Thank you for the opportunity. I thought I'd just touch upon a couple things. 2019 was an excellent year for The Hartford, both strategically and financially. Financially, the results speak for themselves, but at a high level, we generated $2.1 billion of core earnings on ROE of 13.6%, and we're able to grow book value per share about 11% for the second consecutive year. Strategically, I think we've proven we have the ability to acquire and integrate operations companies into our platform that help us expand our underwriting capabilities, expand our product sets, and grow our distribution channels and capabilities. Really at The Hartford, we have been focused, and we'll continue to focus on execution and organic growth. We talked about for Navigators, the integration is proceeding well.
We're about nine months into it, and I think we have our arms around it as far as what we have and the capabilities that we acquired. We're pleased with it, but we're really focused on improving the underwriting performance of that business unit. We're looking at how we cross-sell within our larger platform. We think we're bringing to Navigators enhanced claims capabilities with our fast claims operations, and then really leveraging all The Hartford capabilities. When I say that, I specifically mean data and analytics in our deeper actuarial capabilities. Things are on track. In our earnings call in the fourth quarter, we did reaffirm our view that we can create $200 million of incremental core earnings. What we did was we shortened that by a year. When we closed the deal, we talked about generating that over a four-to-five year period of time.
Now we think we could generate that over a three-to-four-year period of time. As I said, we have our arms around Navigators, its operations. The changes that we've done over this past year give us great confidence going forward that we'll be able to expand margins. We also talked about expanding Navigators' margins in that 5%-6% range on an overall combined ratio. That, again, is really driven primarily by underwriting action, pricing actions, limiting policy limits, looking at terms and conditions differently. Quite honestly, exiting businesses, particularly in London, that just weren't profitable. If I then changed to the commercial lines, we provided our guidance for an underlying combined ratio in that 92%-94% range. That is an improvement over this year, primarily, again, driven by the five to six points of Navigators improvement. I mentioned where that's coming from.
Also we see improvement in our core small commercial, middle, and large commercial segments, in spite of some margin compression, slight margin compression in workers' comp. That's just reality. That's just reality. I'm being honest and transparent as we always are. If I look at group benefits, group benefits had an outstanding year with $539 million of operating earnings, core earnings, a margin of 8.9%. Largely what we're foreshadowing is that we're at the late stages of finalizing the integration of the Aetna book, and we're pivoting towards growth in new products, new services that complement our existing core capabilities, and ultimately focusing on a better customer experience, particularly the employer experience. As it relates to capital management, I think we continue to be thoughtful in managing excess capital that's generated beyond what we need to fund growth in our operations.
We announced our billion-dollar buyback program a year ago. We expect to buy back about $800 million of shares this year in 2020, and we raised the dividend 8%. As I sit here, Jay, I think we ended 2019 with significant confidence and momentum as we head into 2020 about improving our operations, particularly margins, and creating shareholder value for that. That's what I would say.
Any opening comments from you just about how the balance sheet shaped up relative to what you expected at the end of the year?
I think when you look at the things that we've done over the years to get the balance sheet, I think in a very good position. We've talked for a while about our goals relative to leverage ratios and so forth, and see ourselves really within reach of those goals as we look to pay down some maturing debt this March. Very pleased with the profile there. As Chris commented on, we're pleased to be able to increase the dividend again this year, I think it positions us very well going into 2020.
Just to follow up something, Chris, you said about the Navigators. You talked about achieving your goals one year earlier. That always begs the question, what changed relative to your original expectations?
Well, we laid the path out to the $200 million as far as improved underwriting results, expense synergies, and enhanced net investment income. All three of those are still the components, but we didn't anticipate this level of rate increase. We talked about it in the fourth quarter. Basically, the Navigators Group is plus 15%, closer to 18%, and we see that continuing into the second half of 2020. As those rates earn in, you roll forward a couple of years of continued rate increase. We think we do have our arms around loss cost trends for Navigators. We're going to hit our goals a year sooner than we anticipated.
