All right. Good morning, everybody. Thanks for joining us this morning. I'm very pleased to have Chris Swift, Chairman, CEO of The Hartford, and Beth Bombara, CFO. It's been an eventful year for the company, for the industry. I'd love to go through a couple of questions I have. Maybe before that, we can start with some prepared remarks.
Sure. Happy to. Thank you for inviting us. We always enjoy being with you at the Goldman Sachs conference. I thought I'd just cover a couple highlights you might find of help, and then Beth will talk through a couple of announcements that we made this morning. I would say 2018 has been a very eventful year for The Hartford. Starting here in the fourth quarter, with the announcement we made this morning that the catastrophes continue to be elevated again, particularly due to California wildfires. Our estimates that we've put out will exceed last year's estimates at this point. We have a high degree of confidence in them, particularly given our reinsurance structure, but Beth will talk more about that. I would also say, again, from an underlying business performance-wise, our businesses are performing very well and I'm excited about their prospects in the future.
If I look at a couple of simple metrics, annualized year-to-date ROE of about 12.7%, growing book value at 11% since year-end. Top line growth where it makes sense. Again, I'm very pleased with the overall business performance. If I look at what we've done strategically with our capital, we sold Talcott, realized the proceeds of that transaction. We've reinvested in Navigators transaction. We continue to integrate the group benefits business that we acquired last year. I would say, finally, from an overall investment theme, we continue to invest in the business, primarily in our digital and technology skills to allow us to be an easier company to do business with while retaining and attracting, I think, the talent that we need to compete for the future.
If I think about our near-term priorities going forward, I would say our number one priority is to maintain our strong returns and margins that we're generating on the business. I believe that we could do that going forward. What I would also share with you is that the execution, particularly on the integration of our two acquisitions, is paramount importance to us to really fully monetize the benefits that we saw why we did that. I would report to you here today that our group benefits integration is well on its way. If I look at our performance with our one/one new business sales, one/one renewals, very pleased. Right on plan. If I look at the expense savings that we projected when we announced the deal, we're going to significantly achieve that by about 20% or $120 million of operational savings.
If I look at another reason why we bought that acquisition was the claim system that Aetna operated in its benefits business. We have fully integrated into our environment, added some enhanced digital capabilities, rebranded it a little bit. I would tell you that the operational platform that we wanted to build when we integrated it is now complete. Really, the next 24 months is about migrating Aetna's accounts that are still on Aetna legal entity paper, given it was a reinsurance deal, onto our paper, given that we have that operational environment built. On the Navigators transaction, what I would tell you is we're working hard on the operating model and our go-to-market strategies that we will announce well in advance of closing. We estimate closing to be around the April 1st timeframe, early second quarter. Navigators shareholders' approval has been received.
All our regulatory filings have been complete, it'll take a little bit of time to seek all that. Really, the benefit here of this acquisition will be to create a new global specialty operation for The Hartford and augment our capabilities and talents in middle market. As I think about particularly capital, our businesses are generating excess capital in excess of their current needs. If I couple that with the monetization of our tax benefits, AMT and NOLs, we will be in a position after we close Navigators to generate excess capital that can be positioned for deployment going forward. Very pleased about the capital generation capabilities. I would say that our priorities are probably twofold.
We always want to continue to invest in our businesses to be relevant to our distribution partners, to be relevant to our customers, to have, again, an updated technology platform. That's first priority. Second priority is to continue to pay down debt. The third priority is share repurchases. I would say that with the two acquisitions that we've done, I feel like we filled in all the gaps that we've had in our portfolio and don't see any other strategic gaps that we need to fill in with acquisitions going forward. We'll go back to our organic focus. Before turning the call over to Beth, I'll just comment quickly on workers' compensation frequency trends. I think you know we've called out some elevated frequency trends over the last couple of quarters, elevated from five years of historical negative frequency trends, particularly in workers' comp lost time claims.
