The Hartford Financial Services Group, Inc. (NYSE:HIG) Q4 2022 Earnings Call Transcript

The Hartford Financial Services Group, Inc. (NYSE:HIG) Q4 2022 Earnings Call Transcript February 3, 2023

Operator: Good morning ladies and gentlemen. Thank you for attending today’s Fourth Quarter 2022 The Hartford Financial Results Webcast. My name is Alex, and I’ll be your moderator for today’s call. I would now like to pass the conference over to your host, Susan Spivak, with The Hartford Group. Susan, please go ahead.

Susan Spivak: Good morning, and thank you for joining us today for our call and webcast on fourth quarter 2022 earnings. Yesterday, we reported results and posted all of the earnings-related materials on our website. For the call today, our participants today are Chris Swift, Chairman and CEO of The Hartford; Beth Costello, Chief Financial Officer; and Jonathan Bennett, Group Benefits; Stephanie Bush, Small Commercial and Personal Lines; Mo Tooker, Middle & Large Commercial and Global Specialty. Just a final few comments before Chris begins. Today’s call includes forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and actual results could be materially different.

We do not assume any obligation to update information or forward-looking statements provided on this call. Investors should also consider the risks and uncertainties that could cause actual results to differ from these statements. A detailed description of those risks and uncertainties can be found in our SEC filings. Our commentary today include non-GAAP financial measures. Explanations and reconciliations of these measures to the comparable GAAP measure are included in our SEC filings, as well as in the news release and the financial supplement. Finally, please note that no portion of this conference call may be reproduced or rebroadcast in any form without The Hartford’s prior written consent. Replays of this webcast and an official transcript will be available on The Hartford’s website for one year.

I’ll now turn the call over to Chris.

Chris Swift: Good morning, and thank you for joining us today. Today, I will start with a summary of our fourth quarter and full-year 2022 results and accomplishments. Then I will turn the call over to Beth to dive deeper into our financial performance and key metrics, after which I will close our prepared remarks with a review of expectations for 2023. We will then be joined by our business leaders as we move into Q&A. So, let’s get started. The Hartford is pleased to report an excellent fourth quarter, capping an outstanding year of financial performance in progress against our strategic objectives. Quarter-after-quarter, we are delivering strong financial results demonstrating the power of the franchise and the depth of our distribution relationships.

Our commitment to superior customer experience, the benefits of significant investments made over the last few years, and superb execution by our 19,000 employees drive our success. These competitive advantages helped us deliver exceptional results in 2022, including core earnings growth of 14% with core EPS growth of 23%, top line growth in commercial lines of 11% with an underlying combined ratio of 88.3. Group Benefits fully insured premium growth of 6% with a core earnings margin of 6.5%. Strong investment results with excellent limited partnership returns and increasing fixed income portfolio yields, and core earnings ROE of 14.4%, while returning 2.1 billion of excess capital to shareholders. Looking forward, with strong momentum across all lines, I am confident we can continue to deliver superior results.

Now, let me share a few highlights from each of our businesses. In commercial lines, written premium growth for the year was driven by strong exposure growth, pricing increases, higher policy retention, and continued strong new business. Underlying margins improved by nearly a point driven by earned pricing, exceeding loss cost trends across most lines in growing expense leverage driven in large part by our Hartford Next program. Across commercial lines, our brand, depth of distribution and enhanced underwriting capabilities combined with excellent customer experience, have positioned us well to capture market share, while maintaining or improving already strong margins. Small commercial results continued to be exceptional, consistently producing sub-90 underlying combined ratios with industry leading products and digital capabilities, all of which drove record breaking written premium in new business levels in 2022.

Going forward, small commercial will remain a growth engine for The Hartford. For example, beyond our traditional product lines, we will continue to expand our addressable market with capabilities in the excess and surplus binding lines. This portion of the E&S business is in about an $8 billion market serving small business owners, property, and liability exposures. With current written premiums exceeding the $100 million, and the evolving innovative capabilities within our broker quoting platform, we expect to become a leading destination for E&S binding opportunities and a strong complement to our existing admitted retail offering. In middle and large commercial, our team has done a tremendous job improving underlying margins by approximately 7 points since 2019 with a written premium compounded growth rate of 6% over the same period.

