Q3 2021 Hartford Financial Services Group Inc Earnings Call
Good day and welcome to the Hartford's third quarter 2021 financial results webcast and conference call all participants will be in a listen only mode.
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Your question. Please press Star then two please note. This event is being recorded I would now like turn the conference over to Susan Spivak. Please go ahead.
Thank you good morning, and thank you all for joining us today for our call and webcast on third quarter 2021 earnings yesterday, we reported results and posted all of the earnings related materials on our website for the call today, our speakers are Chris Swift, Chairman and CEO of the Hartford, Beth Costello Chief financial.
Officer, and Doug Elliot President.
Following their prepared remarks, we will have a Q&A period, just to find a few final comments before Chris begins.
Days call includes forward looking statements as defined under the private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and actual results could be materially different we do not assume any obligation to update information or forward looking statements provided.
On this call investors should also consider the risks and uncertainties that could cause actual results to differ from these statements. A detailed description of those risks and uncertainties can be found in our SEC filings.
Our commentary today includes 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 call can be produced or rebroadcast in any form without the hartford's prior written consent.
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.
Thank you for joining us this morning.
Once again, our outstanding underwriting capabilities and consistent execution on strategic initiatives.
Comes increasingly evident with each quarterly earnings report.
It reinforces my confidence about the future for the Hartford.
In the third quarter, we reported core earnings of $442 million or $1 26 per diluted share.
Percent growth in year over year diluted book value per share excluding a OCI.
And a trailing 12 month core earnings ROE of 12, 5%.
We returned $634 million to shareholders in the quarter from share repurchases and common dividends.
And one 6 billion for the nine months ended September 30th.
The confidence we have in our business is also evidenced by the announcements that we have increased our share repurchase program by $500 million, bringing the total authorization to $3 billion through the end of 2022.
And we increased our quarterly dividend by 10% payable in January of 2022.
With strong cash flow generation, we will continue to have a balanced capital deployment approach to support growth and investments in the business as well.
With capital return to shareholders.
Looking through to the underlying results the positive momentum continued with written premium growth margin expansion operating efficiencies and a significant return on alternative investments.
However results were impacted by Hurricane Idaho.
<unk> related excess mortality in group benefits and the Boy Scouts of America settlement.
Commercial lines reported stellar margins with an industry, leading 87.2 underlying combined ratio.
Another double digit topline growth.
Reflecting higher new business levels continued strong retention.
Solid renewal price increases.
Our teams continue to execute exceptionally well.
In personal lines, we are in.
In the midst of a transformation to provide a more contemporary experience and product.
Through a modernized platform in partnership with AARP, one of the largest affinity groups in America, we see the opportunity to capitalize on the growth in the mature market segment.
Is this demographic is expected to grow three times as fast as the rest of the U S population over the next decade.
I am pleased with the progress being made with the introduction of the new platform and Doug will provide more commentary.
Additionally, in the quarter, we entered into a new agreement in principle with the Boy Scouts of America.
This agreement now includes not only the BSA, but local council's and representatives of the majority of sexual abuse claimants.
We have now been asked to officially vote on the BSA bankruptcy plan.
The Hartford settlement becomes final upon the occurrence of certain conditions, which we expect to occur in early 2022.
Now turning to group benefits core earnings for the quarter were $19 million, reflecting elevated life in short term disability claims.
Partially offset by strong investment returns.
Improved long term disability results in earned premium growth.
Throughout the year, we have been reporting earned premium growth over prior year and this quarter's positive trends continues.
Fully insured ongoing premium is up 4%.
This reflects growth in our in force book and continued strong sales and persistency.
Persistency was above 90% and increased approximately one point over prior year.
The group life industry has been impacted by excess mortality over the past six quarters.
During our July earnings calls, we were optimistic that trends would lead to an improvement in COVID-19 related mortality.
Our optimism was short lived as the number of U S deaths started increasing in August due to the Delta variant and continued through September.
As of this week U S COVID-19 deaths for the third quarter now exceeded 112000.
And this number is likely to continue to increase in the weeks ahead due to reporting lags in the data.
The rapid increase in Covid deaths in the third quarter drove elevated mortality in our book of business and across the industry.
Additionally, the mortality experience from the Delta Serge.
A higher percentage impact on the under 65 population compared to prior periods.
Approximately 40% of U S reported COVID-19 deaths in August and September.
We're of individuals under age 65, compared to approximately 20% of co with US in December of 2020 in January of 2021.