I assume you probably thought initially those prices might be up single digit?
Yeah. We, in essence, had a view of, I wouldn't say exactly single digits, but in that higher range of single digits, just given the needed improvement where ROEs were. We're basically double the rate increase from our original expectations, in spite of interest rates coming down, and this really wasn't an expense play for us. This was an expanded capability in maximizing our distribution play.
Let's talk about, I guess, the commercial lines market. You seem to express some conviction that this pricing momentum would continue into this year, maybe even into next year. As you look at the world, what gives you that level of confidence?
Well, the straight answer is, I don't think as an industry broadly defined, we've really kept up with loss cost trends over the last five or six years. If you look at where we are today in certain lines of business with our combined ratios, it's going to take 18-24 months of continued rate increases, rate-on-rate increases, I think, to hit targeted returns in commercial auto, liability, and property. You couple that with a low interest rate environment, lower for longer, with 10-year today at 160, 155. I think as an industry, we need to continue to be disciplined and focused on rate and underwriting to make up for that loss in NII that inevitably is going to happen.
Yeah, the question that I get a lot is, yes, prices are going up, but there's a reason. Claims are going up as well, not across the board, but in many lines. As you look into 2020 and 2021, is your assumption that the loss environment continues to get worse from here or get better? What's your underlying assumption?
We believe it's stable. Again, it's making up for sort of accumulation of years of not keeping up with trend. I think we've been pretty clear that we feel good about where we have trend pegged today in that 5% range in aggregate for our portfolio. We just need to continue to execute above that to be able to expand margins from here. I would say, again, at least for our book of business, we don't see anything dramatically shifting. We've talked about our litigation rates, our representation rates have been very stable. We're not experiencing a major shift in any of our liabilities. We've seen over the years, the last five years, the need to make adjustments in loss picks for certain liability lines, primarily commercial auto and general liability. We've done that.
Jay, for us in our book, we just need to keep up with that trend that we've pegged for liability lines in that 5% range. Primary, maybe a little less. You get into umbrella and excess, it could be a little bit higher. You blend it all together, as an industry, we just need to catch up from where we were.
Is it fair to say that the backdrop is a fairly rational industry? In other words, as you take this action, would you expect your new business to suffer notably or your renewal retention to be impacted?
What I would say is the trade between rate and retention, you always need rate ahead of retention because if you have an unprofitable account or unprofitable segment, you just need to fix it. If it leaves you, it's unfortunate from a customer side, but you need the rate in your book. I would say generally, our distribution partners understand the environment. We've been working hard with them, particularly the last six to nine months, to educate the reason for the rate, the trend environment. I think we have alignment with our distribution partners about what are the actions that we need into 2020, then also heading into 2021. The best example I could give you, maybe just tangible, is that we worked really hard on our commercial auto book over the last six years. It's about a $600 million book of business to us.
We put about 50 points of aggregate rate into the book over that period of time, it still produced 102 combined ratio today. When I talk about the next 18-24 months to get that line to targeted rate increases, we're going to need 10-12 points of rate this year, 10-12 points of rate in 2021 to even get close to earning an adequate return on risk-adjusted capital.
You could argue you guys have been maybe a little ahead of the curve there, arguably others would have to at least see that kind of increase, if not more.
I'm not going to disagree with you.
Okay, fair enough. Let's turn to workers' comp. I guess it was last year or the year before, you had this bit of a speed bump. I think it was in the third quarter. We had talked, I think the market made too much out of it.
Second quarter.
Was it second quarter?
Yeah, I think it was first half of the year.
Okay. What are you seeing as far as claims trends there now? For us to actually see prices going up in workers' comp, I'm assuming there would have to be some sort of change in the claims trend.
