Welcome back. It's the 2025 U.S. Financial Services Conference from Bank of America. If you're in this room, you're going to hear about The Hartford. So just make sure you're in the right room. We're really honored to have Chris Swift and Beth Costello here from The Hartford. Chris is the Chairman and CEO of the company. And I think in November of 2024, both Chris became the CEO and Beth became the CFO. Since that time, the stock is up significantly over a 14% annual CAGR, pretty much among peer companies, I would argue close to the best performance of the stocks in the sector, outperforming the S&P 500. And it's been a good job. Just a little background information.
I think that some of the accomplishments over the past decade include the acquisition of the Aetna business in terms of the group life, the disability business there too, the Navigators acquisition in 2017, the, I guess, packaging of the Talcott Resolution, and the sale and out of the annuity business there. It's been a time of transformation for the company. Just a few pieces of information. Chris is also on the board of directors of Citizens Financial and the American Property Casualty Insurance Association and has a particular focus on promoting mental health in the workplace and fighting stigma against those issues. Beth is on the board of the Bushnell Theater in Hartford and the Connecticut Women's Hall of Fame, and in terms of very big focus, she is the sponsor of Hartford's Flex-Abilities Network to get the best out of every individual that they can deliver.
And they put a lot of time and effort into developing talent within their organizations. And we're really pleased to have them here today. So if anybody has any questions, I would be overjoyed for you to be allowed to ask them. Just raise your hand and I'll call on you and we'll get to it. But let's start with, I guess, general liability on everybody's mind. If you look at over the past couple of years, there's been extreme favorability in workers' compensation and general liability, piecemeal improvements to portfolios and whatnot. And there's a lack of trust from investors out there that we've really put a bow on things. How should we feel about general liability markets reserves and where Hartford is positioned relative to the industry?
What's acting? So I would say we made our move, obviously, in the fourth quarter, but we had some prior development in the third and second quarter also. So I think we've got our arms around it the best way we could tell right now with data and facts, assumptions. I think we're made a little bit more prudent going forward. And what we've talked about before in different settings, particularly in our earnings call, is that we really want investors to know that, yeah, these are some older accident years and some younger accident years. Beth will give you a little bit more detail. We then trued up the 2024 accident year also, Josh, with about a point of adjustments.
We've already reflected those higher trends in our 2025 picks and, more importantly, in our pricing models so that our underwriters, as they hit the ground January 1, particularly, we're using those higher trends, meaning we needed more price to keep up with those trends. I think the other context point then also is, if I really look back the last five years, on average, for all our liability coverages, whether it be primary, umbrella, or excess, our trend that actually has emerged is closer to 11%, and our pricing over that same period of time has been 12%. So I think we still start from a position of strength. We weren't perfect. I admit that. It's hard to anticipate just sort of the velocity of some of these trends.
But the way we manage the book in the last five years, I think that is helping us to sort of say we think we have it contained and we're going to execute on our new written rate plan in 2025 and hopefully put everything behind us. But Beth, what would you add?
I think you covered a lot of the comments that we've been making on this. Again, as Chris referenced, when we look at the actions that we've taken over the course of 2024, some of them related to older accident years, primarily 2015-2018, some activity that we saw in sort of a construction defect book, obviously costs being higher, much higher now than I think could have been anticipated back then, definitely had an impact on that, and a lot of that book, we've re-underwritten. It really is kind of an older book, and then, as Chris referenced, what we're seeing in the more recent accident years, so think 2022, 2023, that it would equate more to sort of the commentary that people have been talking about related to social inflation, definitely seeing higher attorney representation, higher litigation rates than we would have anticipated.
I also like to point out to investors that if you go back to 2018 in our middle and large business, we had been going through a re-underwriting process as it related to GL. And we can see the benefit of that because our frequencies over that period are actually down. So that speaks to the actions that we've taken. It's just that when we look at the different buckets of claims, those that have no attorney, no litigation, litigation and attorney rep, the decreases aren't uniform across those categories. And so as we saw activity increasing over the course of 2024, we took actions as we made our final year-end calls. We evaluated our IBNR reserves and increased those reserves to reflect that we anticipate some of these trends to continue. And as Chris commented, we also then trued up our 2024 year.