We felt the need to call it out because it was a deviation from the prior trend. I would tell you that our analysis to date, we think it's a one-time movement here, particularly related to macroeconomic conditions, low unemployment, tax stimulus, job creation, job demand, and particularly high turnover wages. Our metrics are working. We called it out to highlight the nature of our metrics. We're taking the needed adjustments on underwriting, on segmentation. Again, in the context of a $3 billion workers' comp book, to make a minor adjustment in middle-market comp picks, I think is manageable within the overall context. If I look at our commercial book in total, which is about $6 billion of premium. I think, again, the impact on margins going forward is very negligible.
Again, our goal is to really maintain and improve margins if we can, recognizing that there is some pressure on that workers' comp product line, we got other product lines that will contribute to a margin improvement story going forward. That's what I would share with you. Beth, would you-
Sure. Let me just touch on the announcement that we made this morning relative to catastrophes for the fourth quarter. As I imagine most of you saw, we did release that we anticipate for the full fourth quarter, our cat losses, or the net impact of catastrophes, to be $350 million-$365 million pre-tax. Again, that takes into consideration the hurricane at the beginning of the quarter and obviously our estimates as it relates to the most recent wildfires. Obviously, our claims adjusters are continuing to work with our policyholders as it relates to the California wildfires, and we're continuing to look at our estimates there. I'll remind you that we have very solid reinsurance in place. We have an aggregate reinsurance treaty, which covers losses in excess of $825 million cat losses.
The way that works is any one cat can contribute up to $350 million into that layer. After $825 million, we have protection of up to $200 million in excess of that, as well as our per occurrence treaty, which attaches after $350 million of losses. Even though we're still early in putting our estimates together as it relates to wildfires, we feel very confident with the range that we put out because of the reinsurance protection that we do have in place.
Great. Well, thank you for the overview. I was going to start with some strategic questions, actually, maybe because you just touched on the wildfires, maybe I dive into a couple of questions around those. Are those considered one event, two events from a reinsurance perspective?
Yeah. For the way our contracts are worded, they would be two events. Obviously, for us, the larger event would be the Camp Fire.
Right. Would that be mostly personal lines oriented?
Yeah. Definitely would be more weighted towards personal lines than commercial lines. We obviously will have some commercial lines impact, but given the area that was impacted, definitely more of a personal lines event.
Okay. Maybe one broader question on California wildfires, and probably doesn't even pertain to this year's losses yet, but I get a lot of questions on subrogation and inverse condemnation with regards to the utility companies down in California. How does that process work, and what will your expectations be around subrogation?
Subrogation, I would say there's a couple elements of it, is ultimately trying to define who created the liability or who caused the event. If we look back at last year's fires, that activity of trying to determine who created the event is happening right now. There's three power companies involved, PG&E, Southern Cal, Caltrans. We've have actions and suits against those companies as far as cause of loss. Our accounting ramifications of that is we don't book any subrogation receipts cash until we get the cash in the door. We put up our gross losses net of any reinsurance, and then we work the system to determine root of cause and who would need to contribute to that subrogation. We'll do the same this year. We're just early in the process. There's no suits. There's no, I'll call it, formal process begun.
Obviously, we'll reserve rights to subrogate under our reinsurance contracts. It's generally an elongated process to get receipts back in the door when you're trying to determine root cause of the liability.
The liability determination, is that determined by the courts, or is that determined by the state of California?
There's a lot of parties involved.
Okay.
Investigators. Fire investigators will put out their reports. There could be second reports by other independent investigators. There could be disputes that need to be resolved in the court system. There will be, and that's why it takes a long time to, I'll call it settle all the views of liability.
Understood. Thank you for this. I guess if we go back to more of a broader strategic view of the company. You talked about the deals. I actually remember sitting on this stage a year ago, and I think you had just announced the Talcott deal the day before. How is the company positioned today versus a year ago? What has changed from a broader perspective in terms of the markets that you want to be in, the growth avenues for the market, given the deal that you've executed?
Well, if you really look at even beyond that, with respect to the last transaction and the restructuring.