In 2022, written premiums grew 10% for the year with improved quality retention and solid new business. Advancements in data science capabilities industry leading pricing segmentation analytics and exceptional talent had delivered healthy margin, which I believe positions us well to continue driving profitable growth in this business. In Global Specialty, I’m extremely pleased with the team’s accomplishments since the strategic acquisition in 2019. Their tireless efforts have enabled us to meaningfully increase the size and scale of our specialty business to 3.6 billion of gross written premium, including over 800 million E&S premium. We are leveraging the global specialty franchise to further grow and expand our capabilities across commercial lines in this E&S market.

Global Specialty results in 2022 were outstanding with an underlying margin of 84.6 improving over 4 points from prior year and over 11 points from 2019, demonstrating our execution financity, enhanced underwriting tools, and the expertise of the team. Our competitive position, breadth of products, and solid renewal written pricing, drove a 9% increase in gross written premiums for the year, including 41% in our global reinsurance business, 19% in Ocean Marine, and 27% in international casualty. Turning to pricing. Commercial Lines renewal written price increases for the quarter were 4.9%, flat compared to the third quarter. Underneath, U.S. Standard commercial lines renewal written pricing, excluding workers’ compensation accelerated from the third quarter to 7.9%, up 1 point primarily driven by auto and property lines.

Workers’ compensation pricing remained positive benefiting from average wage growth. Within Global Specialty, excluding public company D&O renewal written pricing remained stable in the mid-single-digits and in aggregate in-line with loss cost trends. Wholesale property, auto, primary casualty, all saw higher pricing increases over the third quarter as did U.S. and international marine. Additionally, the public D&O market continues to be competitive with rate pressures, which requires new business discipline and a focus on retaining profitable current accounts. Moving to personal lines, pricing is accelerated across auto and home, resulting in written premium growth of 4% for the fourth quarter and 2% for the full-year. Like others in the industry, auto underlying combined ratios remain elevated as we continue to experience inflationary pressure.

We have been actively responding with rate filings throughout the year. In the fourth quarter, filed auto rates averaged 8.3% increase, up 3.4 points from the third quarter. In Homeowners, we have kept pace with loss cost trends through net rate and insured value increases reflected in renewal written pricing of 10.7% for the year and 13.3% for the fourth quarter. Turning to Group Benefits, the core earnings margin of 8.3% for the quarter and 6.5% for the full-year represents significant increases from last year as excess mortality has materially declined. Meanwhile, long-term disability trends are stable and within our expectations for incident rates and recoveries. Fully insured sales for 2022 were 801 million, up 5% and employer group persistency was approximately 92%, a strong result for the year.

First quarter is off to an excellent start with persistency modestly higher and outstanding new sales results. We expect the Group Benefits marketplace to remain dynamic as digital transformation, product innovation, and customer demand accelerate. As a result, we are making significant investments today and have a clear roadmap for the future that I am confident will only strengthen our market leadership position going forward. Now, I will turn the call over to Beth to provide more detailed commentary on the quarter.

Beth Costello: Thank you, Chris. Core earnings for the quarter were 746 million or $2.31 per diluted share with a 12-month core earnings ROE of 14.4%. In commercial lines, core earnings were 562 million. Written premium was up 9%, reflecting written pricing increases and exposure growth along with an 18% increase in new business in small commercial and 6% in middle market. Policy account retention also increased in small and middle market. The underlying combined ratio of 87.4 improved from the prior year fourth quarter with both a lower loss ratio and expense ratio. Small commercial continues to deliver superior operating results with an underlying combined ratio of 87.5 and middle and large commercial delivered a solid 90.2. Global Specialty’s underlying margin improved 5.8 points from a year ago to an outstanding 83 as it benefited from strong earned pricing increases.

In Personal Lines, core earnings for the quarter were 42 million. The underlying combined ratio was 96.2, reflecting continued auto liability and physical damage severity pressure driven by elevated repair costs, as well as increased bodily injury trends and includes 2 points of losses related to prior quarters in 2022. Written premium grew 4% for the quarter, largely reflecting pricing increases in both auto and home. In home, overall loss results were in-line with our expectations. Non cat weather frequency continues to run favorable to long-term averages and together with the effect of earned pricing increases mitigates material and labor costs, which remain at historically high levels. The expense ratio decrease of 3.5 points was primarily driven by lower marketing spend.

