Good morning, everybody. Very pleased to have The Hartford's Chairman and CEO, Chris Swift, and CFO, Beth Bombara, with us this morning. Before I hand it over to Chris for a few opening remarks, then jumping into Q&A, I do want to remind everybody that if you have any questions, there is a box at the bottom of your screen, and you're welcome to submit any questions through that. With that, Chris, thanks. Chris and Beth, thanks for joining us. I'll hand it over to you, Chris.
Thank you, Yaron. It's great to be with you at the Goldman Sachs conference. I know Beth and I always enjoy being physically in your wonderful building. We'll do it virtually this year and get back to physical next year. I would just say a couple things. 2020 has certainly been a year of two sides of a coin. Started the year with great momentum, great confidence in all our businesses, really pleased the way we were performing. Obviously COVID hit, and we had to change the playbook completely to first focusing on our employees, then our customers, and handling all their needs during that time. Working digitally, advancing our digital adoption, trying to plan for the 2021, 2022 cycle coming up here shortly. I think we performed actually very well during 2020 in spite of COVID.
Obviously, I think we've been very transparent on what our COVID judgments have been. As I look forward, Yaron, I really believe, and I have the data and facts that support it, now that we can grow our top line and expand margins across our commercial franchise going forward. We'll talk more about that in February when we normally give our driver guidance. I'd like to give your investors and audience that confidence that we are returning to growth and margin expansion. Really, that's the culmination of just 10 years of hard work in restructuring the organization, shedding businesses that didn't make sense for us to have, improving them operationally, investing in them. I really believe the best days of The Hartford are ahead of us due to the cumulative effect of all our strategic actions, all our operating actions, all our capital management actions.
If I just go around the horn, small commercial is the leading franchise. I think we have the leading BOP product out there, Next Gen Spectrum, which is really going to power our growth going forward. Middle market's been in the process over the last four, six quarters of re-underwriting books of business. They're pivoting to growth. They have more products to sell through our agents and distribution with the Navigators acquisition. The Navigators Global Specialty, combined with ours, is almost a $3 billion business that is enjoying robust rates. We've gone through our re-underwriting activities there led by Vince Tizzio. If I pivot to Group Benefits, the integration activities with our acquisition from three years ago are done. We're squarely focused on growth. We can grow the top line from our core products with voluntary and supplemental products coming there.
As I said, we've enjoyed building up excess capital during this time of crisis, but we see more clarity about the economic activity. We have more clarity about COVID. We have more clarity about COVID liabilities in our exposure. We know how to announce these things. We normally do it at year-end towards the 1st of February when we do our earnings calls. When there's something to announce on capital management, we'll announce it, Yaron. That's what I would say, and it's great to be with you again, Yaron.
Great. Thanks. I think there's a lot to unpack there, so forgive me if I go back to some of the points you made with more directed questions around them. One of those points I think you touched on specifically with Navigators, but I think it's true probably for the broader market, which is great. What are you seeing kind of as we head into one renewal, and what are your expectations in the P&C market into 2021?
Well, if you look sort of at the P&C market, it's again, a tale of two sides of the coin. On one hand, we're living through a pandemic that's creating widespread economic hardship, displacements of jobs, people losing their lives, and the human toll here is not to be underestimated. It might take some time for us emotionally as people to get through with that. The impact on sort of the economic toll for us is, we're an employment-centric firm. As jobs shrink rapidly, there was a lot of adjustments through audits, premiums came down a little bit, particularly in Group Benefits also. As jobs are coming back, and I think it's been quite a remarkable employment picture, just the big shock and the big now rebound.
We'll get a good shot of getting back to somewhat close to normal unemployment levels, I think in 2021, by the end of 2021. That's going to bode well for more payrolls and more benefits to come from there. On the P&C side, as we alluded to, most lines of business, except comp, are enjoying You know, strong to robust rate environments primarily because of the factors that we've talked about as a team on our earnings calls. You could look to social inflation, you could look to low interest rates, you could look to COVID, you could look to just a number of different things that are going to continue to put pressure, I think, on combined ratio where the need for rate well into 2022 is apparent, at least in my mind.
Okay. With that construct in mind, as you look into 2021, what areas of the business are the areas where you think you're going to go really into offense and pursue new business more aggressively versus areas that maybe you'll still play a little more defense trying to protect margins, try to protect the market share you have?
