We're going to get started to try and keep on schedule. Thanks so much for sitting in. Our current panelist is Beth Bombara, Chief Financial Officer of The Hartford. I'm going to start with a question that's obviously top of mind with every newsfeed showing pictures of the evacuation from Florida. I don't expect anyone programs so that we can start to just understand the exposure.
Sure. Why don't we start with Harvey, and then we can talk about Florida. Obviously, as you said, looking at Harvey and just where we are, it's premature for us to have an estimate at this point. Given the nature of the storm, it's been slower than normal for us to actually get in and assess damage and so forth. Our claims teams are, as you can imagine, working very diligently to do that. When you think about Texas, and I know people have reported on our market share and so forth and understanding what's there. I think maybe if we just talk about our businesses in chunks and how we're thinking about the exposure. If we start with personal lines. We really are seeing that a large portion of the exposure there is from flood.
Obviously, wind is there as well, but definitely a high percentage of flood. In our personal lines business in the home side, we would not offer flood protection. Policyholders would have to get that from the National Flood Program. On the auto side, though, definitely that would be something that would be covered and similar to what we saw with Sandy with that type of exposure. We're continuing to work through the claims that have been reported. We are seeing a high percentage, about 90% of the auto claims that are coming in are flood-related. On the commercial lines side, our small commercial business, we in the core business, putting Maxum aside for a moment, we do not offer flood protection. There would not be flood coverage in the core small commercial. When you look at Maxum, there would be some coverage there.
Again, as a reminder, that's our E&S company that we purchased last year. They participate in some of the higher hazard and excess of loss type coverages there. We would expect to see some exposure coming from that. Then middle market, we do offer flood endorsements there. Again, we would expect to see claims coming from that menu. Interesting, as we look at what our underwriting appetite has been in Texas. We typically as it relates to floods specifically, and we categorize the zones. The things that are most coastal, we typically do not offer flood coverage on. As you know, the flooding has gone well beyond what people would have expected. We do expect to see flood losses there. I'll cover off on our reinsurance program. Our property CAT treaty is a treaty that kicks in after the first $350 million of losses.
It's 800 excess of 350. As we sit here today and we look at Harvey, we don't anticipate that it would breach that layer.
Layer.
We would still be in that 350. Again, it's early, and we'll continue to evaluate that. As it relates to that program, that $800 million layer that we have above 350, that's also broken into some additional layers. The first $150 million, we would retain 25% of that. Then the next two layers of $300 million, we retain 10%. Then the last layer, we don't retain anything. That's how the program stacks up. In addition, we also have an aggregate property catastrophe treaty. The way that treaty works is that first $350 million on our primary CAT treaty, those losses kind of pour into the aggregate treaty, up to 850. After that, we have $200 million of coverage. We think of that $350 million layer for each event.
If you breached it, could pour into the aggregate, it builds to 850, then we have coverage after that. Overall, we feel very good about our reinsurance programs in total, how they're structured, and the reinsurers that we place that business with.
Right. For better or for worse, and I'm not making a prediction here, but it looks like this is a high-frequency year. The aggregate cover, I think, will be increasingly important.
Yes, it could. Through pre-Harvey, when we just look at losses that have been reported on that, we probably have used a little over $200 million of that $850.
Right.
That's reported. Even we have some CAT that continues to develop that could continue to pour into there. Feel very good about that. If we turn to Florida. Overall, when you look at our market share in Florida, we're a little under where we are in other areas. On the personal line side, we actually haven't written new homeowners policies in many years. Although with our continuation provisions that we have in our AARP contracts, we still obviously do have roughly around 21,000 homeowner policies. Pretty small in that space. Same thing, those would not have flood associated with them. On the auto side, our market share is about 1.7%.
Given some of the challenges that we've had in personal lines and the actions that we've been taking, we've actually seen that count come down over the last year. In our commercial businesses, overall, we're a little bit under 1% market share on commercial property. Small commercial ex Maxum, we would not be offering flood, but obviously we would have the wind. In middle market, similar to what my comments were on Harvey. Maxum would also be participating in there. That's how our market share stands up.
Fantastic. That was incredibly thorough. I do want to talk about other aspects of The Hartford, but if there are questions on catastrophic exposure and reinsurance, now would be a great time. Yes.
Hi there. Scott Ross, JMP Securities. Hey, how are you?
Good.
Good to see you. We're trying to mention the problem, not for Hartford specifically, just for the industry and specifically the reinsurance industry. Everybody talks about, well, if Andrew hit again or if these CAT models that are out there and the industry as a whole lost in 2011, November, hurricane. What sort of magnitude of loss would you guys see and would make you think that the reinsurance industry may be experiencing a CAT on capital event? This speaks to counterparty assessment.