So we felt very good about how we're leaving 2024, and then most importantly, as we think about 2025, our underwriters are already focused on how to get more rate in the book to address these trends, so I think the setup for us as we go into 2025 is very good.
I don't mean to frame it. The question, I think in itself, has a defensive sort of thing, like prove that the reserves were adequate. It's very, very like, these are our picks. We do this. This is actuarial math. But the other side of that coin could be workers' compensation. And you could ask the exact same question, workers' compensation, prove that the redundancies have stopped in some ways. And so when you frame, I mean, workers' comp has been a wonderful tailwind for the company for many, many years at this point in time. What gives you the confidence that the reserves are correct now, in fact, to your benefit? We've nailed everything down and we don't expect them to be favorable.
We've made those picks at the end of the year, but lo and behold, we might get to the end of 2025 and workers' comp is another great year again. How does that fit into the whole sort of?
I think we've been really clear on our philosophy as it relates to workers' compensation reserves. It's a line of business that has a very long tail. Because of that, I think that we very appropriately take that into consideration and making our loss picks and looking at long-term trends. One of the areas that has been more favorable in more recent years has been in the area of medical inflation. We still reserve and price for a trend rate of 5%. That's what we view over the long term. Our trends have been below that, but we don't think it's appropriate to move to that point just given the nature of those reserves. I mean, we still have people who've been on claim for decades. You really have to be very cautious there. It's a large line for us.
Our philosophy hasn't changed. If medical trends continue to be more favorable than where we've made our reserve call, then we would see reductions in that, but that has to play out.
So as compared with the General Liability, I suppose we are taking up our loss trend assumptions in one, but not taking down our loss trend assumptions in the other. And this would give the possibility that if the trend continues as is, it will still be favorable, whereas you may have been able to protect the General Liability because you've been.
Yeah, I mean, again, you're always making calls relative to these assumptions. And I think for a long-tailed line in GL can be long-tailed as well. I think you want to be on the side of thinking about where things can go and make your best call, but give yourself room if things develop differently than you anticipate.
I think Beth and I, we've talked about seasoning those accident years. There's no precise formula, but generally frequency seasons relatively quickly and severity, you just got to be cautious. So I think we have a pattern of holding on to it to initial picks that proved out to be very, very prudent. And I don't see that trend changing.
Over the past, really, it's been going on as long as I've been doing this for 25 years, but the amount of M&A in the agency markets just continues and continues over time and the agents get larger and larger. What has that meant for Hartford? And I generally believe that Hartford's a beneficiary of the M&A. Can you talk about the business you're doing with the largest agents and the trends that you're enjoying because of consolidation?
Yeah, I think you have it framed well. I think as a national carrier with deep agency roots, and as some of these agencies get rolled up, those relationships mature, they continue, they're part of a larger group. And yeah, some of our, I would say, most meaningful relationships have been very active in the roll-up space where we've been the beneficiary. And I would say that the agents want to expand their margin. And I think what you'll see over time is two themes emerge is that they're going to do business with fewer carriers just from simplifying their platform and simplifying how they go to market. And I have the utmost confidence it will be in one of the top four or five players they would want to sort of consolidate around books of business.
And then from a margin side, we want to co-invest with a lot of our agents and brokers to create the digital pathways, the APIs, the connection points. I would say that's a future opportunity. It's been a little slow take up, but there's a couple of good partners that we're becoming much more digitally connected. And I see that trend going forward. And those that really just have scale and size and sort of an investor mindset, I think will win long term. And we intend to win because we've been investing in our businesses for really for the last 10 years. We have the grower-builder mindset. And I think in the agency space with distribution, I think we're going to go through a phase of growing and investing together for our mutual benefit, which really means a better customer experience, more efficient, more timely, just less friction.
Obviously, you've been spending hundreds of millions of dollars in technology. We don't necessarily have a great insight into where maybe you can help us a little bit understand where that spend is going. But also, Hartford's a very large company that can afford to spend this amount of money. And a lot of competitors don't have that same ability. Can you talk about what those gaps are going to be between Hartford and a few others who probably have the same abilities that you have and the rest of the marketplace?