Yeah. I would say, the certain aspects of the casualty market, again, ex comp, I think are ripe for being a tad more aggressive. I think, again, across our portfolio, I would say that our written rate increases that we've enjoyed this year are ahead of loss trend. If you look out even into next year, I see that continuing. When you take aggregates, you lose some of the nuances at the fringes. The lines that I think continue to need the greatest rate continue to be commercial auto, umbrella, excess, certain aspects of E&O and D&O. They're getting good rate. I think they need to continue to push for We as an industry need to continue to push for rate in 2021. I think we'll be a little cautious in comp. The comp, I'll call it debate, is interesting to me.
Obviously, we're on the smaller end of the market. If you look at our results over the years, we've been pretty consistent in that 87, 88, 89, 90 range of combined ratio, which are really strong results. Even though there's a little comp margin pressure that I still feel we're going to face, at least in the first half of 2021, and things might begin to inflect a little bit in the second half of 2021. I mean, we're starting from a point of strength with that workers' comp book and obviously the BOP Spectrum product line as I talked about. I think you just got to put things into context that we're in a pretty good place with comp in small commercial. On benefits, I would say, again, through the integration period of time, we expected a little higher lapse rates, which we did experience.
I know we're off to a great start with January 2021 in renewals. Our voluntary book is getting bigger. Our A&H book is getting bigger. All those will incrementally contribute to growth. The biggest driver will be in the core as employment levels rebound, Yaron.
Got it. You mentioned we may see a little bit of headwind in workers' comp, at least first half of the year. We're seeing a little bit of interest rate headwind as well. How are you thinking about ROEs here? I think the company's had a very strong and stable ROE, call it in the 12% range for the last three years. Is that a sustainable number here, or do you think that just with the environment we're in, we have to reset expectations maybe slightly lower?
No, I'd say in a word, yes. I think that 12% ROE is a good anchor point for us going forward. I'll tell you why. In spite of low interest rates, we've been, again, pruning, re-underwriting many books of business in global specialty, middle market. I mentioned what Doug and the team are doing there. Actually margins are expanding in those lines, not only due to price but re-underwriting actions that we launched four to six quarters ago. That's going to have a cumulative impact on expanding margins from here. We could talk about it with Beth, obviously Hartford Next, our $500 million expense saving program will help overall margins, particularly on the expense side. Lower for longer is going to be a little bit of a headwind. Again, I think it's manageable with our investment capabilities.
We're not going to dial up risk in this environment. At the margins, there's things we could continue to do to eke out 10, 15, 20 basis points of NII improvement while facing those headwinds. I put it all together, plus obviously we're sitting on excess capital today that we'll talk about. When I put it all together, I think over the next two years, a 12% anchor point on ROE is very realistic for us and doable.
Okay. I want to dive maybe a little deeper into COVID, which you've gotten a lot of questions on over the last couple of quarters or a little more now. Maybe if we start with-
We've contributed to those questions on our earnings call.
I have, yes
Yaron. Yeah.
Guilty as charged.
You really have. Yeah.
Yes. Try to offer some answers as well. I don't know if they're right, but I try. I guess if we start with maybe a broader view here, not a Hartford view. I think some of the earlier estimates around COVID losses were call it in the $100 billion range, a little more, a little less. I think what we've seen to date has been closer to mid-20s for the industry. Do you think that we just got the numbers really, really wrong? Or do you think that there's still a lot of catch up in terms of the losses that are still coming through the system?
It's just hard for me to say, speculate.
Right.
I could tell you my instincts, it's a little heavy. Again, there's different terms and conditions and policy wording in different countries and around the world. You could see the litigation that is happening in various different forms. That's why we say not all litigation is created equal, right? Just because there might be higher case counts in our particular case.
You could have one litigation involving one client that is pretty material and pretty significant. I can't speculate on what the final tally's going to be. Obviously it's a big shock, and we're still living through it, quite honestly. The second wave, I think we all need to be very thoughtful about activities. Some of these liability exposures, some of the disputes that are going to inevitably need to be resolved in courts will take some time to play out, Yaron.
Right. Speaking of that last point, I think over the last few months, we've seen a few developments. One, I think the multidistrict litigation, I think ultimately the courts sided with the industry there of not forming these MDL. On the other hand, we're starting to see maybe at the state level, a few court decisions that are putting together some suits on the business interruption side specifically. Even a couple of early cases now where courts have actually sided with the plaintiffs on business interruption. Have your views on business interruption and potential exposure changed as we've seen these developments from the courts?