Right
What do you think you would have to look at in your assessment to say, "Yeah, if you hit this number, you're going to have to go out and raise capital generally?
Yeah. I think that's a difficult question to answer, and I don't think one that I want to make a prediction on when other companies are going to have to raise capital. I think that as you look at the experience and what's happened in Texas, and I think as you look at the potential for this storm, I think you can start to see pressure on the reinsurers. What will actually trip them into having to raise capital remains to be seen. I think there's some that are probably more thinly capitalized than others. I think this could be a test even for some of the alternative capital that we've seen come into the system.
Even the storm maybe isn't as significant as potentially predicted, but I think there's a lot of people that are running a lot of models right now and looking at how they've structured their program. That's probably a long way of not really answering your question, but I think that this does put pressure on the system when you look at an event that potentially could be as large as what people are seeing.
Would you characterize it as a marginal pressure, modest pressure, meaningful pressure?
I think it depends on exactly what the storm is. I think if it.
Yeah. For example
became I think that that definitely starts to put pressure on that system. There is a lot of capital out there, too. I think you will start to see people question the returns that they've been getting in those businesses and potentially see some changes.
Okay, thanks.
Great. Josh.
Yeah. Josh with JP. Would you say you do not expect to breach the 350 on Hurricane Harvey?
Sitting here today, again, that can change as we get in and do more assessment. When we look at where we are, our assessment today is that we would not breach to that level.
What about 200 in excess of 300, is that what you said?
Yes.
What about reinstatement? You talked a lot about activity with your counterparts, but it's not at this point, but during the season, are you entering it, unlimited reinstatements or you may have to re-up at some point?
From a reinstatement perspective, we feel very comfortable with our program. We do have reinstatement provisions. In the cat treaty that we have, the reinstatement provisions by layer can change a little bit, but at its core, we have very good reinstatement provisions.
Does that mean like claim one to two or claim level?
Yeah. We have on our program, I believe, have to get back to the exact number, but sitting here today, the reinstatements is not something that I'm concerned about, even with the storms that we're looking at.
Okay. Are you done? Did you have a question?
How are you-- You don't think you'll hit 350, now reinstate. How many reinstates do you have, you don't think you'll hit 350? Correct.
Right. I don't have the exact number of reinstatements on our core CAT. We'll get back to you guys on that. I thought that I had it here, but we have reinstatements on the layers, the first, second, and third layer. Again, we don't anticipate to breach that on Harvey.
Okay. Anything else on this topic? It's obviously very important, but there's other things to cover as well. I just want to make sure I'm not precluding anyone from asking any questions. Okay. Thanks so much. That was incredibly thorough and really helpful in terms of framing things. I think, as you pointed out, still unfortunately very early in hurricane season. There's a lot of energy in the waters right now, so it's hard to know when we're done. Let me go back to auto, which was probably a main consideration or concern for Hartford investors for the auto insurance industry domestically up until about two weeks ago. Those are very real issues.
You've had, I think you've clearly achieved a turning point, not just in terms of getting pricing in place on written premiums, but actually seeing the results start to flow through in terms of improving the auto core loss ratio. Can you give us an update in terms of how you see the next, I'll say six quarters, but whatever timeframe is helpful in terms of that process playing out?
Yeah. We have been very pleased with the progress that we've been making on the auto profitability. It has been a slow process. We've talked about before some of the challenges that we've had just relative to how our policies were structured, being 12-month policies, and where we started to see some of the changes in trend. In the first quarter and second quarter, again, if you adjust last year's numbers for the subsequent development that we saw, we definitely were seeing improvement quarter-over-quarter and are in line to, as we see it, get to the combined ratios that we talked about at the beginning of the year in the auto line. That progress is continuing.
We see that continuing and helping us to get to our long-term objective, as we talked about in getting our auto combined at that 96.5 level, which we said, kind of getting into the tail end of 2018 when our actions continue to take place and the rate continues to come into the book. We've seen some of our exposures fall, and all of that has been playing out. The other thing that we talked about in our second quarter call was the fact that we are seeing that we are at rate adequacy in certain aspects of our book. Beginning to turn on, again, some of our marketing spend.
People should anticipate to see that the amount of marketing spend that we have in the second half of 2017 will be higher than what we saw in the first half as we look to continue to grow again in some areas. We think that process will take some time. Obviously, when you pull back, when you have some of the disruption that we've seen, it's not as if you can just turn it on and get right back to where you were. We do believe that over time we will again be able to start to grow in those areas where we've achieved our target returns.
