All right. Hi. Good morning, everyone. Thank you for joining us. I'm Chris Campbell. I'm one of the P&C Analysts at KBW. With me today I have Ms. Sabra Purtill, The Hartford Treasurer.
Head of Investor Relations.
Head of Investor Relations. I was thinking about the new title.
Yes.
You still have Investor Relations.
Yes.
Okay.
I just want to say, first of all, I don't normally volunteer myself for podiums. Not that I can't manage a podium, I prefer to fly undercover and let Beth and Chris do all the public speaking. I just felt it was important, given the recent announcement to acquire The Navigators Group, to give people an opportunity, and I guess a friendly forum for any follow-up questions or the rest. I'm happy to be here. Would just note, from an earnings perspective, The Hartford's off to really a terrific start for the first half of the year. Results have generally been stronger, even with what I would call relatively high levels of catastrophe losses. We've had great earnings in the group benefits segment and also pretty strong investment returns. All in, like I said, we're off to a pretty good start.
Knock wood with the third quarter. We've got more fires than hurricanes at this point. We'll keep our fingers crossed for the third quarter and into the fourth.
With that, I'll let Chris just take a swat at all the questions.
Okay
fair to the U.S. Open.
Great. Yep. Okay, I guess we'll just start. You had mentioned HIG's acquisition of Navigators. Can you give us some background on why Navigators as a specialty platform? They're very nichey versus maybe more a general specialty platform, just given the scale that The Hartford's businesses operate. Why was Navigators attractive?
I would start from first of all saying it's been a kind of longstanding interest of Chris and Doug to expand our capabilities in the specialty lines area, as well as in industry verticals in what we would call our middle market space. We've looked at a lot of things. I would say that we looked at things that were rumored and that we didn't pursue or didn't find to be a strong enough fit that we were the highest bidder at the end of the day for.
For Navigators, we've been in touch with them, it started about four years ago with a conversation about their businesses. We were attracted mostly for what I would call the specialty lines orientation within the financial products, D&O, E&O. You guys know we have a business in that, but we're relatively small. Combined with them, we'll be much bigger platforms together. Also because they are a true underwriting-focused industry company. They get in and out of markets, but they started 44 years ago as an MGU focused on the marine markets and mostly the maritime industry, I would say. They've expanded their marine lines coverage to construction and energy, life sciences, and a bunch of other different industry verticals. It was that orientation that attracted us.
The other thing that Chris would say is that their culture is very similar to ours in terms of owning the underwriting results. While they've still got that specialty orientation of entering markets when they're hard and pulling back when they get a lot softer. They really do, as an underwriting basis, reward and focus on the underwriting results over time, which we felt was important given our franchise, our brands. Clearly, we still have to make some decisions about how we're going to be branding the different entities going forward. We didn't want to mar our reputation with being with somebody who is known for entering a market and then exiting five years later. We wanted more consistency and tradition and support within the certain lines of businesses that they are. From our perspective, the attraction was principally in their U.S. insurance business.
They also have a strong international business, including the Lloyd's platform, which I would note in Lloyd's, a lot of their business is still U.S. risk because they're following their energy maritime liability, some of their liability clients into that market. In total, about 75% of their premiums are U.S. risk. We did find it intriguing with their international platform as they've expanded into Europe first following really the again, the maritime industry into Stockholm, Antwerp, Rotterdam, but also then adding professional lines businesses in those areas. We found that kind of interesting, particularly as we think about servicing our U.S. customers' international needs. I think many of you might be aware that we do not have a foreign flag footprint at The Hartford itself. We actually sold our last U.K. runoff operation about two years ago.
We do have a relationship with AXA which kind of enables us to provide international coverages for our domestic clients. Given AXA's acquisition of XL, we've been thinking about whether or not that arrangement will be as robust going forward. Like I said, the international aspect of the Navigators was interesting to us, and we're very focused on kind of maximizing the value of that relative to our U.S. platform.
