Q4 2019 Earnings Call

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Rooted in our SEC filings as well as in the news release and financial supplement. Finally. Please note that no portion of this call can be reproduced or rebroadcast in any form without the hartford's prior written consent replace of this webcast and an official transcript will be available on the hartford's website for one year off during the call over to Chris. Good morning and thank you for joining us today 2019 was an excellent year and a pivotal year for the Hartford. We set ambitious goals and delivered on strategic objectives while achieving strong financial results.

Fourth-quarter earnings were five hundred and twenty two million or Dell or $43 per diluted share an 84% increase over prior year driven by significantly Lower East repeat losses exceptional results in group benefits and strong investment performance for the year quarter earnings were 2.1 billion or $5.65 per diluted share up 31% from 2018 book value per diluted share see I Rose to $43.71 off and 11% increase for the year. And the 12-month core earnings are a week was 13.6% in impressive result in the current market environment long hard work by talented employees across the Hartford enabled us to perform at this high level.

turning

To our results in commercial lines. The underlying combined ratio of 94 is a strong result particularly in a year where we have Incorporated Navigators.

Just as impressive has been the speed with which the two organizations have come together as a focus team able to strongly position the Hartford in the marketplace and capture new business opportunities in firming market conditions.

As the integration progresses. We are seeing more opportunities to improve underwriting profitability cross sell products improve claim process has all the capabilities of the Hartford platform these activities coupled with continued rigorous execution and renewal pricing and retention or contributed to our goal of achieving $200 million of incremental core earnings from the acquisition.

In commercial lines, I am pleased.

With achieved rate increases across the portfolio with a focus on margin Improvement in middle-market renewal pricing excluding workers compensation accelerated through quarter of the Year culminating with a 7.1% increase during the fourth quarter.

Personal lines core earnings improved the $285 million as we benefited from much lower catastrophe losses with an underlying combined ratio of 91.9 months through sales for auto and home or up 36% over prior year with improving retentions all contributing towards the goal of future net written premium growth.

Group benefits had an outstanding year with quarter earnings of $539 million up $112 million from 2018 with a quarter earnings margin of 8.9% off its performance was largely due to a three-point loss ratio improvement over prior-year reflecting continued favorable disability incidents Trends in Chicago disability claim recoveries, partially offset by elevated life severity experienced earlier in the year.

on the top

line fully insured ongoing premiums or flat to Prior year

fully insured ongoing sales for 2019 or 647 million down $57 million as prayer year included first year sales related to the new page Family Leave product in New York.

Persistency as expected was slightly below historical Trends as we adjust pricing on targeted segments of the Aetna book.

Overall on premium on the in a book is in line with our deal assumptions in case conversions continue to go well from both a platform and pricing perspective. We are pleased with the operational execution integration in financial performance of group benefits.

Looking ahead to 2020. We are expecting a core earnings margin in the range of 6.5% to 7.5% which assumes moderate price growth over 2019 driven by sales and improved persistency.

lower

Expected investment yield driven by a 7% limited partnership return assumption in normalized claim incidence rates in recovery trains or recovery Trends in long term disability.

January sales were solid in a competitive market but were down slightly from 2019 due to fewer large case sales before turning the call over to Doug a provide my perspective on a couple macro themes first social inflation continues to dominate industry conversations as the current Hot Topic off.

Last quarter I said that social inflation was not a new phenomena 1/4 later. My view hasn't changed but there are a few points to make.

Expect some level of social inflation will be felt by many carriers. If not all across the industry. However, the impact on Lost costs will vary by company.

very

It depends on several factors, including the line of business and coverage limits type of coverage such as primary umbrella or excess specific contractual terms and reinsurance programs.

Each company's ability to react to social inflation will be impacted by the quality of data and analytics supporting product pricing and lost Reserve estimates at the heart. I feel confident that we are that are analytical capabilities along with our talented claims and legal professionals have allowed us to build a track record of making tiny adjustments to Lost cost assumptions reflected in our financial results over the past four to five years.

The second topic is interest rates for several quarters. We have discussed the impact of a persistent low interest rate environment on the ability to grow net investment income home currently or portfolio continues to perform well, but it is clear that the interest rate environment is becoming more challenging. This will impact the investment Returns on new cash flows reinvestment rates in our overall portfolio healed. The implication is that net investment income will likely become a headwind to quarter earnings growth requiring higher levels of underwriting income to support earnings in r o e

this

Coupled with lost cost Trends leads me to believe the firming cycle. We are experiencing will likely continue for the next eighteen to twenty-four months.

In closing when I look out to 2020 and Beyond I think about how far our businesses have evolved over the past decade and how well-positioned the Hartford is as a market leader.

We have expanded underwriting capabilities and provide a broad range of products delivered through multiple distribution channels to meet customer needs in a dynamic Market environment.

We are focused on execution integration innovation in maximizing our enhanced capabilities to organically grow the business.

Small commercial we are a top industry player and have demonstrated consistent financial performance and Innovation over the years where they focus on the customer experience wage growth orientated with a multi-channel distribution strategy and expansive underwriting appetite to serve more classes of business.

Large commercial we aim to improve margins and leverage new product breath pricing is improving and we have identified attractive opportunities to cross-sell Specialty Products.

In global specialty. We are newly positioned with a broader product portfolio in expanded distribution in the wholesale and Lloyd's Market. We will focus on integration and improving margins.

You know personal lines business, we have enjoyed a unique relationship with for over thirty-five years. We continue to look for opportunities to drive top-line growth.