Right. That higher marketing spend is contemplated in the 96.5, as I understand.
Yes.
Okay.
Yep.
We're fine there. Let me ask the next question. I may be getting ahead of myself, but in terms of medium-term thinking, obviously The Hartford has a phenomenally powerful brand. How do you think about the opportunity to leverage that outside of AARP in the independent agency channel once the difficult work of sort of getting auto pricing where it needs to be is completed?
Our focus really is more on our AARP channel.
We've seen that through the years that has been very profitable for us. On the agent side, we really look at that as an extension of that program, where we have agents that see the value of the product that we're bringing to the market through our AARP through agents. Our focus on sort of traditional agency, I think will continue to be somewhat narrow. AARP really is where we see the growth. Again, we want to make sure that we're partnering with agents that appreciate the value that we're bringing, and not just necessarily looking for the lowest price.
Right. Fine. Moving on a little bit, I guess this gets us back to weather, but not the catastrophic weather we're talking about now. The first half of 2017 was one consistent theme across the industry was elevated non-cat weather losses. Tornadoes rather than hurricanes, hailstorms, that sort of issue. How does that factor into pricing on the commercial side, that elevation and expectations going forward?
All of those experiences get contemplated in our models. We have seen an increase in non-cat weather across our book. As we look at the adequacy of our pricing, when we look at the adequacy of are we getting rates that covers loss cost trends, all of that is being incorporated into those trends. We have seen an uptick in that. That is reflected in how we're thinking about the rate that we need to maintain our profitability.
Okay. Fantastic. I'm asking one part and it's unfair because there are so many different factors. Is there an expectation of heightened non-cat weather trends? Like maybe expecting that experience next year will resemble 2017 instead of, let's say, 2014 or 2015?
Yeah. We look at it more on averages and over a period of time. Obviously elevation in 2016 and in 2017 you would take into consideration. It's not as if we're just looking at one year. We're looking at over a period of time. Over a period of time, we have seen slight elevation there. It's not a trend of just recently. A lot of that is incorporated in the loss cost that we're putting into our models.
Okay. Fantastic. Again, if there are questions in the room, just let me know. More than happy to include your questions. They're probably better than mine. In the absence of that, we'll use mine. On the small commercial side. Small commercial seems to be similar to what we see on personal lines. It's a brand. Brand is important. Scale is important. Pricing seems to be reasonably benign, certainly compared to what we're seeing or what we have seen in reinsurance and in specialty lines. In the context of that stable pricing and obviously one of the powerhouses of the industry, how should we think about the opportunity for continued top-line growth and margin protection within specifically small commercial.
Yeah. Small commercial has continued to perform very well. We are a market leader there in our capabilities, and we see the potential for continued growth, especially as we think about our risk appetite and types of coverages that we think we can provide. We definitely do see room there. It's really across the spectrum. We're very strong in sort of the micro end of small. It's a very small commercial. We also continue to focus on the higher end of small, too. We think about that as companies with revenues of like $25 million or so as kind of our boundary. Our platform that we've invested in for 30+ years, we think puts us at a very strong competitive advantage to others, and we see the ability to continue to utilize that to our advantage.
Is there an opportunity to target more agents as a way of growing? Are there agents whose profiles you like where you're currently under-penetrated?
Yeah, we're always looking at that and opportunities to find ourselves higher in the rankings in certain agencies and so forth. Again, I think the proposition that we have relative to the ease of doing business with us and the things that we can do in our service capabilities makes that a very compelling partnership for us. We continue to focus on agents where we think we can expand and penetrate more into their book. Part of the reason why we were so attracted to Maxum, that was a capability that we didn't have in the E&S space. We did find situations where being able to bring those capabilities to market would be helpful to us, especially in some of our plans as far as penetrating various agents.
Is it fair to say that there are some small business accounts and some standard lines at quality specialty accounts that having the Maxum capability allows you to write?
Yeah, I think it rounds out that capability. As we look sometimes at when agents might come to us with what they refer to as book rolls, where they're looking at trying to consolidate. Again, having that capability that we can bring to the table, we think over time will be beneficial. Again, Maxum today primarily distributes its business through wholesalers. The capabilities and how we can bring that into the retail side, we see as an advantage for us.
All right. Perfect. Before, you were distinguishing between, I don't know how to call it, tiny commercial and small commercial, and obviously you've got the middle market as well. Can you talk about the differences and similarities in terms of how you view those books of business and
Yeah
maybe the differences in underwriting performance?