I don't have perfect insight into what our competitors are doing. We respect a lot of our competitors, but on a broad-based basis, it's just hard for me to feel. I have anecdotal data and information, but I'm not going to talk about it that way. All I would say, Josh, is we know what we've been doing and we know what sort of our future strategies and path is. We're sort of in execution mode. From the past side, I would share with you, and this leads to the sort of the confidence in the future is that a lot of our investing over the last 10 years were in two major categories. One, platforms. You think of our new platform in personal lines, which I know you follow closely. Our new platforms in claims, both on the P&C side.
And the reason why we did the Aetna acquisition was to really get a more modern claim system. Our Guidewire platforms for administering policies, our billing systems, our journey to the cloud with all our data and applications. That's a six-to-seven-year project. We're at the halfway point. So we've been building on a foundational basis where we thought we could then invest more and faster for ultimately a differentiated customer experience. Investments of recent, I would say, tended to be more on the underwriting side, the risk management side, the modeling side, the data and analytics side. You could see the data science, again, which I think are all great foundational elements, Josh, because AI and all the generative AI that we're going to continue to think about and invest in, again, that gives a great foundation. So I think we've been very methodical.
We've been averaging $400 million-$500 million a year in capital spend associated with technology. I think we have the basics covered, and now it's really about ultimately using all the generative AI that can really impact our business, and look, it's not going to emerge over the next year, but I would say over the next three to four years, those that really are thoughtful and disciplined and are executing could have an early first mover advantage.
I would argue, and maybe you'll take it as compliment. I think that Hartford is second to none in terms of small commercial capability.
Say that again. I couldn't hear you.
Small commercial capability. And in terms of that marketplace, just delivering value to customers. If you think about the yoga instructors and the lawn care specialists and the self-employed physical therapists out there, there's obviously hundreds of millions of people who need to buy small commercial policies. And the disintermediation that comes from the agent for really simple purchases may be unnecessary over time. You talk about technology. Hobby Horse for me has been direct-to-consumer small commercial sales, which is in its infancy right now. In terms of that technology spend, how is Hartford preparing for that world? And do you expect 10 years from now we'll look back and that's going to be a major part of the market?
Yeah, the honest answer is 10 years from now, I don't know. What we do know is insurance is generally still a complicated sale, whether it be a simple product or a more complex set of products together. And advice is still important. So the real question is, where does that advice come from 10 years from now? Is it still agents? Is it another form? Don't know. I think what we have right now is about a $250 million premium-based direct-to-the-consumer business in small. What we do is we primarily focus on the agent channel with new developments, particularly from a digital side, a consumer side, an experience side, and then learn and then roll it out direct to the consumer type channel. So we're comfortable doing that. We're comfortable buying media ads and generating responses and clicks.
We've grown that business, I would say, over the last six years, seven years from zero to $250 million. We still have the approach that it's same price no matter what channel, and we still believe in the advice that our agents give to our consumers, but customers are finding us directly and we're okay with that also.
And at the same price, you have to find the customers. That's expensive to do. Is the ROIC on direct-to-consumer similar to the ROIC on agent-sourced business the way that you're running that business today?
Yeah, we really haven't disclosed that or talked about it. All I would say, it's a creative and we're comfortable with it at this point.
2017, I guess the Navigators transaction, or is that 2019?
'19.
The integration logic was to increase Hartford's shelf space with the agents that it's using and make them more of a necessity for that agent. To what extent do you think that it's facilitated the company's growth over the past few years that you wrote more Navigators-type specialty business and you wrote more retail-type Hartford business because you had both units?
Yeah, I think it's been a tremendous success along those dimensions that you just described. Just to flesh out the logic and the strategic orientation, at that time was build versus buy. We had been fixing a lot of parts of the organization and the P&C and the benefit side. And we knew we needed to become more growth-oriented. And we were going about it really from an organic perspective. And if you remember back then, we were talking about liability products, property products. We were talking about industry vertical expansion and broad-based sort of E&S capabilities. We had a specialty business that tended to be focused really on the financial management lines and the management lines along with surety.
But when we really started talking with Navigators, we felt it was like a home run from using some of their product sets in the retail channel and then creating a more scaled specialty organization that had dedicated E&S product, dedicated, not blurring between retail and wholesale, but dedicated E&S product. And that's primarily why we did the transaction. I think at the time, Josh, forget exactly what you wrote, but you've become a fan. You weren't a fan day one.