Yeah
That was a momentous event that we worked hard on for a long time to get that completed. We had been positioning the company for a long time to focus in on more underwriting-centric businesses as opposed to capital market or spread-sensitive businesses. Commercial personal lines benefits. Benefits is an underwriting business. It happens to be morbidity and mortality based, but it's underwriting centric. We have our mutual fund platform. Really, over the years, all we've done, I believe, at the core, is to strengthen those businesses with our organic investments, with our organic mindset of becoming a larger, more relevant underwriter with more products, with more capabilities, with more industry verticals, and a player in benefits that has more scale. If you look at us today, obviously MetLife is the largest benefit players given their large mortality block.
We're the second player with a very balanced mortality, morbidity block of business, a growing A&H block, a growing voluntary block of business. We still, at our heart, believe benefits and P&C cooperate together nicely, particularly in our environment where workers' comp claims and LTD claims are managed by the same group of leaders. They have different intake mechanisms, but there's similarities. We're beginning to market those capabilities in a very productive way. We like all the businesses we're in. They're all strategically important to us. We're trying to grow them, invest in them, particularly on an organic basis going forward. I think the real performance is really shining through the last couple of years here, in spite of some large catastrophe losses that the industry is prone to.
Right. With the deals you've gone through, I look at core earnings. Navigators builds up your commercial earnings. The Aetna deal builds up your group benefits business. I guess the weighting of personal has maybe shrunk a little bit. Is that a temporary thing, or do you think personal lines will build up again?
Is it temporary? Well, it's math.
Yeah.
It will be reflective of our overall contribution of other businesses to the total. We're committed to the personal lines business, particularly with our unique and special 30-year relationship with AARP. In fact, I think it's 33. You always remind me it's a little longer. We like it. It's a profitable segment of the market plate in spite of large losses coming out of California. We're doubling down in that area, continuing to invest in technology product sets, modernize that platform.
Doubling up.
Doubling up. Yeah. Excuse me. Yeah, it is an important part. The personal line space is very competitive, dominated by the top five or six players. I think we could effectively compete in our niche, in our segment, and create returns for our shareholders over a longer period of time.
Got it. You said earlier, it's been an eventful year for Hartford, for the industry. What do you think the market's missing today in The Hartford story?
I don't know. I was going to ask that question at the end to our investors and shareholders here. Look, it's hard for me to share what's missing. I think all we're trying to do is continue to tell the story about our strategy, what we're focused on, our strong execution capabilities. I think a very strong management team across the board, honestly, how we cooperate, how we think in terms of what's best for shareholders, best for customers, best for employees, and we'll put up good numbers going forward. I understand why certain people might have rotated out of the stock given some of the actions that we've taken over the past 18 months, we've signaled those actions pretty intently over the last two plus years of what our priorities were, why we wanted to do what we did, and we're doing what we said we did.
We're going to just continue to work hard every day to create value for shareholders, tell a positive story about the momentum that I feel we have in the organization. I think over time that the value of what we've created will be realized.
Okay. You're now also signaling that in terms of capital deployment, those strategic deals are through. Not to say you won't see any financial deals or tuck-ins, but large deployments of capital towards large deals are, seems like you're comfortable with where your.
Totally
platform is today.
Totally. That is a clear intended message of, look, we always want to be opportunistic in that space.
Right.
What we did to create the second largest benefit players, what we've done to create a new global specialty player with the Navigators acquisition and add to our middle market capabilities, I thought was very strategically important, primarily because of the role that distribution plays in our business. Our distributors are consolidating rapidly. They want to do more business with us. To continue to grow organically our product sets and underwriting capabilities, but augment it with a strategic acquisition, I thought was the right thing to do.
Okay. You touched on it in your opening comments, but maybe we can spend a little more time on excess capital generation. At what point should investors expect to see maybe a buyback program being reinstated? I don't know if you can offer any thoughts as to the magnitude of excess capital that you're generating.