Yeah. You are right. We did basically in the first half of the year signal that the frequency of claims, not severity, the frequency of claims in certain segments of our book was increasing. If you remember at that time, we talked about sort of the demand surge that we suspected occurred with tax reform and hiring and getting maybe more inexperienced workers into certain job classifications that posed just more injuries early on. That still is what largely happened in our book of business. If you look at segments like retail, restaurants, I'll call it high demand, maybe high turnover businesses, there was a little bit of surge hiring that just was inexperienced in certain classes, including manufacturing. I think that largely settled down in the second half of the year.
As we sit here today, the trend really over the last six quarters, except for those blips in the first two quarters of 2018, frequencies have gone back to normal, have been slightly negative, and severity, particularly on medical, is better than our long-term assumptions that we generally plan for in that 4.5%, 5% range. I think the line is performing well. We still make good margins in returns, but with the continued rate rollback pressure due to good experience, those margins, as we alluded to and guided to, are going to be under some slight pressure heading into 2020.
What's interesting is those factors that you cited when the frequency picked up arguably are still around and in place, yet it seems like the frequency has settled back down again. The impossible question is why do you think that happened? I know there's no answer, but I'm sure you guys have thought about it.
I call it demand surge, right? When you needed workers-
Okay
There was a demand surge primarily related, I believe, to tax reform and some of the stimulus. What happens is people get trained as they get more experience, as safety always continues to improve, it reverted back to the long-term mean.
Let's talk about small commercial. You're obviously a leader in that area, but you're not standing still. You continue to make investments there. Can you talk about some of the more recent investments you've made and how they could drive growth going forward in that platform?
Sure. Yeah. We're clearly really proud of what we've done with small commercial over an extended period of time. All right. It's been about 30 years since we launched that segment of the business, and it's one that we've constantly invested in for innovation, for customer experience. I think there's two examples that I could give you just quickly, Jay, without sounding like a commercial.
You can sound like a commercial.
Unless you want me to sound like a commercial.
Go right ahead. You got a platform, might as well. We're not going to charge you for it even.
Oh, thank you. As we rolled out what we called Next Gen Spectrum, which is basically our BOP policy, our Business Owner's Policy that combines property and liability insurance. We've had a BOP out there for a long time that is used by many different classes of business in the industry. This one was basically a modular design. If you think of Amazon and your shopping cart, we're able to present to agents that are quoting our BOPs a more modular approach of sort of what is a baseline policy, baseline from a liability side, and then all the additional coverages and features that you can add, whether it be cyber, enhanced protection and liability, industry-specific recommendations for restaurants or dentist office.
We really customized it so that depending on what type of customer you were, we're able to present to you optional coverages, price points for those optional coverages that protect your business more holistically on a more transparent basis, and clearly with more speed so that you know sort of your running total of what your spend for your policy is. We think it will revolutionize the BOP business. We weren't going to be able to do that until we basically invested in some core platform capabilities of how we administer policies, how do we quote. Those all investments started four or five years ago on a baseline basis that allowed us to innovate today with our Next Gen Spectrum.
The other thing that I would just say, and I know everyone in this room knows it, the power of data and analytics is real, and our ability to cut down questions from, let's say, 50 years ago down to something less than 10, to be able to pre-fill data that makes underwriters and agents' jobs easier, to be able to use imagery and underwriting. Just the advancements in data and analytics that's embedded into the small commercial underwriting process is pretty impressive.
It's just interesting you mentioned Amazon. People are so used to buying goods that way, especially younger people, whether it's the phone or the computer, that whole process of buying something with a card. I guess you're tapping into that, and I think certainly as these younger people come up in the industry, that's a natural thing for them.
Sure. No, it really is. The way we really present it, and if you want, you can go online and see it, is it's sort of the base, sort of the good, the better, the best. Then you could see the optional coverages that are attached to each of those different characterizations of good, better, and best.
There's something that I guess you haven't been impacted too much by, you'd hear about it in the industry, is this whole concept of social inflation. It's affected some of your businesses. Give us your thoughts on what do you think is causing that. Is it just more aggressive, creative lawyers? Is there a backdrop politically or socially that's changing it?
