Q3 2020 Hartford Financial Services Group Inc Earnings Call
[music] good morning, and welcome to the Hartford third quarter financial results Conference call. All participants will be in listen only mode should you need assistance. Please signal the conference.
Specialist by pressing star followed by zero after todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Susan Spivak Bernstein.
Senior Vice President Investor Relations. Please go ahead.
Thank you Andrew.
Good morning, and thank you for joining us today for our call and webcast on third quarter Twentytwenty earnings we reported our results yesterday afternoon and posted all the earnings related materials on our website.
For the call today, our speakers are Chris Swift, Chairman and CEO of the Hartford, Doug Elliot President and Beth Constella Chief Financial Officer. Following their prepared remarks, we will have a Q and a period.
Just a few final comments before Chris begins.
Todays 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 materially differ be 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 financial supplement.
Finally, please note that no portion of this conference call may be reproduced or rebroadcast in any form without the Hartford. 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.
Good morning, and thank you for joining us today.
In the third quarter, the Hartford continued to deliver strong results, including core earnings of $527 million.
For $1.46 per diluted share a trailing 12 month core earnings are are we have 12.3%.
5% growth in book value per diluted share excluding AOCI from.
From year end 2019.
These results in the midst of a pandemic and unusually high catastrophes.
Demonstrates the progress of our strategic initiatives.
Growing execution resilience and.
The dedication of our employees to serving our customers and distribution partners.
Today ill.
I'll review the key highlights for the quarter, beginning with the PNC business.
In the third quarter, we saw very encouraging signs on our topline pricing and margins.
First.
The total written premium stabilized goal.
Although down compared to prior year quarter, New business was up substantially from the second quarter.
As for pricing the strong momentum of the last three quarters continued across most lines.
U.S global specialty so the largest increase at 20% and our standard commercial lines was also strong up 8.2% excluding workers compensation.
And finally underlying margins benefited from favorable pricing trends as well as recent actions to improve profitability and efficiency across the platform.
Overall property and casualty underlying margins excluding covered losses.
Improved 4.2 points versus prior year.
The commercial lines underlying margin improved 1.8 points ex covered.
Each of our segments underlying margins were better than the prior year.
Expanded margins reflect strong rate increases in nearly all lines excluding workers comp.
With a stable loss cost trends.
In our standard commercial lines margin improvement also reflected underwriting actions, we began implementing prior to the overall market firming.
In global specialty the ex covered combined ratio for the first nine months of 2020 has improved significantly and is on track to achieve our full year margin improvement goal.
I am very pleased with the team's performance and integration of this business to the Hartford platform.
In personal lines, the underlying combined ratio improved 10.9 points from prior year, which was offset by 15.7 points of catastrophe losses in the quarter.
Cobot incurred losses in the third quarter were 72 million pre tax with $37 million in PMC, primarily from workers' compensation and financial lines.
And the remaining $35 million group benefits.
These losses relate to claims from the third quarter and do not include any increase to previously reported second quarter covered losses or legal expense accrual.
Included in these estimates are the retroactive workers compensation presumptive actions taken in New Jersey, and Connecticut during the quarter.
Catastrophe losses of 229 million pretax were driven by significant storm in wildfire activity during the quarter.
The industry experienced its second highest level of third quarter catastrophe losses since 2005.
However, the hartford's loss impact from these events was less than our market share would imply right.
Reflecting strong risk management and underwriting discipline.
Before turning to our investment results, let me just say that our thoughts are very much with all those dealing with the many challenges posed by this extraordinary year.
Well I believe the events of 2020 have once again highlighted the pivotal role played by the insurance industry in helping businesses individuals and communities recover from catastrophes.
It has also highlighted the inherent limitations of the industry.
There continues to be the need for a healthy public private partnership when it comes to issues like changing weather patterns and pandemics.
As a result, we are committed to working with industry partners and public officials to find sustainable solutions to these challenges that are beyond the capital capacity of the insurance industry.
Turning back to our results net investment income was $492 million up materially from the second quarter driven by contributions from limited partnership investments as valuations improved.
During the quarter, we also made significant progress.
On our Hartford next program.
As you will recall Hartford next is a transformational multi year $500 million program focused on increasing our overall competitiveness.
Initiatives are now underway to improve the effectiveness of our operations, while reducing costs.
Including investing in new automation and improved workflows.
We remain on track to deliver lower run rate expenses.
As previously shared.
Turning to group benefits core earnings for the quarter were $116 million with a 7.9% margin, including 35 million pretax of co with life and short term disability losses.
The disability loss ratio was 65.3 up nine tenths of a point $2 million to $7 million.
Of pretax short term cobot disability losses, and a difficult comparison to the prior year quarter that benefited from more favorable claim recoveries on long term disability.
The underlying performance of our disability book of business remains quite strong with favorable claim recoveries in incidence trends.
We are closely watching long term disability trends in light of elevated unemployment levels.
The life loss ratio of 87.5 increased 6.7 points from the third quarter of 2019 due to covert related losses of 28 million pre tax.