When we looked at the combination of Their products, their industry expertise, largely U.S.-focused. Underwriting culture, very strong and tenured management. I think Stan Galanski 's been CEO there for about 17 years. It just all kind of fits. The end result is that we feel very strongly that this will significantly accelerate where we wanted to be in middle market and specialty lines, which would have taken much longer to get there through organic growth, if at all, in fact, possible, given how competitive those lines can be. Like I said, we're very pleased to have reached an agreement with them.
They, as you know, have a go-shop, no-shop period. Under the terms of our agreement, they can openly solicit other offers right now. I would note that once we get through that period, which is about 30 days, where they can basically actively shop, and then another 15-day period where they have to conclude any of the conversations that they started during the 30-day period. Once they get through that, if there's not any competing offers, we'll move to the next stage, which is the shareholder and the regulatory approvals.
So.
All right. I'm going to make the assumption that The Hartford and Navigators end up together. I'm just thinking about Navigators' book is kind of, at least the way it's structured now, is inherently volatile. They have a lot of-
Okay
excess business that is typically a little bit harder to reserve. That's kind of made their earnings, at least from our perspective, a little bit difficult to predict on-
a quarterly basis. How does The Hartford, who's a much more I know you have the cat volatility and the homeowners and auto, but how do you incorporate that volatile of a book into-
the more stable Hartford-
Sure
earnings stream?
Well, first off, you just have to keep in mind the relative scale. For Navigators, $1.7 billion gross premium book of business, and in the lines that they were, obviously that volatility ran all the way down to the bottom line, right? You saw it in the per share book. Within the context of The Hartford, we have about a $17 billion premium book of business, including our group benefits businesses. As you know, most of our businesses are more stable, more flow type businesses, right? Small, commercial, and particular personal lines as well. That inherent volatility in the underwriting results that they have will obviously be dampened within our combined operations. Secondly, that's one area where we have noted in terms of harmonizing approaches to reserving and losses that I think we'll figure out as we-
go through the integration process. I would suspect that just given what you've seen from The Hartford over the course of the last really seven years since Doug has joined us, is that we do tend to approach reserving with some conservatism as well as some, shall we say, letting the reserve season before we start releasing the redundancy. We've gotten comments from people for several years now about our workers' compensation redundancy and when we're going to release it and all the rest. I think that as we harmonize the books of business-
there will be probably more stability in just how we approach that book.
The other area, too, which Chris has talked about, is just given the nature of their reinsurance structure, that's another area where I think we'll probably look at whether we want to use less or different structures and the rest, because again, The Hartford's balance sheet can take that kind of volatility, and in fact, it probably could enhance our returns on the transaction a little bit more if we were willing to take more of that volatility onto our book.
Okay.
I think one of the financial metrics out there were four to five years, $200 million in core earnings. Obviously, Navigators is a little bit more volatile today. How do we get to that $200 million-
Yeah
core accretion? It doesn't have to be specifics, but you had mentioned-
Yeah
potentially the reinsurance restructuring could save costs there.
Right. There's multiple levers. What I would start with by saying is that Navigators as a company, again, 44-year track record, started with no capital in the business, grew to $1.2 billion of capital. Their approach as a company, at least from my observation, and Chris having followed them, and probably at his, is that they took the risk on the underwriting side, and really the rest of the balance sheet has been pretty conservative. Some of the levers to look at for returns, again, are relatively simple when you look at it as part of The Hartford. One example would be their investment portfolio is much more conservative on both credit rating, liquidity, and duration than ours is. Our portfolio is about a single A-plus. Our duration runs around five and a half years.
Obviously, duration is going to be related to the liabilities. Given that they have a largely casualty book, I would still argue that that duration might be a little short. They also generally invest in corporate or public securities, whereas given our past history in the life insurance business, we actually have a sleeve of investment expertise in structured finance, commercial whole loan mortgages, things like that. One of the levers, like I said, is going to be on the investment portfolio. The other is really focused on revenue synergies, which I know people hate to see and talk about, they are, again, a specialty lines player that has grown organically, we think with the benefit of The Hartford brand, financial strength, capital, as well as the fact that they have never sold workers' compensation insurance into their distribution channels.