Sure. Well, like you said, I said it a couple times in our earnings call, it's a phenomenon that's affecting all aspects of the insurance business. East Coast, West Coast, Central. Its effects vary, obviously, based on your business mix. What I was trying to describe was a primary liability writer might have certain impacts. Umbrella excess writers might have more, as you get more severity into those types of conditions in events. What we were also trying to say is that I think we've been ahead of the curve when we've been adjusting and reacting to social inflation over the last five years in various aspects of our book. The root cause, look, I'm not a sociologist. Does that sound good?
Yes.
I'm not. Really, I'm an accountant. I just think we're in a litigious environment. I think maybe plaintiffs bar is doing a more effective job in arguing for larger settlements. Maybe juries are more sympathetic to injuries and outcomes. Whatever it is, others have talked about it, I'm stealing some of their language, it's a tax on society that we all pay in one way, shape, or another. How we fight it, we do it every day with our claims and law professionals in trying to say what's a reasonable settlement. I always think claims, those that are legitimate, covered by our kind of languages, that's fair. That's not excessive or punitive. We approach for our shareholders and our policyholders.
I wanted to shift away from commercial lines. Before any questions out there on The Hartford's commercial business, before I make that shift, if you have a question, just raise your hand and we'll get you a mic. Covered a lot of ground. You guys covered a lot of ground. That was pretty good for an accountant, by the way.
I resemble that.
Beth, let's shift to you. You had kind of alluded to before in your opening, cutting the leverage ratio down to your goal. Walk us through, I guess, the next two capital generation, what debt you're retiring. When do you think you can get to those margin levels or the leverage levels that you expect?
We did, I think, lay out pretty in our earnings release our thoughts on capital generation 2020. What we're expecting as far as dividend companies. Again, our P&C company targeting dividends about $800 million-$850 million. Group Benefits, $300 million-$350 million, and then Mutual Funds, $100 million-$125 million. Have some more tax attributes on our balance sheet that we're monetizing. We expect a little over $500 million of cash receipts to the holding company as we both get refunds of our AMT credits as well to use our net operating losses. Healthy cash flows to the holding company as we look at 2020. As I mentioned, we do have maturing in March, and we do plan to pay that down, not refinance it. $500 million of debt.
When we put that into the mix, it puts us in a really to our leverage ratios. From a whole cash requirement, it's really just interest in dividends. All of our operating expenses are allocated to the areas, and interest in dividends are a little bit over $700 million. Kind of gives you a sense of just sort of what the cash flow generation is. As Chris said, we do have 800 that we'd be doing in 2020 to complete our billion authorization. As we look beyond, as our operating companies continue to improve as far as earnings, we take that into consideration in the future. I think there'd be some room for those to increase slightly.
We've been on a path of doing that year-over-year, we'd continue to evaluate if that made sense here. That kind of gives you a picture of just the excess at the holding company to decide what the best use of that would be.
You've done decent sized deals, acquisitions over the past several years, and I'd say you executed on them well so far with Navigators, you're obviously achieving your goals quicker than you thought.
I might quibble with the heat to your stage.
Oh, you had to. Well, fair enough.
The plan purchased and sort of opening balance sheet.
reinsurance and all the eyes wide open on and getting our arms around day one.
You've executed on both pretty well, say. It always raises the question as to future acquisitions. When you think about the ability to acquire business, someone comes to you tomorrow with the perfect fit to you, realistically.
Sure. Again, the context of our acquisitions were things that we've needed firm side to expand our capability and to basically serve more customer needs. That was the primary behind our acquisitions, whether it be the scale business or really some of the specialties and the specialty orientation we picked up with Navigators. I thought both were important and financially will work out very well. The bar is high going forward, principally because I think we have everything we need as a present organization. We just like to grow it organically, make it bigger, have larger scale, have more shelf space in our agent's office. I'm trying to describe that there's not a burning desire to do any additional. Like you said, we're aware, we'll listen.