As well as updated reserving assumptions for late reported claims.
On the topline book Persistency remained solid at approximately 90%.
Sales for the quarter were up 81% versus prior year, driven by several national account wins.
Despite strong persistency in sales total premium is down 1.5%.
This decline is due to lower premium on in force cases as businesses reduce their employee base in response to recessionary pressures.
All in from.
From a topline and bottom line perspective, Im very pleased with our group benefits results.
As we move through the final quarter of 2020, this clear that the Hartford's digital journey over the last several years.
Has been an important part of our current success and will be crucial to our future.
Despite operating in a remote environment.
We have been able to maintain outstanding service and support for customers and distribution partners.
Since January we have achieved a significant increase in the adoption of digital tools by customers agents and brokers across our businesses.
Some examples include.
A 60% increase in small commercial endorsements processed online.
A 36% increase in quotes that started online for our.
Personal lines.
And and online completion rate of 71% for premium audits.
In addition for the second year in a row, our small commercial business place first for customer facing digital capabilities in the Canova annual study.
I will close with some comments on the PNC industry hardening price market.
At the beginning of 2020.
At forecasted a firming pricing environment would continue for 18 to 24 months.
I'd now see the potential for a longer runway.
Current market conditions are driving the need for higher rates, even more than a year ago. When the firming first started.
Factors behind the hardening market include.
Social inflation, which remains a very real concern and one we are watching for signs of increased exposure.
Catastrophe losses that remain above average levels as we deal with the ongoing impact of changing weather patterns.
A pandemic that continues to weigh on the economy and threatens human health.
And a prolonged low interest rate environment, putting added pressure on the need for underwriting profits to make up for lost yield.
In spite of the many challenges we face as an industry and a country.
Im optimistic about the Hartford's performance in the coming quarters.
As our results benefit from continued margin improvement.
Innovation that enables us to serve customers better.
And initiatives targeting improved operating efficiencies and expense reductions.
Now I will turn the call over to Doug.
Thank you, Chris and good morning, everyone.
Across our business, we remain focused on the underlying fundamentals, including pricing underwriting and expense management, while we continue to manage the still emerging impacts of the global pandemic.
Multiple catastrophes also provided added challenge to the quarterly results. Nevertheless, progressing levels of economic activity contributed to a much improved top line trajectory during the quarter and we're pleased with the progress achieved on many of our 2020 initiatives as I will comment on this morning.
Overall property and casualty core earnings were $428 million for the quarter and written premium was $3 billion down 3% from prior year.
The underlying combined ratio of 90.6 included $37 million or 1.2 points of covered losses was three points lower than last year.
Excluding covered losses, each of our businesses reported underlying margin improvement.
Before I get into the segment details let me summarize the actions we took this quarter with respect to covered losses cats and prior year development.
In commercial lines incurred cobot underwriting losses of $37 million were down significantly from the second quarter grew.
Gross workers compensation covered losses were $65 million, including a retroactive provision for presumptive coverage in New Jersey and Connecticut.
Offsetting the gross loss was continued non covance specific favorable workers' compensation frequency of $48 million driving a net impact of $17 million.
Financial lines and other losses were $20 million, primarily for Dino and SNL.
Turning to catastrophes, we incurred $229 million in the quarter.
Industry losses were also elevated due in large part to Pacific Coast Wildfires Hurricane Laura try.
Tropical storm essayists, and the Midwest to reach show event.
We have made significant advances in our cat modeling and underwriting capabilities.
For example, we're confident our incurred wildfire losses in the quarter were lower due to specific underwriting actions taken previously.
Over the last two years, we have reduced our overall, California homeowners policy count approximately 17%.
And our footprint in the five costliest wildfires. This season is down 35% over that same time period.
Net favorable prior year development for the quarter was $75 million.
We continue to experience favorable loss emergence in workers compensation small commercial spectrum liability and personal lines auto liability.
US professional liability claim activity is also developing favorably.
Within the navigators business, we increased prior year reserves $14 million, primarily in wholesale construction.
The entire increase was reinsured by the adverse development cover.
Turning now to our business line results.
The commercial lines third quarter underlying combined ratio was 93.7 slightly better than prior year.
Favorable property results and a lower expense ratio were partially offset by 1.6 points for covered losses and a few large marine losses in the international Global specialty book.
Now a few comments about the expense ratio.
First reduced travel and incentive compensation our contributors this year.
Second we're starting to see some modest early wins from our Hartford next transformation program, which will carry into subsequent quarters.
And finally, we continue to benefit from actions, we took this year to reduce acquisition costs.
As I pivot to pricing, we continued to achieve excellent pricing gains for the quarter renewal written pricing in standard commercial lines was 3.7% nearly flat with Q2.
Excluding workers compensation pricing was a solid 8.2% slightly ahead of our strong second quarter.
Layering in us global specialty lines brings ex workers comp commercial lines pricing to approximately 11% for the quarter of very strong result.