Yeah. Again, small commercial in the way that we're set up in that space is very, I would call it low touch, right? We can do a lot, sort of agents can do a lot sort of on the screen. It's not underwriting policy by policy. The volumes that we have, it's a very different market. When you go to middle market, obviously a lot more touch there. Policies that are being underwritten, and it's a different model. In middle market, we have, over the last several years, been looking at expanding our capabilities there relative to product lines. We've talked many times in the past about the fact that, several years ago when Doug Elliott first came to The Hartford, he noticed that we were very quickly in the middle market space becoming a monoline workers' comp writer.
Through actions that he has taken over the years in bringing new capabilities to The Hartford, we've been able to change that profile. I think that's an area where, again, we see the potential for continued growth as we look at different industry verticals. Energy we've talked about in the past. Healthcare and so forth, where we can expand in that marketplace as well.
Are the specialty verticals more of a middle market phenomenon?
I think of those more in the middle market area, especially just because of the high touch, and the underwriting kind of capabilities that you need as you're writing each of these risks.
In that context, when you've got the Maxum acquisition, and your own sort of legacy Hartford specialty capabilities, how should we think about that going forward? The opportunity for growth through acquisition or based on the resources that you currently have?
As we've talked about before, as we think about our strategy for expanding our product suite and our capabilities, we start with looking at doing it ourselves and either through hiring talent, devoting talent to that. We'd always be very open to acquisitions that could accelerate that. Again, Maxum is an example of that. Our core strategy for expanding these capabilities really starts with us doing it ourselves. It's not reliant on having to do an acquisition. Again, we would look at that if that was a way for us to accelerate that strategy.
Okay. So far, your acquisition activity has been fairly limited. I think it's very fair to say you've been disciplined-
Not willing to chase prices up. Ultimately, more broadly, can you talk about your interest in acquisitions, whether it's personal, commercial, maybe some of the non-P&C units within The Hartford?
Yeah. When we work and think about acquisitions, obviously the commercial space is front and center to that. I would say also our group benefits platform, whether that's expanding products. We're starting to do more voluntary products. There's other aspects of that business that would be attractive to us, as well as just increasing our market share. Personal lines I would put low on the list. Obviously, we're very focused on the auto profitability, we're also focused on retooling our homeowners product, which again, we think we can do ourselves. That's kind of how we think about those priorities. As far as non, I don't know what you refer to as non-P&C or non-insurance or maybe a group-
You could maybe say mutual funds.
Yeah. Mutual funds. Mutual funds has done a couple of things, but it's very contained. Things that they've done through they did a small acquisition last year. It's of that size. They can fund that on their selves.
I'm going to presume you have no interest in buying life insurance.
I thought that was pretty obvious.
Yeah.
If you want me to say that, yes, we definitely do not have an interest in buying life insurance.
When things are obvious, I have a better chance of getting them right. Again, if there are questions from the floor, please just signal to me. More than happy to include them. Can you talk a little bit about the profile of your group benefits customers, maybe contrasting that or comparing it to small commercial middle market, both in terms of actual overlap where there's been successful cross-sells or theoretical?
Yeah. There's not a significant amount of overlap. When you look at our group benefits business, we definitely have more of the larger employers than you would see kind of in our middle market and small commercial business. We do see opportunity in the smaller size employers in group benefits. It's not as if we can point to specific sales that are happening because we have both. We are noticing just more conversation with brokers, with agents that are talking about both sort of in the same sentence, which you really didn't see several years ago. I wouldn't point to it as a significant accelerator, but I think that there is something there over time. We are looking at ways to bring our group benefits offerings more to the forefront to some of our small commercial and middle market clients.
We see synergies there. As we've talked about in the past, we also have seen a lot of synergies from a claims perspective of having both. From both our disability and our workers' comp business the claims operations are now under one. We definitely see some learnings that you get from both sides of that and the data available when you're looking at those types of exposures.
Okay. I'm thinking specifically about the claims initiative, it could be other factors as well. Does that portend maybe margin expansion from current levels, or is it more of a top-line growth opportunity?
On the claims side, we really see it as an outcome perspective. Both with comp and disability, one of the biggest things that you focus on is how to get people back to work. That will improve outcomes. That improves our cost, which ultimately, it just kind of trickles from there. Improves our profitability, improves our capabilities in going to market. We see it as a real selling point to employers both on the comp side and the disability side. Eventually I think that gets into the sales process as well. It's kind of all part of the whole picture.