No. Not at all. I think it's playing out as pretty much as we thought. There'd be early wins in disputes that might be on a state basis. The state court system was probably our biggest concern in certain jurisdictions. As we reviewed and as we've shared with investors and analysts, we've done an exhaustive review and ground up of all our policy forms. We feel very good about how we've constructed it, and we feel very good about the direct physical loss requirement. We have containment and pollution exclusions. We also have the virus exclusion that wraps around all that. I think our language is clear, is unambiguous, and it's just going to take some time in the court system.
I don't keep track like a baseball score, but I think it's been 80/20, at least in my judgment, that 80% of the decisions have generally gone the industry's ways and 20% maybe have not. That there are going to be further appeals and further debate and motions to ultimately dismiss hopefully a lot of these claims.
Got it. One question coming in from the audience on this specifically is as you renew policies over the course of the last few months, have you added additional exclusions or tighter language around business interruption?
Yes. Totally. In all our lines of business we've tightened up terms and conditions where it needed to be tightened up, provided additional clarity.
As we head into a second wave here, we don't think we will have any increased exposure.
Okay. On the flip side of the COVID loss, there's also the non-loss of decreased utilization and how it impacts everything else, if you will. The people who are not in stores, not in restaurants, not going into work. How is that impacting the loss ratios? What impact do you think it may have on the intermediate or longer-term loss trend?
Yeah, those are things that I'm going to turn to Beth in a minute as the reserving function and the actuarial function reports to Herb. You're right. There's a lot of moving parts in establishing loss picks, loss ratios, year-end judgments. I think we've been very thorough and thoughtful on that. We've been through most of it. Beth has been taking me through with the actuaries and Doug. I think we got our arms around everything.
I'll let her explain, I think we've been pretty transparent of what our direct COVID losses have been, where we've put up, I'll call it $ loss dollars, whether it be on comp, whether it be on surety, E&O, D&O, or expense for litigation reserves. We also been equally clear that we have taken some frequency benefits in comp for exactly the reasons that you've talked about. Slower economic activity, people working from home, we felt that there were real frequency benefits this year. We also obviously reflected some frequency benefits in personal lines. By and large, that was the only, I'll call it frequency benefits that we took during this COVID period. Beth, what would you add?
Yeah. No, that's correct. Obviously on the comp side, we have seen reduced counts from a non-COVID perspective, we reacted to that. We are watching closely, though, the severity side of comp. Taking into consideration the fact that with some of the shutdowns and people's reluctance to go to doctor's offices and things like that, you can see extension sometimes. We've taken that into consideration in our overall loss picks and feel very good from a comp perspective of where we stand. As Chris mentioned, on the personal auto side, definitely have seen decreases there, which we reacted to. We did provide rebates to customers in the second quarter to reflect some of that.
Those are really the two primary areas where we've made sort of an explicit judgment to reduce our initial picks from the beginning of the year because of those frequency trends.
That's helpful. Chris, I guess returning to one of your opening comments, Beth, I'd love to hear your thoughts from a reserving perspective as well. Low interest rates. I've heard many times the argument of, we're in a lower interest rate environment, we've set lower, therefore we need to get more price to offset the loss in yield , essentially. I feel like over the last 30 years, we've been in a pretty continuous bull bond market, and we haven't seen that play out in terms of P&C pricing or reserve fix for that matter. Why would this time be different? What's changed?
I'd poke at your thesis just a little bit. I can remember the days 20 years ago, you could feel good about running comp at 101, 102, and make some money off float. You can't run comp today at 101, 102, 103 and make anywhere near adequate returns.
I think we also debate returns in relation to our cost of equity capital and what is an appropriate long-term spread to try to target. As rates do come down, interest rates, that theoretically does lower your cost of equity capital. It's not necessarily dollar for dollar, but directionally, I still believe that we're going to have to raise rates to earn any semblance of a good return on capital. Just given the sheer magnitude of the declines, right? If you look at the 10-year compared to just a year ago, it's probably down 125 basis points.
It's trading at 91 or 92 these days. That's a meaningful difference that will have to be reflected in rate increases, in my judgment, they arent'.
Okay. Beth, anything you could add from a reserving perspective? How you factor in a low interest rate environment?