In middle market renewal written pricing in the us excluding workers compensation increased 10.3%.
Just over half a point from second quarter, and 440 basis points higher than the third quarter of 2019.
Property general liability and auto pricing are holding steady near or slightly above double digits.
In global specially we're also seeing continued strong pricing gains in both our us wholesale book as well as the international portfolio, which is primarily written in Lloyds.
The us wholesale book achieved 26 points of rate in the third quarter up a point from quarter two.
Auto was in the low teens, while property lines are now in the mid Twentys and excess casualty in the mid Thirtys.
Property and excess casualty are approximately five points higher than last quarter.
Pricing gains in the international portfolio remained steady with very strong results in professional lines energy and cargo.
Let me now share a few more details on our commercial businesses small.
Small commercial posted an underlying combined ratio of 87.77 tenths of a point better than third quarter 2019, when covered losses of a half a point are excluded.
Small commercial written premium was down 1% versus prior year.
Driven by favorable audit premiums. The result was much better than we expected 90 days ago.
GAAP line will continue to be impacted by somewhat lower exposures as a result of cobot impacts on the economy.
Small commercial new business declined 14% versus prior year, yet its up 9% versus the second quarter.
Spectrum, our industry, leading packaged products off 15% sequential growth and record new business in September.
Our new spectrum product delivers insurance coverage recommendations tailored to individual small businesses.
Real time transparent pricing and uses advanced analytics to pre fill underwriting information and classify risks for an unparalleled agent quoting experience I am thrilled with the results in the outstanding feedback received from our agents.
As expected policy retention in small commercial was lower in the quarter largely driven by the billing hold actions from the second quarter.
Premium retention also declined but to a lesser extent as the average premium of cancel policies was lower reflecting the impact of the pandemic on main Street America and the micro segment of small commercial comes.
Combining these past two quarters average policy retention remained strong.
Turning to metal and large commercial we reported an underlying combined ratio of 97.7 in the third quarter 3.5 points better than prior year after excluding covered losses of 1.6 points.
A favorable expense ratio lower non cat property and improved national account losses drove the x. coded margin improvement.
Written premium declined 2% in the quarter, largely driven by the impact of lower insured exposure.
New business in middle market was down 10% versus prior year, but up 32% from the second quarter.
Submission flow hit ratio and average premium in our core middle market book, all improved over second quarter levels.
While retention decline I continue to be pleased with the margin improvement driven by our pricing and underwriting actions.
Moving to global specially written premiums declined 2% in the quarter.
The domestic U.S business grew 5% with solid contributions across most lines, while international written premium declined 23% driven by underwriting actions to improve the profitability of the book.
The underlying combined ratio was 98.2 this quarter 1.6 points better than prior year after excluding covered losses of 3.6 points.
Margin improvement in U.S wholesale and a lower expense ratio were partially offset by $11 million or two points from four large losses in the international Marine book, including the Beirut, and Tilbury Port explosions.
I do not see these losses as a trend rather we expect to incur large losses in this book from time to time.
We continue to be pleased with margin expansion in global specialty year to date, the underlying combined ratio was 100%, including five and a half points for coated losses.
Excluding the impact of coveted we've seen approximately four points of improvement from the second half of 2019 almost entirely coming from the navigators book.
Shifting over to personal lines written premiums declined 5% in the quarter. The result was partly impacted by the ketchup cancellations from the second quarter's Grace period extension along with the continued declines in the agency book.
New business premium declined 10% driven by lower responses, which outweighed an increase in conversion rates right.
Responses were up a very strong 9% in the second quarter. So some of this decline was expected.
Despite lower growth, we had another strong quarter of underwriting results in personal lines auto the underlying combined ratio of 84.9 was 13.9 points better than 2019.
Consistent with the industry frequency continues to run well below prior year. However.
However, due to the demographics of our customer base, our third quarter frequency reduction of plus 20% has been better than industry results. We expect this trend to return to historical levels with the adoption of therapeutics and the introduction of a vaccine targeted for 2021.
And home the underlying combined ratio of 74% was 2.6 points better than prior year, driven predominantly by favorable non cat weather in the quarter.
Before I turn the call over to Beth let me close by saying that I'm encouraged by our momentum on a number of fronts.
After a very challenging second quarter commercial lines, written premium and new business momentum picked up in the third quarter, gaining traction with written premium almost back to prior levels.
Pricing continues to be strong and our underwriting actions across global specialty and middle market books are demonstrating progress.
And our view of loss cost trends for accident year 2020 have not materially changed with continued strong written pricing achieved nearly all lines, except workers compensation, we are clearly exceeding loss cost trends across most of our books, we need improved underwriting performance to offset the continued downward pressure on investment income as Beth will describe.
I look forward to updating you on our progress and results after year end, let me now turn the call over to Beth.
Thank you Doug today Im going to review the third quarter results for the investment portfolio perfect fans and corporate.
Net investment income was $492 million for the quarter, which is about even with the prior year as increased limited partnership returns and higher make whole payment offset declines caused by low interest rates.