I don't think it's just, I don't remember exactly, but I don't think the market loved it at the beginning.
But I'm telling you, it's been a home run. And I'll give you some data and Beth will make sure I'm accurate. But if I look at just the specialty operations, we improved over 10 points of underlying combined ratio over the last five years in that business. If I look at the wholesale division, wholesale Navigators standalone was probably a $350 million business. We're up to $1.2 billion today. If you look at the reinsurance operation, it was basically a $200 million business when we acquired it. We got out of some parts of it, like medical stop loss. And it's a $900 million business today. If you look at anything in the property area, we were basically zero in E&S property. And we're growing that book nicely.
Yeah, I would do that deal in a heartbeat over and over and over again, knowing that the trends and why we did it was really strategic and trying to participate in segments of the market we just didn't have access to.
I think the other thing I would add to that, I agree with everything that Chris said, and I think something that we feel is unique to us and how we go to market is when you look at our business insurance and you look at small, middle, and large and global specialty, we really face the market as one company, and because of that, those business units work together to bring the products and services that their customers need, and I don't care if it's a global specialty product or a middle and large product or small. I mean, it is a cohesive team, and I know you've been in those discussions with some of our distribution partners who notice that that's how we perform in the marketplace, and I think our results show for that.
Culturally, yeah. It's a difference. You mentioned small commercial. I'm not sure if I answered your question or if you want me to describe sort of.
Yeah, well, I mean, you're talking about how Navigators benefited Legacy Hartford as well.
Yeah. Well, and again, I know you're focused on direct-to-the-consumer, but that's $250 million. This year, we surpassed $5.5 billion, I think, of written premium and a small billion of new business. It's been on a growth rate that far exceeds any of our other businesses with strong returns that are sub-90 from an underlying combined. So again, that is a product of significant investing in that business, particularly in our digital capabilities. In fact, Keynova, one of the raters out there, rated us the number one carrier for digital experience for our agents and customers for the sixth consecutive year. So again, mindset-wise, I think it's important for your audience to know that, yeah, that is a key business for us that we continue to invest in to ultimately differentiate ourselves as best we can from our competitors.
Changing gears a little bit, one of your competitors this morning put out a preview for their wildfire loss in California. I don't think that you've told, but as I tell investors, whether it's $350 million or $1 billion gross, which is obviously very meaningful to the people who are impacted, but to Hartford's balance sheet, it's not particularly different with giving your reinsurance structure and whatnot, and if people want to know about that, they can certainly ask you, but this isn't the first rodeo for Hartford and California wildfires, and obviously, in the Tubbs Fire and the Camp Fire in 2018, in retrospect, the loss wasn't that great because you did get subrogation from PG&E, but obviously, it did tell you some things about aggregation, and so here we are, eight years later, seven years later, depending how you count.
What did you learn back in 2017 and 2018 about wildfire management and coming into this current moment we're having right now?
There's a couple of major learnings at that point in time. I would say one, micro concentrations was a big learning. I mean, if you really look at the Camp Fire, obviously, there's many lives lost. I think it was close to 80 or 100. Really, in a sort of a small area. Micro concentrations weren't effectively managed by us. Second, we grew too fast in California five years earlier. We tried to grow with independent agents and we tried to grow with AARP. Again, just a little bit of a flawed growth strategy in that part of the country.
But I think ultimately, what it spurred is a recommitment to, if we wanted to be a broad-based property player, including home, we needed to make some fundamental investments in our modeling capability, our risk management capabilities, our underwriting capabilities in certain of these. I'll call it secondary peak perils that happen around the country, whether it be tornado, whether it be hail, whether it be wildfire. So we doubled down on investing in the capabilities. We went from a market share of maybe 2% in California home to about 0.7% today over that seven, eight-year period of time. So we shrunk. We had to, given the concentrations that we had. Our auto market share in California is relatively modest at 1% also, but it's one of our larger states from a standalone basis. So I think those were the key lessons.