Well, again, from a reserving perspective, we're looking more at loss costs, right? The fact that you can earn investment income because we're not discounting our reserves isn't really going to impact our loss pick. To Chris's point, we look all in when we're doing our pricing models to make sure that we believe we can make an adequate return over time. I think the other thing, too, that's happened over this period of time is you have seen loss cost trends in some lines like comp trending down. I think that that sometimes has had an impact relative to maybe not seeing the full impact of low rates. I agree with Chris, given the size of the decline and how quickly it has happened, I do think that you will see it work its way into pricing over time.
Okay. Again, going back to the opening comments, social inflation and maybe tying it to loss trends as well, loss cost trends. I would imagine that trying to figure out loss trends in this environment is nearly impossible, just given the volatility and the shutdowns and whatnot. How do you go about it? How have you gone about it in 2020? Have you seen any changes in what we call social inflation, considering that courts have been shut down for part of this period, maybe we haven't seen as much economic activity. How are you thinking about those?
Yeah. Again, I'll let Beth add her commentary, too. Social inflation is a broad term, right?
elevated claim judgments, usually coming out of courts or settlements.
There's elements of just inflation that is creeping into damages at a fairly alarming rate. Some of it could be current activities. Some of it could be like the reviver statutes in various states where, again, people were actually harmed due to physical or sexual abuse. That has then a cumulative effect of wasn't in loss costs years ago, I could tell you that. There's current trends, there's catch-up matters. It's just a reality of where you're at. We try to make our best estimates, again, by line of business. I think the more challenged lines are obviously the excess casualty or the retail umbrella lines where, again, we're upper single digits to low digits on some of the loss cost trend picks there.
The trick there is to be stable and consistent over a longer period of time and look for trends, because as you know, one or two years does not make a trend. Even in COVID, as Beth said, there might be a slowdown in judgments or court decisions or people seeking appropriate medical attention, which creates then larger problems down the road. I think our team is very thoughtful in looking at all aspects of what goes into a loss cost trends, frequencies, severity, everything. I believe we've been very thoughtful over the years in how we pick trend.
Got it.
Yeah. The only thing I'd add is that on the specific comment on social inflation and recent trends, given the fact that courts have been shut down and so forth, is we take that all into consideration and not sort of over using kind of a current trend to say that's the new long-term trend. We try and balance that as we make our loss picks, and that's why we don't usually come off of our initial picks until time has really transpired, and they've seasoned so that we can really see activity, because you can always have distortions.
Right. Maybe that's a good segue to my next question. Industry's seeing more considerable rate today. Some are seeing rate over trend, and now we're entering into rate on rate over trend. Yet we haven't seen a lot of that actually come through the loss picks yet or lower loss ratios. I'm not necessarily asking for a date in which we should expect to see that, but in terms of recognizing good news later, what kind of guideposts are you looking for? How much maturity are you looking for before you feel confident in releasing some of that or resetting?
Well, I'll let Beth add her points of view, but she said it. It's the word we use around the office quite a bit, is just seasoning, time. These are long-duration policies and liabilities. You could put up 90% IBNR in sort of the current calendar year for the most recent accident year. It takes time. I wouldn't say there's a formula, there isn't a guidepost. It's guided by data, historical trends. Are you getting more or less claim counts coming in? Settlement patterns. Generally, on these casualty lines, it's a minimum, in my judgment, three to five before you get real good indicators of how things are going to develop long term.
Okay.
Beth, would you add anything?
No, I agree with that. Sometimes you'll see the frequency probably, maybe sometimes a little sooner than the severity, and you try and balance that relative to the overall loss pick that we made. We typically don't come off of our initial estimates unless we see something to the negative. Obviously, you tend to respond to things that are going against some of your judgments than the other way. We look at this stuff every quarter. We look at our claim activity every month, and all that helps to form our judgments of just understanding what's happening in our book of business.
Okay. Next we switch gears to the personal P&C side. We've seen the company really improve the loss ratio over four years preceding COVID. On the top line, we're seeing kind of the sustained pressure. When do you think that that inflects, and what actions are you taking to get there?
Yeah. I think we addressed a question you had on the call, what are we doing with personal lines, and we talked about, remember, this is 90% AARP book of business. We did extend our AARP relationship 10 years. The new contract runs through, I believe, 1/1/2033. We are investing in a new platform, new chassis to administer products by Duck Creek. We're rebuilding home and auto products. We're changing terms and conditions. We're going to six-month auto policies. We're really modernizing the program to really The two organizations, AARP and The Hartford, are committed to being more of a relevant player. A lot of our growth dynamics were just the way our products were designed, particularly with lifetime continuity agreements. We had to be very cautious of who got that on day one, because in essence, we made a potential lifetime commitment to someone.