At current yield before tax excluding limited partnership with 3.3% down from 3.6% in the third quarter of last year.
We expect the investment yield excluding limited partnerships in the fourth quarter to decline about 20 basis points from the third quarter, reflecting lower yields and short term investments and lower reinvestment rates and no expectations for make whole payments.
During the quarter, we reduced our liquidity level, which represents cash and short term investments adjusted for unsettled trades and securities collateral from approximately 7% to approximately 5.6% of total invested assets at the end of the quarter.
With continued strong cash flow generation, we expect to further reduce liquidity levels targeting 5% by the end of the year.
Credit performance on the portfolio was very strong for the quarter.
We reduced our mortgage loan reserve by 5 million and recognized 1 million of net impairments on fixed maturity.
The net unrealized gain position on the fixed maturity portfolio increased from $2.6 billion before tax at June Thirtyth to $3 billion before tax at September Thirtyth.
Turning to her perfect funds core earnings of $40 million or up 3% from last year. This.
This is primarily due to higher average assets under management combined with lower expenses, largely offset by a decrease in fee income, reflecting a continued shift to lower fee generating funds.
As of September Thirtyth, almost 70% of Hartford fund outperformed peers on a three and five year basis.
At corporate core loss of $57 million in the quarter was 20 million higher than the prior year quarter, primarily due to the impact of the company's retained equity interest in Talcott resolution.
For the quarter, we recorded a $21 million at pre tax loss from Talcott, primarily due to hedge losses experienced in the second quarter driven by strong equity market performance.
In September we received a cash dividend from talcott of $30 million.
As a reminder, in the fourth quarter, we will complete our annual study assesses and environmental reserves.
Under the adverse development cover we purchased in 2016, we have $860 million remaining coverage available for potential future adverse development in these reserves.
As Doug mentioned during the quarter, we seeded 14 million to our adverse development cover for navigators after.
After the session, we have $96 million of coverage remaining under the AIDC.
In September we signed an agreement to sell the navigators legal entities that operate in Continental Europe.
We are very pleased to reach this agreement as the go forward flow focus of our international business is principally in the Lloyd's market.
With this agreement we recognized a loss on sale of 32 million after tax.
Finally, we are executing on our Hartford next initiative.
As a reminder, this program will improve our overall efficiency and achieve annual operating expense savings of approximately 500 million by 2022 contributing to our goal of reducing our 2019 PNC expense ratio by two to two and a half point our group benefits expense ratio by one and a half.
Two points and our loss expense ratio by half a point.
We are very pleased with our execution during the quarter and realized savings from Hereford next slightly above our expectations.
We incurred pre tax restructuring costs at $87 million, which are recognized outside of core, earning including $78 million of accrued severance.
As it relates to the fourth quarter I would expect the PNC expense ratio to be about 31.5, which would be about a two point reduction from the prior fourth quarter, reflecting continuation of the impacts of the current environment. We are operating in as Doug mentioned as well as the impact of Hartford next.
Before moving to Q and I wanted to provide a high level overview of our workers compensation and property reinsurance programs as it relates to cultivate losses.
We have various reinsurance programs to mitigate losses, including an aggregate property cat treaty and excess of loss occurrence based treaties that cover property and workers compensation.
Our workers compensation program provides coverage of 350 million excess of 100 million for losses occurring from a common origin, which occur within a defined period of time, commonly referred to as an hour supplies.
Based on current loss activity, we have not booked a recovery under this program as we believe it is unlikely for coverage to attach.
Our property Cat aggregate program requires a PCR cat designation for events in the U.S.
Since the pandemic caused by Cove. It has not been designated at Tcs event covered losses are not covered by this program.
Our property Cat occurrence program does not require at Tcs designation and does not exclude pandemic.
This program begins attaching for losses in excess of 150 million.
If losses breach our retention, we would have the opportunity for recovery under the terms and conditions of the contract including applicable our closet.
To date, our property losses do not reach this level and accordingly, we have not book any recovery from this program.
Additional details on our reinsurance programs can be found in our form 10-Q.
To recap despite the many challenges in 2020, our results benefited from execution on financial and strategic goals.
Very encouraged by the underlying strength of our businesses and confident that we have the right initiatives in place to continue to deliver on our stated goals.
As per our past practice, we plan to share our outlook of 2021 financial metric in February on our year end earnings call I'll now turn the call over to students. So we can begin the Q and a session. Thank.
Thank you Beth.
About 30 minutes for questions Andrew will take our first question.
Thank you.
First question comes from Michael Phillips of Morgan Stanley. Please go ahead.
Thanks, Good morning, everybody appreciated, Chris and maybe Doug opening comments, you've talked about margin expansion, obviously had some decent amount in commercial lines ex the cold.
Chris Your comments were now with pricing stable loss trends in your underwriting actions before the market started to form.
Has allowed for this and should continue I guess.
When you talk about stable loss trends there Thats helped your margins are you also including what we're seeing from cold with frequency.