Current accident year cat losses in the quarter were 135 million, which includes the benefit of a 68 million reduction in estimates from catastrophes that occurred during the first three quarters of 2022, including 31 million related to Hurricane Ian. Winter Storm Elliott losses were 167 million net of reinsurance, of which 150 million was in commercial lines. Total net favorable prior accident year development within core earnings was 46 million, primarily related to reserve reductions in worker compensation, catastrophes, and bond, partially offset by reserve increases in general liability and commercial auto. We completed our annual asbestos and environmental reserve study in the fourth quarter, resulting in a 229 million increase in reserves comprised of 162 million for asbestos and 67 million for environmental.

All of the 229 million was ceded to the adverse development cover, leaving 256 million of limit remaining. The increase in asbestos reserves was primarily due to an increase in the cost of resolving asbestos filings and a modest increase in the company’s share of loss on a few specific individual accounts. The increase in environmental reserves was mainly due to an increase in the estimates for PFAS exposures, one large account settlement and higher estimated site remediation costs. Before turning to Group Benefits, I would like to review the January 1 reinsurance renewals. Overall, we are very pleased with the placements and terms and conditions for our program against the backdrop of a challenging renewal season. Our current and aggregate property catastrophe protection were renewed at an approximate 20% increase in cost and 28% on a risk adjusted basis, which based on publicly available information, compared favorably with overall market increases and speaks to the quality of our book of business and favorable experience.

Overall, the structure of our property cat program did not change significantly. We increased the attachment point on the 200 million aggregate cover to 750 million, up from 700 million. There were also some changes in the treaty that provides coverage for certain loss events under 350 million. We have summarized these changes in the slide deck. In addition to our property catastrophe program, we also successfully renewed several other reinsurance treaties, which also experienced rate increases with limited changes in terms and conditions. The rates we charge insured already have been incorporating these higher costs and therefore we do not expect any significant adverse combined ratio impact from these renewals. Turning to Group Benefits, core earnings in the fourth quarter of 141 million and the 8.3% core earnings margins reflect a lower level of excess mortality losses and growth in fully insured premiums.

The disability loss ratio improved 6.1 points from the prior year quarter, which had elevated estimated long-term disability incidence trends. In addition, COVID-19 related short-term disability losses were lower this quarter. All cause excess mortality was 43 million before tax, compared to 161 million in the prior year fourth quarter. The group life loss ratio, excluding excess mortality increased 4.7 points, primarily due to higher accidental death losses as compared to very favorable experience in the fourth quarter of 2021. Turning to Hartford Funds, core earnings were 390 million, reflecting lower daily average AUM, primarily due to equity market declines and higher interest rates over the past 12 months. And lastly, investment results were strong in the quarter with net investment income of 640 million.

Our fixed income portfolio is continuing to benefit from the higher interest straight environments. The total annualized portfolio yield, excluding limited partnerships was 3.7% before tax, a 40 basis point increase in the third quarter. We anticipate our portfolio yield, excluding limited partnership returns will increase by approximately 50 basis points to 60 basis points in 2023, compared to the full-year 2022 before tax yield of 3.2%. Our partnership returns of 16.8% in the fourth quarter and 14.4% for full-year 2022 were exceptional. Performance was primarily driven by income from opportunistic sales within our commercial real estate JV equity portfolio, which generated annualized returns of 31% in the fourth quarter. Our private equity holdings were also resilient, delivering a 7% annualized return in the quarter.

For the full-year, real estate generated a 22% return and private equity generated a 14% return. As we enter 2023, we expect continued volatility in markets. Given outlook for a slowdown in consumer consumption, corporate investment and M&A activity, we expect our private equity returns to be below our long-term target. At the same time, the increase in financing costs and the reduced availability of real estate financing is expected to impact sales activity in our real estate JV equity. With this backdrop, we expect a 4% to 6% return for partnership and other alternative investments in 2023. Turning to capital, as of December 31, holding company resources totaled 1 billion. For 2023, we expect dividends from the operating companies of 1.5 billion from P&C, 400 million from Group Benefits, and 125 million from Hartford Funds.