Their distribution channels are a little bit different. They have more of a wholesale focus in their business. We're more retail. In addition, even where they are retail, they have a slightly different tier of brokers than what we have on the retail side. We do believe very strongly that as part of The Hartford, we will be able to increase the amount of product that they are able to sell, as well as cross-offering some of our product expertise, like I said, particularly in the workers' compensation. We do not consider this transaction in and of itself to be driven by any change in loss picks and loss experience.
By the same token, given our size, our scale, our investment in technology, data, and analytics, we do believe we will be able to help them have greater insights into the data that they can use for underwriting, pricing, and risk.
That's another area. The last area I would say, and we're not expecting this in the near term, but we do believe as part of the combined organization that with higher returns, there's also an element of higher capital generation.
We're not expecting any return of capital from those subsidiaries in the first two years, in part because we're expecting there to be some growth. As I said, there's some harmonization of the reserves. We have to figure out what our operating platform is going to be long term, and operating structure and the rest. Those are the key levers.
Great.
Do we have any questions for Sabra?
Scott always has a question.
This is Scott Frost from State Street Global Advisors. As usual, asking you questions about this. I wanted
Yes
to shift a little bit. Some of us just heard Goosehead in here talking about personal homeowners lines. I know that's not a big business for you, but you're familiar with it. We just heard them describe how their business model is disruptive to traditional homeowners policy acquisition models, and that mortgage brokers and bankers and realtors refer home buyers to their agents
who can sidestep any binding issues in the closing process because they could be more nimble in shifting carriers if there's a hang-up in closing. Right?
They have described for this reason, the personal lines carrier agent-based model as broken. That's what they said.
They were very specific and not very shy about naming names. You weren't named, but they talked about.
We're not a big agent company.
Exactly. My question to you is based on those statements. Do you think those statements hold water?
I'm going to take my Hartford hat off, and for those of you who know me, I've been an insurance analyst since 1990. I'll put back on my industry analyst hat. What I would say is that it's increasingly difficult for independent agents to prove to personal line customers that they add value. Most people are searching online for auto insurance these days. They're not just going to an independent agent for that. The fact that you have opportunities within the home buying cycle for a real estate agent or other intermediary on the sales side to push business over to an alternative provider isn't really surprising to me, and I think you'll probably continue to see that. What we see at The Hartford, again, we are largely a direct lines company or direct writer.
We're a number 4 direct personal lines company in the country through our relationship with AARP, which is a 30-year plus relationship. Almost all of our business comes in through the direct channel as opposed to independent agents. We have a relatively small independent agent platform right now. What we would tell you is kind of the plain vanilla personal lines underwriter has got to have a strong relationship with a client in order to be able to compete against the nonstop advertising you see all day long on TV, radio, whatever, for GEICO, Progressive, and Allstate. For us, the part of the market that probably has the most value add still for an independent agent is going to be when people start kind of climbing the wealth ladder.
The mass affluent and obviously the high net worth market, where people tend to have either higher insurance needs or more specialized insurance needs, higher liability limits, that sort of thing, than what you might get through a more standard direct lines company like GEICO. It is difficult for the independent agents. We see that in the small commercial side, too. Within commercial lines, small commercial is the most similar to personal lines in terms of it being a flow business, low average premiums. A lot of agents don't feel like they make money writing it. They'd rather write the $100,000 middle market accounts than the $500 liability account for somebody who's a tech consultant working out of their home sort of thing. We've cracked that code in small commercial, which is why we're a market leader in it.
We've cracked it in many instances by helping the agent basically source the business but not have to service it. Within the personal lines business, the most independent agents have to both source it and service it, which is economically challenging then to make a profit at the end of the day.
That would be a little bit different than a standard vanilla homeowners policy. They seem to be saying that the advertising targets the consumers is maybe the wrong target. It's the person who can refer the consumer to a carrier in a certain process.
That's probably true, particularly for home purchasers. Here's the thing, there's moments, whatever the insurance product is, P&C or life insurance, there are life points in people's lives where suddenly they have a need for insurance that they didn't have before. Whether it's you have a baby, you buy a first house, you get your first car, and that's the point where you as an individual say, "Oh, I need insurance. Where do I go?" If somebody is standing right there next to you when you're buying the car and says, "Oh, don't worry about the insurance. Here's a quote. It's all done. You can pay for it when you buy the car," all those sorts of things. It's an advantage for the sales process.