And then maybe you can give some thoughts on.
You talked about how it's going to continue in 2021, the level or should this continue the margin expansion and the full year 2021.
And Michael I'll share my views and Doug I know will share his so.
Yes, we feel really good about the execution of various initiatives over the.
Last 12 months and I tried to highlight the impact even prior to covert there were certain aspects of our book of business that we were targeted for underwriting improvement.
Particularly in <unk> and middle market. So.
A lot of those activities started.
Prior to covert I think what we're seeing right now and if you look at the numbers in the <unk> in the third quarter, we had net.
$17 million of cobot impact.
So theres a gross impact and there is a benefit.
And it's relatively minor so right now what we're what at least though we feel in workers comp is.
And on off offsetting impact on.
Uncoated related losses from a frequency benefit of just slower economic activity.
And then as I tried to conclude in mice.
Prepared remarks, Michael.
Low interest rate environment, the social inflation factors that are still out there catastrophes that seem to be elevated the last three or four years to mine.
Metric driven mind.
All points to that we just need to continue to get after and expand underwriting margins.
Earn adequate returns on our capital, but Doug what would you add.
Mike I would just add that it was a core priority of ours. This year to improve our returns and middle market and global specialty for sure. We gave you the underlying X. Covance you could look underneath covet and understand what those changes are and I'm quite pleased that both those businesses, we're seeing real progress we're willing to forego some.
Topline to achieve that initiative and obviously those goals were set pre covert but when I look through cove. It I feel underlying three and a half point improvement in metal and I feel that the navigator book is really improving as we expected. So I'm quite quite pleased by nine months of the year, So far and I would just conclude with.
As Chris and I talked about the forward trends.
We talked a lot about written pricing trends they will earn in the ensuing quarters. So we expect and improving earned premium impact as we go into 21.
Okay. Thanks to book to Bill to you on the second question on the.
You put up about $40 million of legal defense and into Q. It looks like that's still holding in Threeq you I guess as you think about co lid and litigation expense helped how confident are you that that's enough given I guess the spotlight that seems to be on companies like you hopeful global litigation and then.
Any concerns you might have for Europe.
Your exposure should maybe a second third fourth whatever number you want a pick of shutdowns occur in the near term.
Yes.
There's a lot to unpack there so well I'll try.
I would say in our overall coal with.
Litigation posture, we remain very confident in our policy language.
How thats been constructed.
Clarity.
On ambiguous terms that we use and as we sit here today, the $40 million accrual we did not change.
Yes, Thats, a thats established with.
With a mindset that this litigation is going to take some time to fully resolve.
But again were work we're confident.
As it relates to your last point and the question is as far as.
I think cobot impacts in the second waves thirds waves. However, you want to frame it.
That is very real.
And you can see that the beginnings of it right now.
As the winter turns so I would just frame it for you from an economic perspective is that.
The next two quarters are probably going to be a little rough.
From a from an economic side, our forecast would say that we would have about a 3% contraction in economic activity at the end of 20 compared to 19.
But when you then get into 21 compared to 20, we can see a 3.5% to 4% economic expansion.
Quickly as Doug said in his comments as vaccines come onboard as we get more theres more treatments to keep up.
People healthy so I think the trends are all in the right direction.
Michael but.
It's hard to predict what what is really going to happen in the near term.
And Thats, what we are bracing for but Doug what would you add I think that well said, Chris nothing that.
Thank you thank you Chris.
The next question comes from.
At least greenspan of Wells Fargo. Please go ahead.
Hi, Thanks. Good morning. My first question is on the capital side of things you guys have a good amount of capital 1.6 billion holding company.
And an update on thoughts around we are just days on and what you guys are looking for when you contemplate a return to buying back your stock.
Yes, thank you for noticing Elisa and you're right, we have built up excess capital during.
The last seven months.
And again that was partly by design too.
Right.
Deal with any unknowns that might come our way, but as we sit here today I mean, we're still operating in a pandemic environment.
Economic outlook is a little.
Foggy, particularly as it relates to fiscal policy coming out of Congress Congress. So.
I would say, we're just waiting for just slightly little bit more clarity.
And then as we head into 21, and we share our business plans with you on our metric drivers.
We will also update you on our capital management actions.
Okay. That's helpful and then my second question.
Tobey yet.
Little bit more color on the pricing trends that you're seeing within workers comp odd.
Decreases that you are seeing there still valid meeting I think you alluded to that last quarter and then can you give us a sense of how the app the app linear.
Year to date on this year compared to 2019.
Yes, let me start with the first part of that lease. So when we think about color on pricing trends I would start by saying that there really isn't anything in the quarter that surprised us.
Our middle market workers comp.
Quarter to quarter pricing trends were about flat second quarter to third quarter and.
And we saw a little bit of deterioration about a point on the workers comp small commercial book keeping.
Keeping in mind that small commercial as I said in the past is less subject to underwriter actions, it's more slot rated and it's in that small negative single digits and our expectation zone for 2020, so not surprised by anything that happened in the quarter. This is not a lease as you know a new story the negative trends were.