And finally in group benefits, we are nearing the completion of integration activities are focused now is on future growth stemming from new products and services designed a complement existing risk products while improving the customer experience. We enter 2020 well positioned in the market moreover. We remain committed to making a sustainable in positive impact on society as an essential element of our ongoing success.

cross the Hartford

For making this happen by always doing the right thing fostering a workplace where everyone is welcome and respected using our resources and influence to address the challenge of changing climate and helping to make our communities where we live and work be safer and more successful.

I'm very proud that these sustainability efforts are widely recognized as industry-leading.

In summary, I'm confident or enhanced capabilities in a firming Market combined with ongoing Capital Management provide the opportunity for the Hartford to enhance value for them all our stakeholders.

Now, I'll turn the call over to Doug.

Thank you, Chris and good morning. Everyone 2019 was a very good year for Property and Casualty were pleased with the underlying financial performance of our business units and the achievement of important initiatives were established for 2019.

In small commercial we continue to outperform with another sub ninety underlying combined ratio for the year and early new business. No momentum from the launch of our next-generation Spectrum product.

in Middle

And large commercial we're maintaining positive traction across our industry verticals while we work to improve profitability on our core book.

And Global specialty and across commercial lines were leveraging the product breath and underwriting expertise arising from The Navigators acquisition to deepen relationships with customers and distribution partner through year-end. We've delivered approximately fifty million of incremental sales across middle and large commercial and Global specially that would not have been possible without the off position this positive start provides confidence that we will outpace our three-year incremental Revenue goal of two hundred million in personal lines, the business had an excellent earnings. May we continue to work on driving new business growth while moderating renewal written price increases have helped to improve policy retention levels for the Year. Let me now pivot to suck our financial performance for 2019 and then I'll conclude with some thoughts about 20 20

commercial lines corner

Things were 1.17 billion for the year on a combined ratio of 97.7. This includes catastrophe losses of 323 million or three point nine points off net favorable prior-year development for the year was a hundred twelve million or one point four points, excluding Navigators prior-year development recorded at the acquisition life in the fourth quarter. We reported thirty-seven million of net favorable prior-year development which primarily consisted of favorable experience in both small commercial package business office and the workers compensation 2016 and 2017 accident years. This was partially offset by 16 million of unfavorable development primarily on Navigators International Reserves.

The commercial lines underlying combined ratio was $94 for the year increasing 2 and 1/2 points from 2018. The Navigators underlying combined ratio is higher than our Legacy commercial book club and contributed approximately one point of the increase. The remainder of the increase was from non cat property workers compensation and higher commissions.

Assistant with our expectations the underlying loss ratio for workers compensation increased one point from 2018 reflecting the competitive market and pricing declines.

Lost friends were modest with negative frequency while medical and indemnity severity trends when the mid single-digits.

Renault written pricing and standard commercial lines was three and a half percent for the quarter up fifty basis points from third quarter fourth quarter 2019 were no written pricing was up.

1.9 points from the fourth quarter of last year.

Middle-market were no written pricing in the US excluding workers compensation increased 5.2% for the year up to point two points from last year in the fourth quarter. The rate increase was 6.1% up 1.8 points from the third quarter of 2019 and up over 4 points from fourth quarter 2018. We have now seen increasing renewal written price increase in wage in these lines for four consecutive quarters.

especially book is experiencing even stronger pricing gains in both our us wholesale books and the international portfolio, which is primarily written in the Lloyd's Market r u s wholesale book achieved an 18 per month rate increase in the fourth quarter several lines run, excessive 20% including property Auto and excess casually our International portfolio also had strong pricing performance in a quarter with particular emphasis on professional lines and onshore energy ongoing underwriting actions coupled with sustained rate increases in this book will drive profitability wage in 2020 and Beyond

We continue to monitor lost friends in our book, especially liability. We expect 20/20 primary liability and Commercial Auto Lost friends to be in the mid-single digits off excess liability lost friend will be a few points higher than primary while our book is certainly not immune to the ongoing unfavorable Trends. We continue to take underwriting pricing and Reserve actions to address this liability Trend our teams actively monitor these claim Trends and currently do not see significant shifts in either representation or litigation rates. This will continue to be a critical watch area for us in 2020. Overall. I'm very pleased with how effectively our team is balancing growth and profitability along with our pricing program is in the second half of 2019.

moving

Our individual business units small commercial had another strong year. The underlying combined ratio is 89.1 for the year up 2.4 points from prior-year reflecting the workers compensation pricing environment wage higher property fire severity and higher supplemental commissions total small commercial written premium increased 2% for the full year with fourth-quarter written premium relatively flat 2018 policy count and premium or tensions remain strong both up from prior year and new business increased to $646 million for the full year up 8% off.

In the fourth quarter 2019 new business declined from prior-year primarily reflecting the increase in new business last year from the foremost renewal rights transaction, excuse for most new business premium increased 9% in the quarter moving to middle and large commercial. We posted an underlying combined ratio of $99 for the year up six tenths of a point from 2018 primarily due to higher commissions and Technology spend.

total written

Increase by 9% for the full year 6% If you exclude the impact of Navigators acquisition, we are achieving positive top-line results from our investments in new industry verticals for a large property construction programs and energy. We're also growing our national accounts business with written premiums up over 6% last year.