During the quarter, we repurchased 4.9 million shares for $350 million. As of the end of the year, we have 2.75 billion remaining on our share repurchase authorization through December 31, 2024. To wrap up, our businesses performed strongly in 2022 and we are well-positioned to continue to deliver on our targeted returns and enhance value for all our stakeholders. I will now turn it back to Chris.

Chris Swift: Thank you, Beth. Let’s where I’d like to share a few thoughts about 2023. Underpinning the outlook is our commitment to disciplined underwriting and expanding or maintaining margins, while prudently growing our book of business. In 2023, we are expecting a commercial lines underlying combined ratio in the range of 87% to 89%. Total renewal written price increases in commercial lines, excluding workers’ compensation are expected to be fairly stable, compared with 2022. Meaningful increases in standard commercial property, auto, and general liability pricing are somewhat offset with competitive pricing headwinds in parts of our financial lines business. In our global reinsurance book, we expect meaningful written price increases, including over 30% for U.S. and European property coverage.

Commercial loss cost trends are expected to remain fairly stable with some moderation in property severity as inflation is expected to ease during the second half of the year. Before I get into specific trends for our market leading workers’ compensation business, let me remind you of its current margin strength and stellar contribution to our overall commercial line results. Looking back over the last 25 years, our loss ratio results have outperformed the industry on average by approximately 5 points, reflecting our significant competitive advantages in pricing sophistication, underwriting analytics, management. In addition, our scale and wealth of data allow us to anticipate, identify, and quickly react to emerging trends as we manage retention and growth in this line.

Over the past 10 years, our standard commercial lines workers’ compensation book that’s produced combined ratios averaging near 90, while our premier small commercial book has performed even better with an average combined ratios in the mid-80. Also impressive, is a 6 point underlying loss ratio improvement since 2019 in middle market accomplished by equipping our underwriters with advanced risk segmentation tools. We expect workers’ compensation to remain a highly profitable business and an important earnings contributor to The Hartford. Turning to a few specifics in our forecast. Workers’ compensation renewal written pricing, which is comprised of net rate and average wage growth is projected to be flat to slightly negative. Loss costs are expected to be up slightly as long-term frequency and severity selections remain unchanged from 2022.

We will continue to use our market leading tools in underwriting expertise in risk selection and book management to minimize any margin compression. In 2023, we expect workers’ compensation returns to remain attractive with deterioration equating to roughly 0.5 point on the commercial lines underlying combined ratio. In summary, for commercial lines, we are extremely confident in our ability to manage our book through a variety of economic and market environment, an underlying combined ratio within a range of 87 to 89 will be an outstanding result and reflects our ability to execute consistently and deliver superior margins. Turning to Personal Lines, we expect a 2023 underlying combined ratio in the range of 93 to 95. In auto, renewal written price is expected to accelerate into the mid-teens by the second quarter and remain there for the balance of the year.

By mid-year, we expect new business to be price adequate. Loss cost trends, primarily driven by severity, are expected to remain elevated during the first half of the year before returning to more normal level in the second half. In Homeowners, we expect earned pricing to generally keep pace with loss cost trends throughout 2023. As we navigate this inflationary period across Personal Lines, we are focused on balancing re-adequacy, quality of new business, and marketing productivity. Overall, I am confident we have the right execution plans to return this business to targeted profitability in 2024. In Group Benefits, we expect the 2023 core earnings margin to be between 6% and 7% consistent with our long-term margin outlook for this business.

With COVID shifting from pandemic, to endemic state, excess mortality losses are expected to improve versus 2022. However, we expect mortality trends will settle above pre-pandemic levels and we are pricing business accordingly. , group life loss ratios are expected to improve versus 2022 and in group disability, we expect some moderation of recent favorable incidents and recovery trends. Before closing, I’d like to share a few recent ESG achievements. This year, The Hartford will be honored as one of two global catalyst award winners for advances we have made in diversity, equity, and inclusion. The Catalyst Award is the premier recognition of organizational DE&I efforts, driving representation, and inclusion for women. The Hartford was also named to The Bloomberg Gender-Equality Index into America’s most just companies list for 2023 having earned both honors every year since their inception.