Deeper slightly deeper last year, and we expected to face into these headwinds on the pricing side with comp now and we're spending a lot of time thinking about the next several quarters as we and others get ready to make our filings in the various states on the workers compensation line. So thats my color on workers comp I don't think it was a.
Big News story in the quarter from my end.
Relative to margins.
I guess I would say two things there are lot of underwriting activities happening in the middle So the middle underwriting story is a combination of underwriting and pricing and and there I think we feel pretty good about where we are and I don't see any compression in our middle market. In fact, you know optimistic that we'll see improvement in small commercial we said to you.
The beginning of the year, we forecasted 2020, we expect expected small compression pressure.
Pressure and we're seeing that slightly although you know 2020 has got so many moving parts because of Covance. So we've tried to look through them and when I give you that margin component pressure I am really looking through cobot, because as you know we're seeing very site very positive signs of favorable frequency from covance. So there are a lot of things happening with workers.
We're spending a lot of time on the issue I feel like our team is all over it by state by geography by class.
But there isn't anything happening in our loss trends right now that we would say would be surprising sure like we're on top of it.
Okay. Thanks, Thanks, Doug Thank you Alex.
Sure.
The next question comes from Josh Shanker of Bank of America. Please go ahead.
Yep. Thank you very much for taking my question. This morning, I want to put on the leases thoughtful little bit.
Workers comp is more regulated than a lot of other lines of business, but also workers comp is probably more interest rate sensitive than other lines of business and obviously thats a huge driver whats going on right now can you talk a little about the process of.
Getting rate approvals and workers comp.
It's been six months since the big decline in interest rates.
To us and our regulators responsive to that to what kind of is there a lag in workers comp pricing changes were southern lines, how should we think about 2021 and the way regulators think about interest rates.
Sure Josh.
I'd start by saying that right now the industry over the past several months and extending forward is in the middle of.
Filing working on rate changes for workers comp for 2021, I would remind you that much of the experience base for those filings would be 2019 right. We're we're working a year interiors and 29 team was a very good year from the industry. So on one side you have a pretty solid year underlying net.
This year's pricing expectations on the other as you described no question. There has been a change in the yield curve and all companies like ourselves are factoring that in so you have competing forces and then I might add these are very state specific so all of us have our loss experience in the state that we're looking at overall industry experience our loss experience trying to.
Factor all that in.
And now we have a a new dynamic obviously with covered that will enter the picture as we move over the next several quarters. So a lot happening in the workers comp line a lot happening in states relative to presumption not all states have taken presumptive activity, but.
That is basically the way the process works.
And then switching gears personal line.
Theres, obviously state farms now can be price cuts. There is other large competitors cutting you haven't grown in personal lines in a long time certainly on policy count.
You would think about the next year or two how do we see a path for Hartford to stabilize it.
Drip of all declining policy numbers, and what sort of strategies can hard for use.
Maybe even grow that business a little bit.
Josh Thanks for the question I would anchored on our ERP, obviously relationship were.
90% of our business comes from and our renewed contracts are renewed terms and conditions with them plus our commitment to to build a modern play.
Platform chassis to help grow that business for their benefit and our benefits. So.
Yeah, we've been at it I would say quite hard for the last 12 to 15 months, we start to rollout.
Our home and auto product in early 21 on the new platform.
Got a number of states that have fast follow after that so.
Yes, we are we are thinking dramatically different about the marketplace.
Thinking about digital thinking about telematics, and really just modernizing our auto and home offering but.
That's what I would say Doug would you add anything I think thats good Chris.
All right.
Good luck with that.
Thanks, Josh.
The next question comes from Brian Meredith of GBS. Please go ahead.
Yes, Thanks, a couple ones here for you.
First one I'm just curious where are we with respect to the some of the re underwriting actions going on with the mold Navigators book clearly.
Clearly still causing some pressures on topline and and is that at all impacting your ability to take advantage of this pretty.
Pretty terrific pricing environment, where a lot of color CNS specialty players are seeing really substantial growth.
Yes, Brian we are well through what I would say round one so clearly into 12 13 14 months of that progression secondly, I do not think that our underwriting activities our standing in the way of what were able to achieve on pricing advances for customers that we intend to retain for long periods of time, they just needed to.
From price level, and very pleased that were able to achieve that and then lastly, I think its well known but I was just going to stay that there are profit pressures.
Within many of the Lloyd's syndicates and our syndicate is clearly not performed to our objective and so we've taken.
Appropriate actions to get our margins back where they need to be and yes that has meant that we've had more topline pressure than probably we had hoped but im encouraged that our our bottom line margin performance will be much improved and yes, we will take advantage of the pricing dynamic because the market needs that those products demand it and we're going to achieve it.
Got you, but as far as new business outlook there.