Yeah. I'll start with that. As Chris laid out, as we look at going into 2019 and into 2020, we are positioned to be generating excess capital. All of our businesses, as Chris indicated, will be generating capital in excess of their needs. When we think about the three primary business segments that we have, P&C, group, and mutual funds. P&C, we typically look to take dividends out around $850 million-$900 million a year. Again, we front-loaded next year's dividends into this year to fund the Navigators acquisition. As we go into 2020, we'll be in line with that. From a group benefits perspective, we're in that $250 million-$300 million range, and we would expect to start taking dividends in 2019 from group. Mutual funds is a pretty steady contributor to the holding company of about $100 million-$125 million a year.
As Chris alluded to, we also have tax benefits at the holding company, NOLs and AMT credits, that will also be generating cash. When we look over the next 2-3 years, that's another $1.2 billion-$1.3 billion of cash that will go directly to the holding company. Again, as we look at then what our needs are to use that cash, we have interest in dividend requirements that are typically around $700 million a year. We do still need to think about from a leverage perspective the actions that we've taken with Navigators has put us about a year behind kind of relative to the track that we were on to getting to our long-term target.
Sitting here today, we anticipate in March of 2020, we would pay down maturing debt, and that would really put us in line with where we need to be. That would generate excess that, as Chris Swift said, we would look to first to see if there's areas of our businesses that we can fund growth. Absent that, would look at opportunities to return that to shareholders, which again, we see as a viable and appropriate use of excess capital.
Thank you.
I would also point out, because I've been on the road with our investors for a good period of time here over the last six weeks, and we tried to paint a picture that maybe I'd share with this group, that over 2012 through 2017, we've generated, created, freed up through all our initiatives about $12 billion of capital. If I look at how we deployed that, 50% of it has been gone over that period of time through buybacks and dividends. 25% of that amount has gone back to what we would characterize as balance sheet strengthening, such as paying down debt, such as our A&E reinsurance transaction with Warren Buffett. The last balance sheet strengthening item that we would consider was our pension de-risking transaction with Prudential Financial, where we transferred about a third of our retirees' obligations.
The other 25% over that five-year period of time, but it's been concentrated obviously in the last year, has been towards M&A. When we talk about being balanced with our capital management, I think we've had the track record. We have that mindset going forward. More importantly, we're going to have the cash flows that allows us to continue to be balanced in that regard.
If we dive in a little bit deeper into the segments and businesses, one question I'd have is, we look at the group benefits business on the one hand, we look at commercial P&C, where you have a large workers' comp block on the other. Is there some correlation in terms of loss experience or margins in the two businesses? If so, when in the cycle do you expect to see losses pick up?
Yeah. We covered this on the last earnings call. The correlation is generally not there. The only historical correlations that we acknowledge is in high unemployment. The frequency trends that we're seeing here with newer, inexperienced workers, employers stretching to hire people, you don't see that on the LTD side. In fact, you see people going out on disability less frequently. In higher unemployment areas, when I say higher, high single digits, low double digits where we've experienced that, or shocks to certain industries that creates an unemployment gap, that's when there tends to be some correlation of frequency or incidences in workers' comp and LTD.
Yeah, I just will add in, when we look at our LTD experience, the reason why we don't see that correlation to what we're experiencing in workers' comp and what we believe is driving the frequency is it's a relatively low % of our LTD claims that come from someone being injured at work. That's why, whereas the broader unemployment picture might drive people's tendencies differently, the specific item that we're seeing in the comp area, that's why we're not really seeing it in disability, wouldn't expect to see it in disability. We're obviously very watchful to see if there's any trends there, our trends overall and our disability book have been very favorable and continue to be so.
Okay.
The performance this year is significantly exceeding our guidance that we established at the beginning of the year. Very bullish on the outlook for 2019 in benefits, particularly as we roll out more voluntary products to our existing customer and A&H products, which we would define as AD&D and business travel accident.
Okay. With results being as strong as they are in group benefits, I think it's even true beyond The Hartford today. The industry's just doing very well on that front. With the benefits of tax reform flowing down to the bottom line, not necessarily having been reflected in 2018's pricing, how confident are you in pricing going into 2019?