The recognition we continue to receive is a testament to our long standing commitment to sustainability and the dedication and hard work of our teams. In closing, let me summarize why I’m so bullish about the future for our shareholders. One, our 2022 financial results demonstrate the effectiveness of our strategy and the benefits of continued investments in our businesses, resulting in strong growth in margins in commercial line, group benefits operating at targeted returns, and a personal lines business tracking back to target margins. Two, we have the capability to sustain superior returns as a result of our performance driven culture, outstanding underwriting, and pricing execution, exceptional talent and innovative customer centric technology.

Three, investment income is increasing supported by a diversified portfolio of assets and credit quality remains healthy. And finally, we are proactively managing our excess capital to be accretive for shareholders. All these factors contribute to my excitement and confidence about the future of The Hartford. Our franchise has never been better positioned to deliver industry leading financial performance with a core earnings ROE range of 14% to 15%, while creating value for all our stakeholders. Let me now turn the call over to Susan for Q&A.

Susan Spivak: Thank you. Operator, we have about 30 minutes for questions. Could you please repeat the instructions for asking a question.

 See also 10 Most Undervalued Tech Stocks To Buy  and 15 Biggest Neuroscience Companies in the World .

Q&A Session

Operator: Thank you. Our first question for today comes from Brian Meredith from UBS. Brian, your line is now open. Please go ahead.

Brian Meredith: Yes, thanks. Good morning. A couple of questions here. First one, just curious if I look Hartford Next, it looks like you got another 65 million to recognize an expense saves coming through in 2023. It gets to about 0.5 point on the expense ratio. Are there some offsets we should think about in 2023 that will maybe make it so we don’t see that half a point?

Chris Swift: Brian, thanks for the question. Thanks for joining. You are right. I mean the Hartford Next program is contributing to our overall efficiency and effectiveness and it does have about a half a point benefit in €“ as we head into 2023. The second part of your question is, do you see any challenges to executing on that as we sit here today? No. I mean, I think that’s a good assumption, if I understood your question correctly.

Brian Meredith: Yes, yes. Exactly. That’s it. So, I mean the 0.5 points should be beneficial. Okay, good. And then Chris, I’m just curious. Obviously, a really strong property market right now from a pricing perspective. It sounds like you took advantage of some of the property pricing in the reinsurance marketplace. I’m just curious, could you maybe talk a little bit about your capabilities, capacity, willingness to kind of lean into the property markets right now and see some good growth in that business? And perhaps margin accretive for your 2022 results?

Chris Swift: I think Brian you picked up on one of our key strategic initiatives over really the last five years to be a bigger property writer. Maybe it’s not known by you, sort of firsthand, but we have about $3 billion of property premium, including homeowners premium of about 1 billion. So, it is an area of focus. It’s an area of growth for us. We do operate on the small end with a in middle and large, and we also have developed an E&S property capability. And as I mentioned in my prepared remarks, we have some assumed reinsurance property exposures around the world. So, it is on a primary basis an area we’re leaning into. That will ultimately help continue to diversify our book of business so that we’re a more balanced organization going forward. So, yes, it is a focus of ours going forward.

Brian Meredith : Great. Thanks. If I could just squeeze one more in. Group Benefits, are you seeing any impact yet from some of the layoffs that we’re seeing at large corporations?

Chris Swift: I would share with you and then I’ll ask Jonathan Bennett to comment. Generally, no. I mean, we have a book of business that range from obviously large global organizations to small and middle size organizations, but the trends in our book are fairly stable, Jonathan. What would you add?

Jonathan Bennett: I definitely agree with what you said, Chris. Point out in the fourth quarter, we had growth of earned premium and fees of about a little over 8%, so strong fourth quarter. And as you pointed out in your comments, we’re off to a great start in January with good new sales and strong persistency. So, we’re on the watch. We are aware of all the announcements happening as well. But where we sit today, we’re in pretty good shape and looking forward to 2023.

Brian Meredith: Great. Thank you.

Operator: Thank you. Our next question comes from Mike Ward of Citi. Mike, your line is now open. Please go ahead.

Mike Ward: Thanks, guys. Good morning. I had a question on workers’ comp. I’m just curious what you’re assuming around underlying losses and how big might you say the headwind is to the year-over-year underlying combined ratio?