The efforts to improve the profitability of our middle-market booked through rate and underwriting actions have intensified in the second half of the Year middle-market retention levels were up slightly year-over-year and Newburgh premium of $584 million for the full year was up 8% versus 2018. However, middle-market New Britain premium declined 11% in the fourth quarter compared to last year off merrily and workers compensation and auto premium retention was also off three points from a year ago. We remain disciplined with our pricing methodologies as competitors have been willing to write at more aggressive levels.

in global

Especially the underlying combined ratio is 96 for the full year up nearly eight points over 2018 almost entirely due to the inclusion of The Navigators business. We continue to deliver a strong underwriting results in our Legacy Management and professional liability and shorty lines.

In the second half of the year. The underlying combined ratio is 98.52 points above the upper end of our guidance. We provided on the second quarter call in the fourth quarter. We had several large loss in Boston from our International desk including a six million dollar loss related to a Texas oil refinery explosion and a four million dollar property and business Interruption loss from a Florida tornado.

The significant rate and underwriting actions were taking across the Navigator book is pressuring retention and some us business lines retentions are generally stable in the international book off with these actions. I'm confident we've established a path to meet our profitability goals over the coming years Shifting. The person lines corning's for the year of 285 million with a combined ratio of 95 improved from a 2018 core loss of $28 million. This Improvement was largely driven by a $321 million after-tax decreasing tastrophe losses between years the full-year underlying combined ratio increased modestly to 91.9 driven by higher expenses partially offset by slightly improving results in auto-pay.

the personal

Auto underlying combined ratio improved slightly to 97.9 for the full year. We've been able to stay ahead of lost Trends your every year frequency continues to decline while some may be increased in the low to mid-single digits higher underwriting expenses do to increase marketing efforts combined with lower earn premium drove. The person's expense ratio of one point seven points for the full year before I turn things over to bet. I'd like to share a few thoughts about 20 20

And Property and Casualty. We're focused on several priorities first. We intend to fully leverage the combined product breath talent and distribution capabilities. We now have at the harbor. We will drive growth in global specially and middle-market with deep product sets and broader distribution across both retail and wholesale channels.

Second we continue the underwriting journey to improve Financial returns across Middle Market and Global specialty. We intend to achieve strong financial performance as we drive higher written pricing in both domestic and international property and liability lines while actively adjusting our limit profiles and class mix finally. We're focused on growth initiatives with both small commercial spec as well as our new business.

specifically in middle-market

We expect Renault written pricing to remain strong during twenty-twenty in global specially we expect Renault written rate increases to remain in the double digits will continue to lean in this rapidly firming Market to improve the profitability of both our middle-market Coraline's and Global specialty book in workers compensation. We expect continued pricing headwinds as a result. We expect the 2020 commercial lines underlying combined ratio to be between $92.94 slightly better than our performance for 2019 contributing to this improve our improved results in liability and property lines partially offset by margin compression in workers compensation as negative rates learned through our book first lines will continue to drive new business growth in ARP direct. We are fine-tuning our product segmentation and expect new written premium growth in the low double-digits for the year for 2020. We expect to achieve wage

the line to my ratio of 91

52935.

Reflecting back 2019 was a very good year for our business units across Property and Casualty our results demonstrated disciplined underwriting organization committed to achieving strong margins and speaking with when it meets our profit targets. We're pleased with the progress of integrating Global specially and it's positive impact with our customers and distribution Partners. I look forward to updating you all on our progress throughout the year. Let me know turn the call over to Beth. Thank you Doug. I will review results for the Investment Portfolio Hereford funds and corporate and cover a few other items before turning the call over for Q&A our Investment Portfolio continues to perform very well with strong limited partnership returns and generally stable investment yields. Despite lower reinvestment rates off investment income was 503 million for the quarter up $46 million or 10% from the prior-year for the year net investment. Income was about two billion up 10% over 2018.

Due to the growth in assets.

Levels primarily from The Navigators acquisition and higher partnership income the annualized limited partnership return was 11.9% in the quarter due to higher valuations on underlie funds and real estate property sales net unrealized gains on fixed maturities after tax decrease to 1.7 billion at December 31st from 1.8 billion as of September 30th unrealised and realized gains on Equity Securities classified in the income statement were seventy-three million before tax in the quarter and 254 million for the full year off the credit performance of the Investment Portfolio remains, very strong. There were no impairments in the fourth quarter.

For the quarter the current yield before tax, excluding limited Partnerships was 3.8% up ten basis points from fourth quarter 2018 due to higher make whole page and mortgage loan prepayment fees before limited Partnerships and non-routine income items. We expect a before tax average portfolio yield of 3.4 to 3 months 5% in 2020 driven mostly by lower reinvestment rates, and the projected decline in short-term rates based off of today's forward curve.

turning to her

Ford funds quarter earnings of forty million were up 5% from fourth quarter last year and up 1 million sequentially daily average Rose 2% from third quarter glass reflecting strong market performance. Net flows were a positive 218 million in the fourth quarter driven by exchange-traded products and fixed-income funds off the net outflows in fourth quarter, 2018 of one point seven billion investment performance remains, very strong, as of December 31st about 62% of Hartford funds out performed peers and a one-year basis and about 72% appears on a three and five-year basis corporate core classes of thirty nine million in the quarter improved by six million from 2018 the retained Equity interest in Talcott generated $17 million of income after-tax compared to six million in fourth quarter 2018.

during

The quarter we completed our annual study of asbestos and environmental reserves which resulted in a $170 million increase in reserves, which was seated to National Indemnity under our adverse divestment cover resulting in no impact to net income of the hundred and Seventeen million sixty five million related to asbestos, which is significantly less than a development. We have seen in recent years as the number of mesothelioma claim filing was favorable to our previous projections. The increase in asbestos reserves is largely driven by an increase in average set of values environmental reserves increased by $52 million in part due to an increase in estimated cost to remediate sites as required by state regulators.