What we see is in our books, because again, it's AARP, most of the people that we're underwriting have been insured by another company for quite some period of time because we're not focused on, say, the 30-year-old driver market. We're focused on 50 years and plus. The reason why they're switching to us is not because of a change in life moment, but because it's price, it's the endorsement by AARP, it's the product terms. Our products have features that are unique that you can't get other places, that sort of thing. For a lot of, like I said, standardized companies, they've got to figure out where that life moment is where somebody says, "Oh, I need more liability insurance," or, "I'm renting. I now need renters insurance," that sort of thing. Okay. Put my Hartford hat down then.
Just in time. Turning back to legacy Hartford, right?
Yes.
Can you give us an update on workers' compensation rate changes, loss trends? Why are we seeing a frequency uptick that we normally see during economic expansions?
We have seen some uptick in frequency in 2018, and we would say it's higher than what we had expected. That is putting some pressure on our results within workers' compensation. In general, what we would say is that we're examining it. We're seeing this in our data, and we have gotten many people asking us, "Why isn't anybody else talking about this?" We're the number 2 writer of workers' compensation in the country. We have significant investment in data and analytics, and we also try to be transparent with people. When we see it, we basically want to flag it. Maybe it's a blip, but we don't really think so in 2018.
We've looked at it. It's in small, it's in middle. It's a little bit worse in middle on the frequency side than it is in small. We think part of it is attributable to the low unemployment rate. You have people who are getting hired or coming to work now who have either less experience or less recent experience working in certain businesses, and there's historically been a tendency for new, younger workers to have slightly higher injury rates.
There's also an element of severity where if you've got older workers staying in the workforce because of whatever, they are earning a good living and they don't want to retire yet, or their retirement savings got eviscerated by the financial crisis. Older workers, because they're experienced, don't tend to have higher frequency, but because of age, we all know it takes longer to recover from our weekend warrior tennis games these days. What we're seeing, like I said, is on the frequency side. To date, the evidence has not been statistically significant to say, "Oh, it's one industry or one region or one area." We're just kind of seeing it a little bit consistently across our books. That combined with the fact that the rates are coming down in workers' comp.
I saw Florida NCCI recommended, I think it was like a 14% reduction in rates for the state of Florida just the other day. We're kind of balancing what we're seeing from rate decreases because of very, very good experience in workers' comp over the last couple of years with this emerging trend that we're seeing on frequency. There's levers you can use. There's loss modifiers and discounts and commissions and all kinds of things that you can try to use to combat that when it comes to your bottom-line margins. Again, I think we've been pretty transparent over the last couple of years that we expected pressure in workers' comp. In 2017, we actually had better frequency than we expected, we kind of held the line on margins.
Going into 2018, our outlook for the year was that we would see some modest deterioration in workers' comp margins. Because of that change in frequency trends, for the first half of the year, we'd say it's a little worse than we expected. With good property results and improvement in liability results, overall, you're still seeing in our commercial lines book that margins are within the range of what we're expecting for the year.
Workers' comp is historically an economically sensitive line. It's just the way it is. NCCI is looking at data from 2016 and 2017 to make rate recommendations for 2018 and 2019. 2017 was probably the best underwriting year that workers' comp has seen in 20 or 25 years.
If you're looking at that data and making rate recommendations for 2018 and 2019, yeah, you're going to come up with a rate decrease, not a rate increase.
Middle market is a little different than what you would see in small. Small tends to have a base rate sort of follow through NCCI, unless it's a state where we've got enough data that we file on our own basis. Like California is an example of where we might do that. Within middle market, it's still pretty much an account-by-account loss experience. In the first half of the year, we're seeing modest rate decreases across basically what the policyholder sees as a premium renewal. The actual dollars that they're paying is down a couple points in small commercial. In middle market, it's actually up about 2%, and part of that's just what's happening from a competitive dynamic and that you're pricing account by account based on people's actual experience.