I thought our reinsurance program and structure was fine, but we did add it at that point in time. We call it that wildfire working layer that kicked in early days. We attached at 150. We've gone up a little bit before it really attaches. So again, we thought we needed to spend some money given that micro concentrations weren't going to be eliminated overnight and it was going to take a number of years, and that's some of the changes we made in the reinsurance program.
So in a different line of business, if you were here two hours ago, one of your fellow CEOs made the comment that the recent pain seen in the medical stop loss markets is a harbinger of things to come potentially for workers' compensation. And you told me you got out of medical stop loss and whatnot when you bought Navigators. But from the outside looking in, I mean, everything is just thumbs up for workers' comp all the time. It's a big part of your business. You know this isn't going to last forever, but probably after auto, it's the second most regulated line of business. How does Hartford manage to understand that the good times can't last forever like this? And yet you can't really take price because the results are so good at the same time.
And as a third twist, you also have the disability exposure, which seems to be probably related. How do you think about that as an organization?
As we joked before, that was one question, but six subcomponents in it. So I will try to.
I can always repeat and take one at a time.
Yeah. Look, I got a lot of respect for Rob Berkley, but he's been wrong for four or five years on medical trend. I'll put that on the record. But the medical stop loss is still a broad-based index of medical procedures for the broader public as opposed to fixing an injury, a bodily injury caused by an automobile accident or workers' comp. So I still see it somewhat different, but not completely uncorrelated. And obviously, we watch those trends. And look, we've talked about trend sneaking up just a little bit, particularly the last year or so. And so we're watching it. But I think the mechanisms the industry has, we have to react to trend and then work with our regulators on the appropriate rate action. And the insurance model is an overall lag model, Josh, as you know. So if it lags a quarter, that's great.
But we're not going to miss anything major from a trend side that really would cause us to go back to a regulator and press them for more price. It's just not going to happen. What was the two other components of your question?
I think it's one and two. The third part is the aggregation risk associated with disability. Yeah.
Yeah. We are the leader in disability. We're the second largest in comp. We've always said that we're sort of pro-cyclical from an economic side, and that's still the case, so when the economy is good, when employment is full, I mean, The Hartford's going to benefit. We know how to manage people back to health and comp, and we use a lot of the same techniques in getting people back to the health after a disability. The sort of incidence or the underlying peril of an injury versus a disabled condition where you're not able to work are fundamentally different. They're not correlated at all from just an occurrence. One is safety protocols. One is how do you take care of employers or employees in the job. Some of it is the economy is coming more service-oriented.
And then a disabled condition could be mental, could be physical, could be a range of things that, again, I just don't see strong correlation to an injury. But we have, again, the teams, particularly the medical teams and the doctors in the consultation that we do. And you know from a comp side, we direct treatment. I mean, that's our responsibility. On the disability side, we are just replacing income without any direct influence on the course of treatment because that's just not the way that product is designed. So even in how we settle claims and adjudicate claims and get people back to health is different between comp and disability.
So you mentioned, obviously, your role in the disability markets. There is a group benefits juggernaut out there who controls a massive amount of market share, who's generally the major group benefits provider to the largest corporations who said they're going to move down market a little bit. That's going to be their growth strategy. That's MetLife. How do you see them as a competitor? And are they a competitor? Are the businesses that you're running different between what they do and what you do?
No, they're a good competitor. Got a lot of respect, and Michel's a good executive, so yeah, I mean, but I would also say there's probably three of us that are really geared towards the national account size, which is, we call it, 5,000 lives and up, so we're in every RFP. They're in every RFP. A couple of other folks get brought in at times, but I think we compete effectively, but they do have a little more scale, particularly in the life insurance. We have a little more scale in disability, but yeah, I think we're competing effectively. I think also we've led sort of the build-out of our products in the paid family leave or the medical leave areas, particularly for the national employers as they have employees scattered around most of the country.
That's an important offering so that they could be consistent from state to state no matter where their employees are. And again, we're investing in the business, particularly in the down market, which we would describe more 3,000 lives or less. We've struck a relationship with Beam, a dental and vision company where we don't manufacture a dental and vision product on our own, which is more important down market. So yeah, we want to also diversify our book, particularly down market. And we're adding products and distribution to do that.
Great question. We have a microphone. One second.
Within the realm of.