Okay. Fantastic. I want to focus a little bit on mutual funds. My own perspective is that people undervalue the really high ROE-
aspects of this business. It's not that common to have it embedded within a P&C company, but there's a story behind it. Going forward, I guess there's a lot of theorizing about what ultimately will happen with Talcott. I just want to ask a simple question. How dependent is the expense structure that you currently have within mutual funds on the assets under management stemming from Talcott? Is that a reasonable concern if and when Talcott goes away?
Yeah. I won't comment on the latter part of what you just said, as it relates to mutual funds-
Yeah
A couple of things to keep in mind. At the end of June their assets under management were about $107 billion. About $16 billion of that is the Talcott AUM.
Yeah.
What that is that is funds that are offered within variable annuity contracts where policyholders have selected that as their investment vehicle. That has been running off. That's obviously not any part of when we talk about the growth in mutual funds, not any part of what we see there. It's just slowly running off, and it really is running off as policies lapse. That is what will trigger that more than anything else. From an expense perspective, when you think about mutual funds, that Talcott piece really is not much of anything to do with the expense base because at this point, those things are already invested. It's not a part of the sales initiative or anything like that. Our expense base is really focused on that non-Talcott piece.
When we talk about our fund flows and we talk about performance, we're really always really focusing on that.
Okay. Excellent. Again, I just want to survey the floor. Mark?
Yeah. Hi, Tom.
Just going back to the commercial side of the segment. Assuming the industry gets into a harder market given recent events, will that leak into the casualty lines, other liability lines, or is it a fair assumption to say that that's going to continue to maintain on property line coverages or will it go into liability casualty lines?
I think you'll obviously first see it in the property lines. Again, I think many companies are looking at their profitability kind of across the place. You'd expect maybe over time to see it, but I wouldn't think of it as sort of a direct cause for all of a sudden how people think about pricing workers' comp to change significantly. There's a lot that would go into that. I think you'd first see it there. Oftentimes when you're looking at pricing and all of that, I think the way companies are looking at it, they're looking at it from an all-in profitability perspective. Oftentimes you can't necessarily get the rates as quickly as you want in one line, and so you do have to kind of think about it across. I think it could be a catalyst to some of that.
Not that you asked me, but I'm up here anyway and I've got a microphone. We didn't really see any of the commercial auto rate needs spill into other lines of business. I think right now.
Yep
It's probably hard to see that crossover appeal. I think it might make sense, but I'm not sure that's necessarily the industry-
Depends on how big things are and sort of all of the knock-on effects. Typically, you're kind of pricing your products discreetly.
Okay. Then my final question, again, we obviously welcome questions from the floor, the context of this question has changed an awful lot over the last week. In terms of M&A valuations, how are you thinking about it? A week and a half ago, we suggested that things are still really, really expensive in the context of persistent soft market and maybe some signs of accelerating loss cost inflation. I don't know if that's still true, probably potential sellers' minds take a little bit longer to change. Can you give us just a broad guideline in terms of what you're seeing in the marketplace as you consider possibilities?
Yeah. I think that, you all know this better than me, that valuations continue to be high. I think that over time, as people think about what to do next and some of the competitive pressures that we're talking about and what's happening with the pricing cycle, that that could cause people to kind of shift in their mindset as to the values that they're seeing. I haven't seen any evidence of that as of late. We'll see as we continue into this year and next how all these pressures come to bear and do companies look at taking advantage of some of the values that are out there.
Right. Okay. Yes, go ahead, Gordon.
Just had a question on the reinstatement of your reinsurance.
Yep.
Do you pay for that upfront or is that something that you have to pay for it with right now if you want to initiate it to use trade rates? How much would that be going to the initial premium there?
On our CAT treaty, the reinstatement basically is at the same terms as the original treaty. There's no escalation in premium that we would have to pay for the reinstatement provision that we have. If I'm getting your question correctly. I know in the past and many, many years ago, you used to see that reinstatement premiums would be at a higher level than your initial premium. Again, as the reinsurance market has softened over time, some of those provisions have changed. In our treaty, our reinstatement provision premium is based on the same amount as our original.
Is that an option you have or you have to go through it if you have one?
Do we have to reinstate the premium? No. That's our choice.
If you don't reinstate, you just have what's left.
No. The main treaty that I talked about was an occurrence treaty. You have it for the occurrence. If you don't use all the limits in that occurrence, it doesn't roll over to another occurrence. If you didn't reinstate your coverage, you wouldn't have that coverage for the second event. Because you can reinstate it once and you have it for the second event at the same terms that you had the original one at. The aggregate treaty that we have is where it continues to just sort of build. That's separate from our primary CAT treaty.
Okay. If there's nothing else, thank you very much. This was very informative, very helpful. Thank you.