. We feel really good about our rate adequacies. We are strong across, Gary, all the lines inside small commercial.

Speaker 4

And I think the rollout of our new spectrum product over the last 2 years has just hit the street, the exact spot we intended to. So No, I'm very bullish. At some point, you have such strong profitability. We leaned hard into growth that we felt like it was the right time to do that. It was the right product mix.

Speaker 4

And I look back on

Speaker 8

Fair enough. And if I could sneak one more in, when I look at all the favorable development that we had a lot from workers' comp and Cat, I think I understand that, but the other one is package where you've had a very consistent pattern of favorable development. Is there any particular Story behind that or line within that package that's driving that?

Speaker 3

No, I wouldn't point to anything specific, Gary. I mean, again, as we evaluate the actual experience And both from frequency and severity perspective, we've made some adjustments on that. Just really pleased with how the line has performed Over time, but nothing specific that I would point to.

Speaker 4

Great. Thank you very much.

Operator

The next question comes from Josh Shanker with Bank of America. Please go ahead.

Speaker 9

Yes. Thank you. One more question on the ADG. I mean, maybe I'm wrong, but I feel back in when that was created that you raised about 300,000,000 Protection, it seemed like a lot. And I remember having discussion with you that the difference between buying 200,000,000 of protection and 300, It wasn't materially a significant amount of money, so it made sense.

Speaker 9

And here we are, we've blown through it. Given that you had the ADC, it gave me some comfort in your financials You know, about taking those charges, has that book seasoned to a degree that you're confident that PIKs right now are probably very close to where they will ultimately lie or could there be some conservatism in your PIKs Because you did have sort of the protection of the agency to ring fence your core earnings.

Speaker 2

J. Rice:] In terms of thinking in there, Josh, what I would say is, as I try to say, we feel good about where the balance sheet is now. We put our fingerprints over it for the last two and a half years, including new business. You got it positioned the way we want it, and that's what I would say.

Speaker 9

And I mean, look, it can go both ways. I'm just curious if I guess we'll leave it there. I don't think I'm going to get more out on this issue.

Speaker 4

So I'll leave it at that.

Speaker 9

On the personal lines, look, you've been rerating your business for a long time, rerating it. Is there any argument that your customers at this point are stickier Then the average customers in the industry, they've been with you through a lot of rounds of rate changes and underwriting revisions, And you should have a higher persistency even in the face of higher prices compared to some peers?

Speaker 4

I think we have a strong customer base that believes in our product and our association with ARP. And I expect to be strong. To me, one of the hallmarks of great retention is Consistency and pricing and a super product. And I believe those are all priorities. They are in terms of our Strategy and behaviors as we work through time.

Speaker 4

And I'm excited about the advancement of the contemporary product design that we're going to see what prevail. So We felt we needed to do that. It's been a big investment, a lot of work, but We felt like this was the right time for us to completely refresh and rebuild our product. So that Josh, That degree of stickiness would not only stay the same, but get stronger and I think it will over time.

Speaker 9

Okay. Thank you.

Operator

And unless there is time for any other questions, I see it is past the top of the hour. I would like to turn the conference back over to Susan Spivak for any closing remarks.

Speaker 1

Thank you, Andrew, and thank you all for joining us today. If we did not get to take your question, please reach out to my office and we will be happy to follow-up. Have a good day.

Speaker 2

The conference

Operator

has now concluded. Thank you for attending today's presentation. You may now disconnect.

Powered by Quartr
Earnings Conference Call
The Hartford Financial Services Group Q4 2021
00:00 / 00:00