Within the realm of group benefits, one of the other competitors ultimately ends up being how the marketplace tends to get crowded out by healthcare insurance. Are there things you have to do to make sure you're asserting yourself within the marketplace of overall benefits so that this presence of healthcare expenses doesn't sort of crowd you out as companies are making more discrete decisions about which benefits to fund?
Yeah. Actually, I think it's sort of in a strange way, sort of just the opposite. I think our product sets, including you would call it any of the supplemental health products like critical illness, hospital indemnity, accident, leave products now, I think become more important as people manage the cost of medical. They want these other products to be creative, additional, supplemental to an overall benefit package that employees would find valuable.
Moving on to AARP. So I think that.
Did you get your card yet?
I did not, but I could. I could. I don't have a card, though, so.
You could be a member.
I can be a member, yes, I know. But in terms of the business, you've renegotiated and redesigned the product with AARP over the last few years. But then we entered a once-in-50-year hairpin of a market in, certainly, in auto and, of course, catastrophes are happening everywhere in home. Are there signs that you can point to that the redesign has had a positive impact in terms of new business generation or in terms of places where you are growing that definitely shows that there are green shoots for the new strategy to take hold?
Yes, I would say absolutely, and Beth can add her commentary. I just would share with you again, the nature of what we did was a long-term investment in a new platform, which was both product and technology. I thought we needed to be a little bit more digital. We needed a telematics offering. We needed some additional services on the, particularly on the claim side to interface with us, and yeah, we're getting all that in place, particularly as we're virtually complete with the rollout of Prevail in our direct response chassis in almost 45 states right now, so we could say it's achieved sort of the mission. What we're going to learn relatively quickly over the next 12 to 18 months is can we grow PIF count? Early indications are we can grow PIF count in home. It would be because of supply shortages and availability issues.
We haven't proven to ourselves and you all that we could grow in auto, but I believe we can, principally because we got better data. I think we have a better segmentation tool. We have better digital experiences from a customer side. So I put all the components together. They're there, but we need to execute, particularly in a challenging market where everyone rose prices, which is easy to do. But now you get back to sort of rate adequacy and how do you sort of manage the book and tweak the book so that we get back to overall targeted profitability in 2025 while improving our retention and ultimately growing PIF count? That's the dynamic that we need to prove to ourselves, honestly.
With the Super Bowl accepted, generally speaking, most sporting events are just littered with insurance advertisements. And obviously, Gecko and Flo are very well-known individuals. But I don't think that people associate Hartford, even though it is really a direct-to-consumer strategy, with the same type of direct-to-consumer funnel, I guess, getting people to top of the funnel and approach. Obviously, that's some of the work that AARP and that affinity group branding does that. But is there a new, I would say, top-of-funnel customer acquisition mechanism that the company is going to be rolling out to help direct potential customers to seek insurance with an AARP brand?
Yeah, I would say, one, our rebranding was meant to get at some of this to be more effective with the Hartford brand and the Stag. So I think you'll sense that there'll be a better digital experience. But remember, the top of the funnel for an AARP cohort of, say, 55 to 75, there's only so many people in that cohort. We're able to drive responses, I think, very, very well. Ultimate conversions gets a little harder in a competitive marketplace, but it's not a funnel issue for that mature segment. The larger opportunity for us, and we're studying it and just thinking about a broad-based agency play with a Hartford-branded auto and home product outside of AARP, but getting back into the agency channel in a meaningful way. So those are some of the things we're thinking about.
But that's sort of the next logical step where we would take the brand and our capabilities that we have with Prevail and repurpose them in a different channel to attract a larger cohort of potentially 40 to 65-year-olds in a preferred market.
You're already in those agencies.
And the only thing I'd add to what Chris said is that our team with their capabilities and marketing, they're very targeted. How they use media, how we use paid search, how we move those levers around. So with the dollars that they have, I think very effective, as Chris said, at targeting the cohort that we're attracted to.
You as an organization are not required to use the AARP brand to market.
No, the agency channel would be wide open for us.
Thank you very much, Chris and Beth.
Thank you.
Really appreciate you being here. And thank you to everyone in the audience. And next on the agenda, we have Voya. But I think you have a little bit of, no, we don't really have a break. So that's it.
Thanks.
Thank you.