As of December 31st 2019 the company has incurred a cumulative 640 million in adverse development on any reserves that have been seated under the wrong resulting in eight hundred and sixty million of coverage available for any future net Reserve development.

Doug noted in the fourth quarter, we recognize 16 million of unfavorable unfavorable development on prior accident year reserves related to Navigators international business office while adverse development on prior-year reserves is economically reinsured to national identity under the reinsurance. We put in place at closing that benefit is deferred under retroactive reinsurance account off since cumulative losses seed seated exceed. The premium paid of ninety-one million. This deferred gain will be recognized in earnings in future years when we were start recovering cash from National and down after the actions this quarter. We have a 193 million remaining capacity on this ATC.

As of January 1st 2020 we completed the renewal of the property catastrophe reinsurance program for the per occurrence treaty the overall coverage and per month current retention of 350 million remained the same within the recurrence program. We renewed coverage for $200 million of per event losses in excess of a hundred and fifty million for catastrophes other than named storms or earthquakes Arco participation on the two hundred million layer is 30% up from 20% off 2019. We renewed our property catastrophe aggregate treaty and lowered the attachment point two seven hundred million of aggregate covered losses with a fully insured Lady of $200 million above the attachment point.

effective with this

Renewal catastrophe events from Navigators business other than from the assumed reinsurance business are covered by the program a summary of the details of the catastrophe reinsurance program included in the appendix to the slide deck in the fourth quarter of 2019. We repurchased 1.8 million shares for $110 since it's September through January 31st. We have repurchased 4.3 million shares for $254 million dollars in addition yesterday the board increased the quarterly, Thursday dividend by 8%

With strong Capital generation and financial flexibility. We are pleased to be able to both invest in our businesses and return Capital to shareholders.

Book value per diluted share excluding AOC. I was $43.71 up 11% in 2019 quarter earnings are a way over the last 12 months was 13.6% Well in excess of our cost of equity capital in the summary 2019 was a very successful year for the Hartford. We generated strong earnings closed on the acquisition of Navigators, and we are confident in our ability to continue to generate shareholder value. I'll now turn the call over to Susan's so we can begin the Q&A session.

Thank you.

That we have about 30 minutes. For questions. Can you please repeat the instructions Alyssa for asking a question? Yes. We will now begin the question-and-answer session a.m. You may press * then 1 on your touchtone phone. If you were using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time pause momentarily to assemble our roster.

And the first question today comes from Jimmy Bueller of JPMorgan, please go ahead.

Hi, good morning. So I had a question for just on the workers comp line. If you can sort of quantify how much you're what you're seeing in terms of wage pressure in the business. And then on the commercial Auto you're one of the few companies that has not seen sort of continued adverse Reserve development. I think you had some last quarter but this quarter years are better than some of your peers. So if you could just talk about what's going on there. Sure Jimmy, let's take each of the pieces on the workers comp side two different Dynamics one with our small commercial sector where we're seeing negative pricing and have very little ability to do anything about it relative to underwriting. So those rates those negative rates flow through Thursday on the Middle Market side largely a a flattish environment. And so that means we're dealing with the count experience sector performance and doing our best to you know wage.

work against the negative file Trends across the various States, so

That's the workers comp situation relative to Auto. I would describe Auto as an ongoing work and process here over the last eight years. We've been working on auto which is why I think you don't need the surprises in the quarter. We have strengthened Auto over the last six seven accent years. We strengthened a little bit in the third quarter but felt very good about where a position was for Q4. So that's the reason there was no activity in Q4 and then if I could just ask one more on group benefit your margins along with everybody else and disability have been very strong. How much of this are you seeing a companies begin to reflect in their pricing as you went through renewal season. And is there any reason to believe that at least in the near-term that the trend in terms of margins of reverse?

Well, Jimmy, thanks for the the question. I would say yeah, the market is competitive, you know, no doubt about it, but largely still rational but you know competitive and you're you're right. I mean we've we've been enjoying a pretty good run particularly with incidences and and and getting people back to work that I've been out how long this you know continues. I'm not I'm not sure I could predict obviously we gave you our guidance for what we you know think is going to you know happen next year and if I could sort of do a step change on where our margin is today to where we think it is, you know next year on a normalized basis. I would say 7/10 declined due to heavy investment income.

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The cover declined due to again normalize loss ratios and we're going to spend some incremental dollars in our you know infrastructure their life. There's a little bit of a expense pressure. So, you know, we still see, you know a good earning business in that, you know, 7% margin and we'll we'll try to compete with our competitors the best way we can on differentiating our our services are skills in our capabilities.

All right. Thank you.

The next question today comes from Elyse Greenspan of Wells Fargo, please go ahead. Hi. Good morning. My first question, you know when you guys had announced the birth is still the goal was about two hundred million of income over like a 5 year. And so, you know kind of you know half a year into the transaction seems like margins a little bit weaker. And now we also have the headwind of lower interest rates on investment income. So can you just walk us through I guess we're just to kind of what the offsets are and why you still think you should get you know, what would help you get to that you want to get million dollars Target?

Well again, thank you for joining.