As I said, with our 2019 new sales and retention-
Yeah
very confident.
Okay.
Most of our policies, as you know, are on three-year rate guarantees. We do have to take a longer-term view on how the economy will perform, how economic conditions that affect people going out in LTD. Again, very bullish on the outlook for that business.
Okay. Workers' comp. We talked about frequency, and I think we spent some time on it on the last earnings call as well. Where are you seeing the frequency increases? Are there particular industries or parts of the market where that's really coming into full force?
Yeah. I'll comment, and then if Bill, or excuse me, Beth, Bill. Beth could provide her points of view. What we've tried to describe is we think these are broad-based trends, both in our small and middle-market businesses, not in our large account national book. Broad-based industry trends that are reflective of macroeconomic conditions of low employment, and I believe, the pull forward of all the tax investments that people made resists a surge in demand. We are seeing it generally in businesses that have higher employee turnover, businesses that have more of a, I'll call it, a service component to it, that you would be more susceptible to injuries from minor slips and falls, minor incidences at work. Remember, frequent, there's a severity. Our severity trends and our severity outlook is not moving.
It's behaving actually generally very well compared to long-term severity of injured workers from a lost time perspective and also a medical side. It's those industries that, again, probably don't have the robustness in the safety program or those companies that haven't invested in safety. That's where, again, I think we could contribute to better outcomes. I would also say that most of the incidences of higher frequency occurring in the first year of employment. In fact, there's evidence that accidents are occurring in the first couple of days of work for new people. That, again, speaks to a training safety experience issue. Again, with the economy not getting stronger, we don't see unemployment going to 2%. With a little moderation, we think, again, frequency goes back to its sort of zero to minus one on a long-term basis.
this was a one-time macroeconomic induced condition that created a frequency. Plus, as I always like to say, it's human nature, right? People are going to get smarter. If they get a heart once, hopefully they learn what not to do-
Right
in their job going forward that created the event. Beth, what would you add?
Yeah, the only thing I'd add, you touched on this, but just to make the point is, as we look at our trends for the month of October and kind of early in November, we are seeing a moderation from what we've seen in the first nine months, that was in line with kind of what we were expecting to see. Again, it's only two months, but we are very pleased to see those trends starting to moderate. So we'll continue to monitor that. Then as Chris said, workers' comp is a very important line for us. It's a very profitable line. We feel that these trends we can manage through and the book will continue to be profitable.
If I think of slip and fall claims on the workers' comp side, just trying to understand if one should expect that to also ultimately translate into higher general liability frequencies. The same worker who walks the floor and slips, wouldn't the customer walk on that same puddle and slip as well? Are you seeing that, or is that maybe an incorrect way of thinking about it?
I would say I would never call you incorrect.
My wife would.
I would just point you out to the fact that, again, where workers work and customers travel might not be the same area.
Okay
Again, if you think about manufacturing, if you think about retail, the conditions are different. I wouldn't correlate the two of increased frequency to more premise liability on property.
Okay. That's helpful. On the frequency versus severity, you're not seeing any increase in severity to date?
Within expectations.
Within expectations.
Right.
Right.
Within what we would expect.
Fair. You are seeing the frequency coming in, sounds like more from an inexperienced new workforce coming in, right? That seems to be concentrating really the slip and falls. Why wouldn't we see it in industries such as construction or warehouses where maybe the severity should be higher there as well? Is it the training? Is it because it's less temporary or lower turnover business there?
Like anything, I would segment it, right?
Okay.
You've got to get a little bit more granular. We are seeing it in construction. Not the large construction firms that have invested significantly in safety. More the family-owned small construction firms that have a subcontracting role, an odd job here and there. Yeah, you are seeing it there, and you are seeing it again in warehousing, which is a retail-oriented wholesaling function to me, where people are moving goods around or shipping. You are seeing it there too, a little bit.
Okay. Wanting to give the audience some opportunities to ask questions. Start here.
Thank you. Scott Frost, State Street Global Advisors. Hello.
Hello.