I think, again, with a more modern product, with better data and analytics to support our underwriting judgments, and how we refresh those data analytics with six-month policies, I think will all lead to higher and faster growth. Clearly the next two years, 2021 and 2022, we're sort of in that transition period, that flux period. I think we could be flattish to slightly up over that period of time, but it's going to really take until we're in all 50 states with our new product set, which happens by the end of 2022. 2023 sets up for more of a growth story than the next two years.
We're running out of time. I do want to touch on two other things, one being the Hartford Next initiative and the other capital management. If we start with Hartford Next, $500 million of cost saves that you're targeting. Can you maybe talk about the key buckets where the cost saves are going to be extracted from? Maybe on the other side of it's not just about the cost saves, it's also about investing in the platform and digitalization and helping growth. Maybe we can talk about that a little bit as well.
Yes.
Do you want Yeah.
Yeah, I'll start on that. Yes, our Hartford Next initiative that we launched this year, we're on track to save $500 million in 2022, kind of based on our 2019 starting point. It really is across all areas of the company. It is a company-wide initiative, so there's things that we're doing in our operation centers from an IT perspective, how we contract with vendors. Claims is a component of this as well, and really looking to maximize our use of technology and so forth. It really is all-encompassing. There's over 600 initiatives that are tracked by the team on a weekly basis and feel very good going into 2021 with what we've laid out, because we said that by 2021 we would've saved $300 million of the $500 million, and we are on track to do that.
A component of it, as you referenced, is being able to expand the use of digital techniques, and we're seeing more pick up there. Chris alluded to that earlier. We think in the end, this isn't just about saving costs, it's also going to better the experience for our customers, which we think obviously is really important in this day and age.
Right. My final question, buybacks. We haven't seen buybacks from the company in the last couple of quarters. It seems like you're generating a lot of capital today. You're confident at 12% ROE, not that worried about business interruption. It seems like the market is somewhat worried about potential losses. Would it be a very strong signal to the market if you resume buybacks, just in terms of confidence in the balance sheet and in your position?
I would frame it in a slightly different way. What I would share, Yaron, is what is our priorities for capital, and how does then that match up to the operating environment that we're in today? We've always talked about investing in our businesses, as Beth said, whether it be for greater efficiency, technology that we need, security, growth. We've been pretty aggressive, I think appropriately so, in building out and improving our core capabilities, our digital footprint for the future, and we're going to continue to do that. Obviously, in the environment as you alluded to, we want to make sure that our businesses can grow and take advantage of those opportunities in the marketplace. I think also if you look then at priorities, we've had a philosophy of always increasing our dividend in relation to growing earnings.
Again, if you look over the last 10 years, I think we've been able to grow our earnings base so that we have a good, healthy dividend in relation to earnings, particularly GAAP and statutory earnings. Third, we've always said if we can put to good use, and earn acceptable returns, IRRs, we'll return excess capital to shareholders. We've done that periodically over the last six or seven years. You've seen the trend. I think we've been balanced during that period of time. We also paid down a lot of debt as we were rightsizing the balance sheet and ultimately exiting Talcott. We used a lot of excess capital to rightsize the balance sheet and return capital to shareholders, and that continues to be a valid thought priority for us today. As we've talked about, it's the time of year where we finalize plans.
We have meetings, discussions. We typically give our driver guidance in February. Between now and February, we'll have a lot to communicate, and I'm just asking you to be just a little patient.
All right. Well, I do look forward to February, I guess. Any closing comments before we end?
No, it's always, again, great being with you. Thank you for your time and attention. I'll stop and end where we started. I think our next three years are going to be just fantastic. Again, the accumulation of a lot of great work by the team, our talented teammates across the country, the improvements we've made in the platform. The businesses we're in, I think, Yaron, are the right businesses long term to be in to earn superior returns out of those profit pools. We're executing well. We're a team that sets high goals and high standards, and I think we're performing. The environment the next three years, I think, will allow us to continuing to perform at a very high level. I'm the most excited I've been in my 11 years with The Hartford over the next three years.
We've seen a lot, we've done a lot, as they say. Now's the time to sort of harvest all the hard work, all the gains, all the strategic moves we made. I really believe that's what we're in now. There's no more things to fix. There's only things to grow and get better at.
Great. I look forward to seeing that. Thank you both, Chris and Beth, for your time and thoughts. Take care.
Later.
See you later.