The bar to execute is very high because it just really needs to be very accretive compared to where we are. If something were to come along in the small commercial space, middle market space, that would be a nice complementary bolt-on that has additional scale benefits, particularly in small. I think we have the most efficient small commercial operating leverage that great operating in middle market. Clearly, our goal is to be a bigger and more relevant player. We're committed to doing it organically, if there's something, we'll consider it.
Got it. Any questions on capital or M&A on this topic? No one wants to challenge what he said? Enough. Let's talk about a business that probably doesn't get enough attention because it's been a group benefits business. It feels like your 2020 guidance is conservative, given how great these results have been. What are we missing here?
Yeah. It's a $5.5 billion just rider behind MetLife, I think, is right around the corner here. Yeah, proud of what we've built organically. Business, I'm always reminded when I joined The Hartford in 2010, this business earned about $65 million-$75 million of earnings. It's at a pretty good time, and the acquisition obviously helped. All the guidance really implies is that an 8.9% margin is probably unsustainable. We experienced obviously very favorable, excuse me, frequency and severity of getting people back to work and recovering. Our approach to pricing and reserving assumes sort of a five-year averaging. You're right. If it continues to perform, if people don't go out on disability, meaning lower incidence continues, we have a chance to outperform.
The way we price products, given we're making three-year rate guarantees or four, and the way we reserve and where we emerge is more on a five-year average basis of those incidents and recoveries.
Got it.
I think the only thing I'd add is what the outperformance was, the performance of the investment portfolio. Our limited partnership portfolio very strongly across our businesses, but in group benefits as well. We, again, take a long plan, so that's also a component of that decrease.
I think we all hope that's going to continue.
Yeah.
On this business, you sort of suggested in your opening comments, Chris, pivoting towards growth. A little bit of time left. Talk about the sources of that growth. Where does that come from?
Sure. Two main sources. Our core product is group disability, both long-term and short-term, our scale businesses. What we're now is our voluntary businesses. Voluntary in our vernacular means Critical Illness, indemnity, AD&D, accidental, travel accident. You get into the A&H side of things. I think there's an opportunity with our customer, 20 million customers, our distribution relationships, to really enhance growth in our volumes, and that's what we're going to do. Beyond that, we're thinking about, I'll call it wellness technology and services, and augment some of our core capabilities. Those are things on the drawing board, thinking just how is this whole health benefits space going to emerge? Those are probably the three primary, two short-term, voluntary and A&H, where we have products on the street today, and one where we're innovating on offering services.
Got it. My last question in the time we have, was interested to hear in your call when you were talking on your fourth quarter call, you mentioned a number of ESG-type attributes of the company. Hear that from insurance companies. My question is, why did you bring from shareholders, investors, employees, to suggest this is a bigger issue?
I think from an inside, you could point to people in this room and their firms and some of the stances that people brought ESG issues. It is becoming more and more important for investors to understand companies and their strategies and their logic to ESG. I think we've been a leader in this area for a good decade. This isn't anything new that we've been working on as an organization. We define it more from a sustainability, I'll call it four quadrants. One, governance ethics. Second quadrant would be diversity and pay equity. Third quadrant would be communities and giving back. The Fourth quadrant would be environment, e.g., your carbon footprint. We've been working on these things for a while. We've gone public with goals. Last year, I put out a sustainability goal report in those dimensions.
Yeah, I do think more relevant, more top of mind because we have a dimensional focus, I think, for all stakeholders to create value over a long period. Obviously, we're a shareholder-driven organization. We got to deliver to shareholders first, but phase of balancing that with the other dimensions of creating a good community environment for the long term.
I thought it was great you brought it up. I'm not getting a ton. In our department, in the equities business in general, become a really big issue, and it's great that you're kind of leading that and making sure your view of that. It's great. We are really bumping up against the end of this session. Why don't we call it quits here? Thank you very much for joining us again.