Thank you. You have the you know, the components that we've we've talked about in the major ones, you know are obviously net investment income improved loss ratio performance package to a a lesser extent expense savings. I think we we also talked to about the lease on a short-term or near-term basis. We still see approximately 110 million of of quarter earnings in 2024 The Navigators business that will flow through the the new Global specialty, you know segments. So let's say again at the lower end of our range is primarily due to the interest rate environment, but you know equally in the past, you know, the two hundred million and quite frankly, we think it's getting shorter than that, you know, five or your period of time primarily do just as a rate environment and the Improvement of possibilities that we are planning for and seeing in the book club.

pleased with the entire team

Donkey give you more insights and Analysis on it, but we're we're expecting significant rate with what we think is realistic wage lost cost trends that were were planning for and eventually those those will cross and and and start to really improve. In fact, I think just my my calculations and our own analysis would say we're looking for a five or six point loss ratio Improvement in The Navigators book next year at least based on activities that we're seeing today course, I would just a dead absolutely that we you know are bullish about what we think will achieve in 2020. The other thing is that the accumulation of underwriting actions that were taken across the book between changing profile attachment points exiting classes adjusting MGA capacity underwriting limits, et cetera are also going to be a cord driver of that performance change and I'm very birth.

Encouraged by the actions that not only we've taken but we'll continue to take into twenty twenties. I think Vince is yet when that team done.

Terrific job at at resetting the book. Yes, we're encouraged about the pricing and that that provides an awful lot of of our tone. But I also think we'll see the benefits of the life inside our underwriting activities also play out meaningfully in our two hundred million dollar run. Yeah. The only thing I'd I'd add to that and and I think Chris touched on this but your point about our original projections on investment income or obviously correct. The rate environment is different, but we're also seeing more expensive benefit than we originally anticipated and the life of those to you know, pretty much watch each other out.

Okay, that's helpful. And then my second question as we think about Capital return in 2020. Is there any timing to think about in terms of when you can get some of the dividends Thursday subs or the tax attributes or should we just think about kind of you know, even share repurchase throughout the four quarters and then second question their best. Are there any taxes that we should think about four twenty Twenty-One as we think about Capital return Beyond 2020 sure, so a couple of things so is you know as we think about the the cash flow to the holding company wage over the year. I really see those buildings over the year some of the tax benefits come in, you know over the course of time but a big chunk of that comes in with the AMT refund, which is really predicated on when the office accepts our our tax return and when that's filed so, you know from a pace of share repurchase I would you know expect that to be increasing over the year and not necessarily radical throughout the year.

and then as far as

Attributes when we look towards twenty Twenty-One, you know based on our expectation of utilization this year. I expect that when we get to 20 21 will probably just be in sort of the normal course of tax benefits coming to the holding company related to the deduction. We get on interest expense through our normal tax sharing Arrangement. So it would be significantly lower than what we're expecting this year. And you know, probably, you know slightly under a hundred million.

Okay, that's helpful. Thanks for the color.

The next question comes from Palm of Piper Sandler, please. Go ahead. Thank you. Good morning. I was hoping you could expand a little bit more on the personalized operation and give us a little sense of kind of where we are from a pricing vs. Underlined claim costs.

environment

Paul sure, let me tackle that one. This is Doug. We're obviously pleased about our financial performance in 2019. You see the pricing down a bit. I think it's down a bit commensurate with where we see lost friends. So as I've commented, you know frequency has been in very good shape for now and extended series of quarters and we're watching carefully e t watching physical damage in particular, but the aggregate of both frequency and severity, you know, put the loss Trend in the low single-digits and I think that's where we are from a price perspective. So I feel like we're right on top of it. Now, you know, we also have goals to move our new business North so we will address pricing and new business et cetera as we moved through 2020 because we'd like to further stimulate new business growth, but I think we've done a nice job at getting the book healthy from a profit perspective and will continue to balance both growth and profit as we go through 2020 and Beyond dead.

And my second question is is like to know a little bit more about persistency particularly just across the property casually businesses and you know normally in a harder Market you have wage increases in the persistency. Do you think that's going to happen prospectively as well until the the market flattens out with Paul? There's so many pieces to the marketplace if we you know talked about it on the extremes. You could move to smoke commercial and I would say that that's just a very competitive world not a lot of change and we're we've been in the last, you know a couple of years and then you could you know move into either public, you know, or the excess casually world that is going through enormous amount of change and the Dynamics off on pricing and retention are very different across the sector. So yeah where you see capacity shortage and people are driving rate because of their performance, which I think is where the market is and some of these dead

Challenged Financial classes. There may be some Dynamics across the retention element, but you know, we are determined to get rate where

We need it in our book. And so I think we have got a very good sense of where that rate need exists across our various products. And if we have to give up a little bit on the retention side to get what we need to do on the pricing. I'm willing to make that trade particularly in Middle Market and Global specially where our returns have to get better and you saw that in the fourth quarter I share with you, you know that our new business was down slightly in middle-market in the office in the fourth quarter, but I was also really encouraged by our pricing advances and I'm willing to give a couple of points of attention to do that, which is exactly what happened in the quarter.

Great. Thank you make sense.

The next question comes from David Moss of evercore is I please go ahead.

Hi, thanks. Thanks for taking the question just for for Chris or Doug on the commercial lines outlook for 2020. Maybe I just wonder about elaborate a bit more on the 92-94 underlying combined ratio of guide after the, you know, call it 94 and 1/2 to 95% that you guys printed in the second half of 18. And I think Chris you mentioned five to six point Improvement on Navigators and 20/20. Just wanted to talk about just timing in terms of getting there and some of the other moving pieces that get you confident that you can you can get their given the results this quarter.