When touching on your buyback programs and how you're going to manage the stack, I know that the Navigators transaction, you're still on target to reach your leverage metric guide by the end of 2020. That's correct? When we think about how the debt paydown's going to go, you're talking about the 2019s possibly get refied, the 2020s get paid down. If we're thinking about how to dimension a buyback program, should we think of it as you're going to have to build your equity part of the stack to meet that metric by 2020 and buybacks or other capital management has to take place in that context? Is that the right way to think about how you're managing the stack by the end of 2020?
A couple things. Obviously we're looking at both sides. Yes, as we think about our long-term target and getting there by the end of 2020 from a leverage perspective, a portion of that is the denominator. Yes, we need to balance those. Again, when you look at paying down, as you mentioned, the January maturity, I'll just point out that we did do a preferred stock offering earlier in November. We're very well positioned to pay that down and not needing to issue more debt prior to do the Navigators acquisition. Then we'll evaluate from there. There is definitely a component of, even with all of that excess capital, even taking that into consideration, that we could evaluate for deployment and still get to our targets.
Just to be clear, from a rating agency perspective, is 2020 kind of a hard stop for you? In other words, if you don't make it, would there be potential consequences? How patient do you think they are?
We consistently share with rating agencies our path and the path that we're on. We don't have a bright line number that we need to hit by a certain date. These are our targets. This is what we're marching towards. There's no cliff, if that's the question as to we need to make this number by this date. Obviously we need to show progress.
We had one more over here.
Yeah, thanks. I had a couple questions on California. First, it seems like the risk environment has changed. How confident are you in your ability to price that correctly on the primary side? What are the regulatory challenges there? Then just to follow up on the subrogation question, depending on how things settle out, I know you said you won't book anything until all the cash comes in, but it seems like there's at least the potential for yourselves and the rest of the industry to have very large exposure to one or two counterparties. Any risk mitigation that might need to be done there?
Yeah. We're going to go about 20 minutes longer. It's a complex question, right? On the subrogation, yeah, there's a lot of cash at stake as far as the power companies involved. I think what I can tell from a distance in working with our team is that everyone knows you need a viable power company in California. There's three main ones. They all need to be kept alive or floated. Bankruptcy's not an option. That would create, I think, just too many problems. One, modernizing their infrastructure. How does a bankrupt company continue to invest in a more modern power grid that does not cause these fires? It doesn't make any sense if they're in bankruptcy. They're not going to get any financing.
I think that the trick is, on anything in life, there's a balanced approach for all constituencies, and they need time to raise cash. There's some funding options that are being kicked around similar to the California Earthquake Authority, to take a little pressure off the power companies that may have caused that. We, as an industry, will have to come together to understand what our contribution is to that, if any, or if it's going to be other taxpayer-driven, utility-based driven type activity. A lot of moving parts there. It's too early for me to predict what is the path going forward, other than I think, as I said, no one needs any of these companies in bankruptcy. As far as getting paid for risk in California, if you look at California, it's what?
The fifth, sixth largest economy in the world, it's important insurance market for every aspect of insurance from comp to liability to personal lines. Generally, they've had a very proactive, publicly-elected insurance regulator that advocates for its policyholders very well. If you also look at the impacts of climate, if you look at impacts of the environmental concerns about how water is moved around, about how forests are managed, it's a complex equation to come together to figure out what is necessary.
It's easy to sit here and say, "Look, if you look at where even the last five to seven years, the industry is not collecting enough cash to fund the amount of catastrophe exposures that have occurred." All we know over the longer term is unless you're collecting enough cash to fund a new higher level of catastrophes that needs to occur, or else capital allocators, broadly defined, would not allocate capital to a class of business where you can't earn an adequate return. Again, part of the process here is how do all constituencies come together to recognize what are the facts, what are possible solutions, what are contributors to allowing price and risk to be matched up more in a more specific granular way to make sure you're charging the right premiums to cover your attritional losses plus your cat losses.
Thank you very much, Chris. Beth. It was very helpful.
Thank you. It's always good to be here.