Probably not really good for at least the near term, which you could do to these nexus I would say that we are actively involved in the new business now it has to fit our profile on our activity. So you know we've made some choices to move away from some of the other European countries and we've moved away from some classes that we just do not see a way toward profitability, but in our.
Core professional marine lines.
And others, Brian we are open for business and I think you will see further growth as we get out behind this re underwriting process that is largely behind us.
Great and then.
Pivoting over to group benefits.
The margins there continued to be X cobot stellar.
How much of that do you think this is the environment. We're in right now kind of have you kind of re thought with kind of a normalized core margin in that business kind of because it looks like.
Brian Yes, it's good.
It is it is good it's a good margin.
If you really look through kovats comp.
Comparable to maybe slightly up compared to last the last quarter.
I, just really remind you we did guide to 6.5% to 7% margin. This year I still I still think that's a good long term.
Anchor point for a margin on this business that equates into a strong returns on capital.
So.
Thats, what I would say we're at right now.
It feels good that were.
Printing the numbers we are but.
There's there's pressures of building predicted from a competitive side I could feel right now.
Okay. Okay, great. Thank you.
The next question comes from Meyer.
W. Please go ahead.
Yep. Thanks, Beth I was hoping you could look over core share your thoughts on.
Positives and negatives with regard to reinsurance coverage over the course of 2020 liquid parts worked.
As expected to what parts Didnt.
Okay.
Yes, I would characterize that overall, our reinsurance programs have worked exactly as designed and exactly for the coverage is that that we were looking on to mitigate risk and so on.
Yes, there is nothing that I would point to that that would say that are on contracts are not in line with our expectations.
Okay. So can I, except from that that you don't anticipate major changes going into 2021.
I think we're still right now obviously in a process of looking at those renewals that structurally in the way that the program is designed and the types of exposures that were looking to Medicaid I would expect it to be very consistent.
Okay. Thanks, and then more.
More I think of a philosophical question than anything else.
But.
Chris you've been very consistent and your confidence in defenses against B, How do you reserve for the likelihood that some courts are going to make that decision.
So yes, we as we said in the in the second quarter, we did not put any specific reserves up so we.
We think the policy language as I said is this clears on ambiguous and we're going to defend ourselves so.
We'll have to see how things play out over a longer period of time, Unfortunately, where I've spent so many so many hours with our lawyers.
Reviewing strategy and approach and.
I wish there was a quick fix to any other sort of get ready for this.
Overhang, but that's just not the way our legal systems work.
And just going to have to be a little patience as we work through the.
This this litigation.
Litigation environment I mean.
We're still very early in this and.
It's going to take time.
Okay understood. Thanks, so much.
The next question comes from you are on hold.
Goldman Sachs. Please go ahead.
Hi, good morning.
Couple of questions, one with regards to group benefits.
We're hitting the 180 day, Mark I think now from from when the crisis the corporate crisis began.
Do you do you expect to start seeing some long term disability.
Coming in over the next quarter or two and maybe maybe you could talk about it the.
The magnitude of those relative to what we've seen in short term disability so far.
Yes, and as we said in our prepared marks trended.
The trends both on recoveries, which is important plus obviously new incidents remains strong.
You're right that the first quarter of an essence earned premium on Ltd is coming out of that 180 day elimination period and is as I said before we don't see any new trends emerging at this point in time it's.
It's only obviously one quarter, but.
Yes, you can see in the data a slight to modest increase in incidences that were just watching closely at this point in time, but I'm.
Im not here, saying, we've declared a new trend, but its just clearly a watch area.
Okay. Thanks.
Thank you and then I was curious if you can response here.
To John's question earlier with regards to beat the personal lines business. I think you mentioned that you are looking into it did.
Digital and telematics.
And I guess intuitively I I didn't think that that would necessarily be.
An area that though.
Would necessarily be.
I guess, most conducive to the RFP Mike if.
Fuel.
So I'm just curious how you're thinking about that and what do you think the take up rate would be on digital.
Hi distribution and on telematics for for the the ERP market.
Darren.
Hey, RP Hartford customer you called me digital not in not naive.
And in all honesty, it's it's a changing trend and as part of our joint strategy.
I'll, let Doug.
Add his commentary ERP does want to grow in the 50 to 65 year old a call. It mature segment, we want to grow with them in that side of the marketplace.
And.
Digital mobile telephone.
Telematics is all part of the future.
From a number of different perspectives, obviously easy.
There's some concerns about using credit in underwriting in the future that some regulators are are bringing up and then obviously.
Obviously <unk>.
Combing the cobot environment I think is as taught us a lesson of sort of.
Now you can have more on demand insurance in this space. So it's all part of our strategy to modernize.
That that platform going forward.
Okay appreciate the color.
You want to retract call me old.
Absolutely.
Okay.
The next question comes from Jimmy Buhler.
Morgan. Please go ahead.
Hi, Good morning, So first a question maybe for Chris but or Doug.
On.
We are acquisitions, Paul and Neil will hold blend on.
Capital deployment. There is one of your competitors, that's trying to sort of sell and affinity block Oh personal lines affinity block. So its acquisition something that youre interested in.