David let me let me

Start and then I'll ask Doug to comment. So it feels like it's like deja vu all over again, you know this time last year. A lot of our our tone was is similar to this year. You have a worker's comp Dynamic. Yeah that we are going to you know, face some some pressure with with price but generally lost costs there are behaving and then you have all a call at all. The other lines that I think will contribute to margin expansion, you know going forward particular life, you know, the you know, the specialty lines. So sort of It's A A Tale of of a coin there to you know, two sides of the coin but you put you put them all together off and we do still see at least from where our run rate ended in 2019 the ability to expand margins on an overall book basis offsetting some of the pressure we see in comp off.

with the strong pricing

And liability property Commercial Auto and obviously are our specialty lines. So that's what I would say is sort of the macro perspective. Yeah, I agree with that. Chris will also add that, you know, we saw a little bit of a bump up in the quarter for stomach rules on the expense side. So the expense piece also is running a little abnormally high in the quarter. But when I adjust for Thursday the expense piece Some Noise with Navigators, and then the encouragement of what's happening on the pricing side. I really do feel like twenty-twenty is achievable. Yes. I have a lot of work to get done to make that happen, but I believe we will and I think we're off to a terrific start as we you know, close nineteen and enter twenty-twenty to get our numbers moving.

Got a great and if if dog if I could just follow up you had mentioned some adjustments to the Limit profile that that you were that you were making twenty. Just just wondering if you could comment just in terms of of what the average and limit size is where you guys x x workers comp and and what what changes were implementing?

When I talk about limit profile and primarily talking about Navigators and RX s casualty book because as you know across the court a book or essentially talking about million two million limits and we were not much of an umbrella player over the last five years Navigators has been working on reducing its limits. So our average limits an hour well down below 10 million dollars and in very few places. Do we take do we take limits greater than 10? So our normal life is in the five, maybe some cases ten million dollar limit range, but that's where we play and and over the last couple of years. We've also been you know working hard at where we attach so I would say that the profile of limit off the attachment point are are Keen in our focus and will continue to adjust by class as we move through 2020.

Okay, great. Thank you. Thank you. Yep. Next question comes from Ryan of autonomous research, please. Go ahead.

Hey, thanks. Good morning. I guess first of all on on workers comp. Did you see any prepared remarks that that was a one-point drag this year on the accident year combined ratio just on the warmer compacts. I did you ever hear 1819 all the overall commercial.

just on

Comp itself. So that means we'll drag would be what maybe like half a point on Commercial here at nineteen. That's a fair wage estimate to make yes, Ryan. Okay, and I guess in the outlook for 2020. Are you thinking about a similar type of drag from Campo? Do you expect that to accelerate?

You know the the half a point across our book is what we're expecting in 2020. So when I think about all in workers comp across our lines wage is a good approximate number to use

Got it. And then I guess you start Navigators the the five to six points, you know, it sounds like that could come from three areas that could come from I guess less unfavorable lost activity. It could it could come from rate and it could come from underwriting Improvement remediation, you know, if you had to think about those five or six points, how would you how would you divvy it up between those three?

well rate is going to be the

Easiest to measure for sure and I think based on the the high teens that we posted in Q4. We're very positive about progress. We're making their I would add expenses to your pile. I'm not sure I heard wage is in your group, but we are working expenses and and yes will be some expenses that come out of the equation. So that is also a part of it the piece that will be most difficult to measure or quantify clearly be the underwriting actions because I'm embedded in losses and will be very difficult to know, you know, a loss that you've been able to either moderate or or avoid versus an underwriting action taken. I don't think that's measurable. But the combination of those actions and our pricing activity against lost friend to me sets up, you know, the change that you talked about in the Christian I referred to

Got it. And then I guess my last one dog is just thinking about some of the the large loss activity and then you said that was an international and obviously this this business makes it a little bit new to you guys, you know, if you could maybe give us some perspective on you know, why a $4000000 loss and a six million dollar loss is in fact something that you know, you get a handle on that you wouldn't necessarily expect to to recur. I think we've we've shared with you from the beginning that you know, the core of the Hartford businesses with a frequency based and there's a bit more severity in The Navigators book. We've worked hard over the last nine months to understand that better by product as we move into 2020. Our metrics will get tied off again, we've made and continue to make underwriting adjustments appetite adjustments et cetera. So as we looked at the fourth quarter, and we looked at their property results both demez.

Play and also International.

Just felt like there were a few losses that were beyond our expectations and we booked them in the quarter. We moved our acts near pick up accordingly again as we roll into twenty-twenty. We still have to figure out what the right base is to launch from butt off. You know, I feel like we have accounted for twenty nineteen activity and know exactly what we need to get done in 20 20 for us to make the plan that we've talked about.

Thanks.

The next question comes from Brian Meredith of UBS, please go ahead. Hey, thanks a two questions. I just want to follow up a little bit on with David was talking about as far as limits profile Navigator off given the limits profile there is obviously little bit higher more property. Should we expect these kind of large loss activity to be more frequent in your business going forward. I don't think so brain dead. And I would actually suggest to you that you know, we're spending a lot of time on their excess casualty portfolio as well. So, you know their umbrella and excess limit product is certainly be under enormous interest right now. The market is is searching for capacity. And so I think we have deep experienced Professionals in that space a lot of interest on the part of many of our long-term Hartford retail Brokers and agents. So the demand is up a lot for that access casualty. We're using our capacity appropriate and we're birth

in Actuarial data science and all the capabilities that I think we bring as a firm so

Encouraged about both opportunity thoughtful about projections were making and will understand our book and adjust accordingly as we go through 2020. This is Chris. Can I just you know, you know two dogs point of including the the prior question is we've worked hard to get our arms around, you know this book and and and I believe we have I think we need a deeper understanding of all aspects of the book whether it be domestic or International. I'd remind you would you largely kept The Navigators reinsurance program in place that again on a closer look basis we think is is well-designed and remember, you know part of the reason why we did the acquisition was because we liked the people we thought they were were talented did you know men and women that had immense capabilities and their own crafts and in their own art and if we want to empower them, you know, obviously within a risk profile that were comfortable.