If somebody had 10 workers' comp claims last year, you're going to price assuming that they're going to have 10 this year, right?
It's a little bit better dynamic in middle market. Which is the opposite of what it was five years ago.
Right. Okay. Yeah. Any other questions? Daniel? Okay. Shifting gears to personal auto. You guys have taken a lot of rate in that book. Loss costs are kind of decelerating a little bit. How relevant are the lower expected claims frequencies that we're seeing to your auto margin tailwind?
I would say frequency is what's been contributing to the volatility that we've seen over the last couple of years in personal auto results. The severity, by and large, has been pretty stable. Plus 3%, plus 4% increase in severity every year.
A little bit higher than the cost of inflation, that's really, I think, the impact of social inflation. There seem to be more lawyers involved in claim settlement. Frequency has been kind of the more unpredictable variable. As we re-underwrote and repriced our book starting in 2015 and 2016, we actually saw a better frequency trend than the industry was, but that was because of the underwriting actions we were taking. We're kind of past that right now, what we see in our results is kind of more consistent with industry trends. Again, going back to the dynamic of what's happening with employment. Gas prices are up a little bit. Employment trends are still pretty strong. We are still seeing basically slightly favorable or not favorable, but positive frequency.
Accident frequency is still increasing per million miles driven, but it's not the plus four and plus five that the industry saw back in 2015 and 2016, when I think you had just a whole confluence of effects. Much stronger change in employment trends, big drop in gas prices. I think there was an increase in consumer confidence as well that might have contributed to more new car buying, which then puts more cars on the road. The biggest indicator, and I believe Allstate is the one who tracks this, from what I understand, is basically the distance between cars on the highway. Congestion, road congestion. We've had a very strong economy for many years.
The roads in most places, unless you happen to live in like Charlotte, North Carolina, where every time I go there to visit my family, there's a new interstate through Charlotte, North Carolina. Around here, the roads haven't gotten any bigger. If you've got more people driving to work, the cars are closer together, there's more accidents.
Okay. Just I'm thinking Navigators, workers' comp trends, personal auto. We didn't really delve into Maxum and Foremost. Given all the moving parts that you have, how should we think about capital management plans and priorities over kind of the next two years?
Yeah. Certainly from what you've seen from our activities, there's been more of a focus on investing excess capital in the businesses. There's obviously the acquisition of Aetna, which is going great. I would characterize that as a relatively straightforward bolt-on type acquisition.
Big, but very complementary to what we were already doing. Then the announcement for Navigators. That's a change from what we were doing through most of 2012 through 2017 when we repurchased about $6.5 billion of our stock. In my role as Treasurer, one of the things I keep track of is, and have to manage, is holding company liquidity and the dividend capacity. The Navigators transaction will effectively use all of the excess capital generated by the Talcott transaction, plus I'll need to use a little bit of the 2019 dividend capacity from the P&C businesses. Once we get that acquisition closed, then as we move towards the end of 2019, I think that's when we'll start to have more sizable excess capital that we'll need to make some decisions about.
What Chris and Beth would both tell you is that it's premature to make decisions about what we think would be the best use of capital a year and a half from now.
In terms of acquisitions, the Navigators transaction accomplishes significantly what we wanted to do for industry verticals and specialty lines, so that if there were to be another acquisition, it would really need to be something that, again, made a lot of strategic and financial sense.
The near-term priorities are, like I said, closing on the Navigators transaction. As a result of that, we're going to be assuming about $265 million of their debt. Our debt ratios are going to be at the high end of where we want them to be. Between 2019 and 2020, we'll probably repay some more par amount of debt.
Which would be one use of the excess capital. I would just note, we did announce a 20% increase in our common dividend. That's also another use of our excess capital over the course of 2018 and 2019 with the dividend.
Got it.
Yeah. We know share repurchase is clearly a tool.
We just felt that this was an opportunity to significantly accomplish what we needed to do strategically for our businesses. When you look at the Navigators acquisition over time, not immediately, but over time.
It does compare reasonably to share repurchases right now.
Right.
In terms of the return on the investment.
Okay. All right. I think we're out of time.
Great. Well, thank you all.
Thank you all for joining us.