Globally, and then secondly on group benefits what are you seeing in terms of consistency both at the gates level and more importantly at the client level and growth and your outlook for premiums given.
Hi, unemployment.
Sure.
And Jimmy on the first one what I would say is M&A is a low priority for us right now.
We you know we have I would say 50% of the integration activities at navigators completed at this point in time, we need to finish that up.
I think there are wonderful organic growth opportunities that we're focused on with our excess capital and as I as I had alluded to and when we talk about capital management. The early 21, I think it's up.
Due to full time to be buying our shares back, particularly.
In relation to intrinsic value, so I put it all together and.
M&A is just a low priority is politically that I think the opportunity you referring to.
Is the mass market personal lines opportunity and that doesnt fit our profile to allocate incremental capital to at this point in time.
As it relates to GB persistency as I said in my prepared remarks, I am generally pleased.
Within the persistency, that's about 90% through that through the year.
So overall I'll call it account persistency as good but if the trend that we are seeing and it just happens.
Automatically is that monthly payroll payrolls are coming down in all segments, whether it be national accounts or their middle market or smaller end of priority accounts.
With unemployment.
Going up in a shock fashion people are reducing premiums and that's what created most of the drag that we that we've seen but.
Persistency new business activities are returning to normal levels, although slightly down so.
That's what I would share with you Jamie.
Thank you.
The next question comes from David.
Welcome Nathan from Evercore ISI. Please go ahead.
Hey, good morning.
Yeah.
A follow up question.
On commercial lines, if I look at the accident year loss ratio ex cat.
And I take Colgate out I it was around 59%.
This quarter.
That was up from second quarter, but still down.
40 to 40 to 50 basis points year over year.
Im just wondering.
Did you guys benefit at all from any favorable frequency on casualty lines X. Workers' comp are you guys still holding your picks steady there.
David we are largely holding our casualty pick steady there we want to see the maturity inside those trend lines and as such we feel like those years 2020 action years still immature and our deeper casualty lines.
Got it that makes sense and so just thinking about going forward is 40 to 50 basis points year over year improvement in.
Sort of underlying loss ratio, a good baseline or or how we should think about.
2021.
I would say that we are going to help you a lot more with that question in 90 days.
Part of the reason I say that is there's so many different stories inside commercial lines and we've got a roll. It back up there are there are lines, where our pricing on a written basis are several hundred basis points ahead of loss trend there are lines, where it's tighter and so as we get a better look at in terms of what fourth quarter is all about and we kind of pull together our final details with 2021.
Plans, we will share that with you, but we are clearly leaning into.
Margin improvement next year relative to these lines were achieving strong pricing gains.
Okay got it that makes sense Thats fair and if I could just just my second question.
On small commercial.
The topline was.
More resilient than what I would have thought there so that's great to see.
It sounded like the loss accounts were lower premium accounts, but im just wondering if you can expand on anything else that that help the top line, there and maybe how you're thinking about small commercial topline going forward.
Yes. Good question, let me do two things with that and then we.
We can go wherever you want to go first thing I would say is that.
We have adjusted our underwriting strategy over these past eight months when coveted hit.
We certainly increased our referral activity referral to underwriter activity, taking away some of the abilities of csrs to quote us and bind us online and that definitely had an impact on the top line over the course of the last eight months, we've modified that as we've learned more about the virus and we work that through our underwriting protocols.
And as such I think thats, given us a little bit of punch positive punch on the backside of Q3, so I'd start there so.
Secondly, as you look at our supplement on page 14, where we give you some in depth detail with retention.
We've tried to describe for folks that as you look at the pit for attention, particularly with small commercial we were benefiting in second quarter, because essentially we had cancellation holds on all those accounts that were non paying because of our moratorium.
And as they lifted during the month of June into July depending upon state.
We saw the impact downward in the third quarter. So if you put Q2 and Q3 together you look at a PPIF retention thats really stable throughout the year and very consistent with prior years.
The same impact is going on with premium retention. So this is a dollar retention and again lots of things are happening in Q2, but were feeling a little bit of the exposure pressure from payroll down in our 82 accounts and I am looking at small commercial in Q3 in the shop. So.
I look at the fundamentals underneath this ISS supplement that we share as very solid and very encouraging as I shared momentum as we closed out Q3 and jump into Q3, Q4, I'd say that all with the caveat as Chris described that we don't control what happens in the cobot pandemic economic environment, but I feel real.
Hi, good about our engine I feel like our product, particularly on the spectrum side is well understood and now fully appreciated with the digital capabilities and I'm pretty bullish about where we're going to go in small subject to challenges headwinds or the environment, we face into.
Got it that's helpful color. Thanks, a lot Doug you.
Got it.
This concludes our question and answer session I would like to turn the conference back over to Susan Spivak Bernstein for any closing remarks. Thank.
Thank you Andrea we appreciate you joining us and please do not hesitate to contact me. If you have any follow up questions. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yes.
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