With we fully understand but the execution day-to-day is is was left obviously to Vince to zero and his team and I think they're off to a great start and our environment Doug and Thursday, we're growing and improving and I think we're going to add a lot of value together Brian, maybe one other comment on the property side.

I don't.

Think and I'm not suggesting that what happened. The fourth quarter is this new trend to continue with every quarter, you know, multiple exceptions to our p&l. Yes. They've had some noise in it, but I think we are aggressively pricing the sector I talked about, you know, in excess of 18 to 20 points of price in the quarter. We're also non-renewing series of accounts and you know in some of our Tech sectors energy sectors, we have loss ratios that are not sustainable. So we're working on those as we speak and intend to get our property book in line with our expectations going forward with great and then my second question on the person. I'm just looking at the, you know initiatives in place to to drive double-digit do business growth. Guess my question. There is a retention are you happy with returns are in and at what point do you think we can start seeing some actually growth and written premium in the ARP business again? Yeah good question. So generally we are pleased with

With the recovery on the retention side over the last couple of years. I still think there's a little bit of left inside that maybe a point a point. Plus there's a lot of shopping activity in the environment overall in personalized.

So we're mindful of that but we're you know, both encouraged with progress and also hopeful that there's more to be had on the retention side relative to new, you know, we have just improved our capabilities off on the desk and where there are people I think enormously over the last couple of years we continue to dial in our marketing activities. So I feel pretty good about that. You saw a 35% plus change for the year in sales. I'm not sure we're going to get their next year with that kind of number, but we certainly expect, you know to be up next year as I described in my script so encouraged by that and and think that as we, you know move through the latter half of 20 and 2:21 will see that growth move into positive stage for AARP direct right? Thank you.

The next question comes from Meijer Shields, please. Go ahead great. Thanks. Good morning. We can personalize I guess looking at the guidance office give it the sense that to the expectations for non cat whether losses on any of your basis.

That do you have the I'm not sure I have that handy Meyer weekend. Let us go back and look at that one and see if we can help.

Okay, that's perfect and then switching over to workers compensation we've seen recently, I guess sometimes of medical inflation and some signs of wage growth at least in broader economic data. Are we seeing any change in severity friends with in your book?

Our book is generally stable. So as we look at our our long-term pics and our severity estimates, I think we're sensing line. Now the last couple of years we probably help perform slightly, but you know as we move forward 20 21, we have not come off our mid single-digits severity pics both medical and to a lesser extent indemnity.

Okay, perfect. Thanks so much. Thank you. Next question comes from

Buckingham research please. Go ahead and send a good morning the two quick follow-up questions. The first question goes back to the discussion on the standard commercial lines. If I look at the old rate on rate was 2.7% in Q4 and you're talking about the loss cost Trends in mid single-digit in primary school and higher next. So if I were to step back, it's the thought process that owned rate will accelerate much faster than what we have seen and hence out pays off the Lost cost or how should that translate into margin expansion from here. Yeah. I think that's the right way to look at it are delivered written pricing in the fourth quarter extending into a gym twenty is going to move north the earn rate increases to get on top of the Lost friends that I described. So yes slightly disappointed that we have not been able to drive more price.

saying I'm talking primarily about

Middle-market business us and so we've been slightly behind which is why you've seen some deterioration in our margins in middle-market. I expect that to turn in twenty-twenty and the expectation is that we've improved our margins as Chris noted essentially on all our lines ex-workers come. In fact, isn't it? I think that the the data that we have is X workers comp for standard commercial which includes small in Middle X workers comp. Our rate increase is actually about 6.4% you know during the quarter, which is that momentum, you know that you talked about building and uh in and it's expected in our execution is going to drive that, you know continuation into 2020 it is it's the 6 and 1/2 is a pretty solid number and actually even a small commercial sex workers comp. We've been at or around the 6% range now for about eight quarters, so encouraged by that steady performance and that's really been a good driver in terms of why I ask

our combined ratio

Underlying and and total have been in very good shape and small and in the second question I had was in the opening remarks you talked about social inflation and you know mentioned it's not a new phenomenon cetera off. If if you were to go back and compare today versus a year ago based on the data you are seeing would you say it's coming in in line with expectations lower than expectations or faster than expectations?

Yeah, I I would say in in line with expectations, you know, there isn't anything outside of Norm that that we see Doug talked about litigation rates and representation rates that may have been you know, generally stable for us, you know over the last three or four years. So, you know, we've had to make some adjustments we didn't get everything right, you know over five six seven year. Here, but I think we're we're on top of it and we're managing the best way we can and being proactive not only looking back at data. But you know, actually I think what what can happen going forward Chris and that's absolutely true for the Hartford book. What I would add on top of that. Is that probably in the excess area. We see a little bit.

more severity

Little bit more social and place than than we expected a year ago. And that's also driving our price increases in the marketplace. So, you know, I didn't expect to be looking at a fourth-quarter in nineteen twelve months prior in the mid-teens, but I think we need it and and as we better understand that book, we're driving the price increases that that need to chase that lost friends. So I feel we're on top of it and you know, please book continues to perform about the way we expected and that's why we did the the reinsurance transaction with National Indemnity on Navigators was the really take that tail risk off until we got our own school year round it. Obviously, we paid a premium, you know for that but I still I still like that trade we did given some of the uncertainty in in the marketplace today on social inflation.

Got it. Thank you for those answers and good luck. Thank you. Next question comes from Mike sort of Credit Suisse, please. Go ahead.

Hey, thanks. First question on group benefits, you know clearly phenomenal results. I'm curious Chris in your prepared remarks. I believe you said your kind of assuming more normalize incidents and Recovery Trends. So in in the 2020 guidance has changed its incident strong recovery assumptions to kind of reflect a an improved trendline or you just kind of thinking last year was more of a anomaly.

Michael that are

I would say Michael that our assumptions and methodologies are are generally consistent over the years, you know, we haven't changed anything and how we think about setting reserves or prep product which generally uses a I call it a mean average approach so that we're not using the most recent. In a in an incidence report. We're taking more of a a five month period of of of time so there is a little bit of mean averaging, you know going in there as far as our assumptions. So but it's it's been consistent between years.

Okay, that that's helpful lastly and I I need to delve more into it but it looks like the catastrophe reinsurance program. Um might be purchasing a little bit more reinsurance. And if that's correct, that could be behind the the cat load guidance coming in a slightly below last year's guidance wage. Is that correct? If so, is there should we be making in any higher underlying loss ratio from The increased spend time? So so a couple of things and I would say relatively speaking or program is is is very consistent. We did purchase down in the aggregate treaty and took her all when we look at the spend for the whole program and and the various changes. We made is really not a significant Delta from the prior year and as far as the cat ratio guide dog

You know being in in total.

And where we came at this year that's not reflective of any changes in the reinsurance program. It's really just looking at underlying exposures and you know as we ran our models and I really I think only slightly down is down slightly from from last year. And that's if I could speak one last one ended you is there you comment on the PG&E whether that refund, uh, is that come through? And if it does that be used towards Capital Management? Thanks. Yeah, so I didn't I did not comment update our comments on on PG&E wage continued to watch as that, uh, activity continues. We have not booked any recovery associated with the plans that are underway, you know will continue to watch what the final program is that comes out of out of bankruptcy. And yeah, I mean overall that any benefits that we received net of what we would have to log

reimburse our reinsurers for would improve the

The capital position in in PNC but I I wouldn't make a direct link to that to an increase in share repurchases. It will just go into the mix relative to capital resources.

And the last question today comes from Michael Phillips of Morgan Stanley, please go ahead.

Good morning. Thanks for Vivian. One more if I could on the outlook on Commercial and from the expense that I I guess there's a lot of moving Parts. I was going to expense ratio, you know, you've talked about commissions Defending Your small commercial doing that ends. If you could talk about that Investments the benefits of which could could occur at some point if you're still making Investments, so talk about the wage order and then Doug mentioned, you know, a some approvals or whatever that happened in this quarter that kind of bumped it up a bit. So I'm not sure the impact on that but as we think about 20 20 on the expense ratio, so I kind of what's a good starting point off of 34 and 1/2 fish looks like maybe for the year-end. Is that a bit high and how do you spell got to move in 2020?

Yeah, Michael, it's Chris.

I would say again the context to the number that I'm going to give you is, you know, we've we've been on a program to invest in in our platform, you know, whether it be a cord technology whether it be digital whether it be product and underwriting. We've been we've been on a journey and we've talked about, you know, sort of elevation in our expense ratio primarily due to do the invest side. I would say where we ended 2019 on a full year basis in that $30 a month to 33 commercial and personal lines together. I'll keep GB separate for the time being is is a good number for next year to maybe slightly. I don't I think we're coming to the point in that long-term program that we we put into place where the the invest dollars are going to begin to slow down once we we finish up to Thursday.

second half of 2020

Heading into Twenty-One. I think you know, we are a larger-scale organization and we're we're a growth orientated firm that will continue to add premium package again properly priced and good business. So all that would point to a particular as we get out into 21 and Beyond they call it a stair step back to a normalized and competitive expense ratio over over time. So but again, we've been deliberate about what we needed to do as an organization. We think of a great value and be competitive long-term and we're not backing away from that but we're we're at the tail end of the program. That's what I would say dog in about

Okay, great. Thank you. That's helpful. And then I guess my last one kind of more higher level in your opening comments. You talked about the momentum and price you were talking about the overall Market. That's just you guys. I believe you were and and I think you said you expected to continue for eighteen to twenty-four months from here. I guess. Hopefully I heard you right if that's the case, what's behind that to you? That's a pretty long extension. And so what do you think is going to keep driving in pricing up for the next two years?

Well, you know getting too.

Ultimately Target ratios that support a an adequate return for the risk the industry's taking, you know, I outlined low interest rates that it's going to it's going to you know be a you know, a little bit of a walk in but if I look at you know product lines and we're we're Compass, you know is headed I mean and and and again from managing a book of business you never really wants check your book of business and and go to a 50% retention rate. So, you know, generally what you try to do is you'll be thoughtful on retentions, but firm and disciplined and work through distribution Partners to talk through the the actions that are going to be required in the near-term in over a longer period of time and I I just think given where we're starting from and give them some of the pressure off.

Social inflation in liability costs Commercial Auto in general. It's going to take two years to get back to the Target margins.

Okay. Thank you very much. I appreciate it.

This concludes our question-and-answer session. I'll now turn the call back to the Susan's be back for closing remarks. Thank you, Alyssa. We appreciate you all joining us today, and please do not hesitate to contact us. If you have any follow-up questions, or if we did not get to your question today. Talk to you on the next call. Thank you. Bye Jeff. Today's conference call. You may now disconnect your lines.