Since younger age cohorts tend to carry higher face amounts the.
The combination of increased deaths.
And higher amounts of insured values.
<unk> in a significant increase in total dollar levels of mortality claims.
In addition.
We experienced higher levels of non COVID-19 excess mortality during the quarter, representing approximately 30% of reported excess mortality loss.
This is directionally consistent with the broader U S trends.
Elevated non mortality in the third quarter.
As we look to the fourth quarter.
Casting excess mortality mortality is a challenge.
What we do know is that vaccinations are savings lives.
And higher levels of vaccination rates should help mitigate mortality claims.
Bottom line the fundamentals across the group benefits business remained solid.
We are confident and optimistic about our performance in the future.
Turning to the economic backdrop while.
While there are conflicting signals I remain encouraged on the 'twenty two macro economic outlook and believe the environment will be one in which the hartford's businesses performed well.
Headline inflation remains elevated but core inflation is on the decline.
I do not expect inflationary pressures to go away overnight.
The focus of global governments, and the private sector on supply chain solutions as well as the normalization of hard hit pandemic sectors.
It causes me to believe in Flushing inflationary pressure will begin to ease in the second half of 2022.
Well.
Employment gains stalled in the last couple of months as the U S was impacted by the Delta Serge.
Explanations rates therapeutics and growing levels of natural immunity provide confidence that COVID-19 will become less of a deterrent for individuals to seek employment and return to the workforce.
Unemployment is expected to continue a downward trend as borders increasingly reopen.
And pandemic related benefits fully roll off.
This bodes well for the Hartford's business mix.
As I reflect on my tenure with the Hartford.
I am extremely proud of the progress we've made.
Over the years, we've fixed core businesses.
Exhibited underperforming or noncore segments.
<unk> integrated the new operations, we added.
Positioning the company to capture even more opportunities in the marketplace going forward.
This is a direct result of our performance driven culture and a significant investments we have made to transform the organization into one with exceptional underwriting tools and expertise.
Expanded product depth and breadth.
And industry, leading digital capabilities.
Complimented by a talented and dedicated employee base.
However, the journey is not complete.
We will continue investing for the long term to become an even more differentiated competitor in the customer experience.
All while producing superior financial results.
At our November 16th Investor Conference and look forward to sharing how the business is positioned for continued outperformance.
Highlighting the talented senior leadership team.
With a high quality franchise growing revenues strong margins prudent capital management.
I am very confident that the Hartford has never been better positioned to continue to deliver on our financial objectives and enhance value for all stakeholders.
Now I'll turn the call over to Beth.
Thank you Chris.
Core earnings for the quarter of $442 million or $1.26 per diluted share reflects excellent investment results with a 40% annualized return Unlevered and partnership investments and continued strong underlying result.
By $300 million of catastrophe losses of 200 million from Hurricane Ida an excess mortality of $212 million in group benefits.
In P&C underlying combined ratio of 88, three improved two three points from the third quarter of 2020 highlighted by excellent performance in our commercial lines segment.
In commercial lines, we produced an underlying combined ratio of 87 point to a six five point improvement from the third quarter of 2020, and 15% written premium growth for the second consecutive quarter.
In personal lines and underlying combined ratio of 91, eight compared to 81 four in the prior year quarter, which reflects higher auto claim frequency from increased miles driven and higher severity.
Doug will provide more detail on these results in commercial and personal lines in a moment.
P&C prior accident year Reserve development within core earnings was a net unfavorable $62 million driven by the new settlement agreement with DSA, partially offset by reserve reductions of $75 million, including decreases in workers compensation personal auto liability package business and bond.
In the quarter, we seeded an additional $28 million of navigators reserves to the adverse development cover primarily related to wholesale construction.
Although these losses are economically ceded reserve development resulted in a deferred gain representing a charge against net income in the quarter.
Group benefits core earnings of $19 million decrease from $116 million in third quarter, 2020, largely driven by higher excess mortality losses, and replace partially offset by increase in net investment income.
All cause excess mortality in the quarter with $212 million before tax which includes 230 triple development from prior periods.
Predominantly from the second quarter of 2021.
The percentage of excess mortality.
Not specifically attributed to a COVID-19 cause of loss is more significant this quarter than it has been in the past and represents approximately 30% of the total.
Excluding rocket from short term disability related to COVID-19, and excess mortality a core earnings margin was 12, 6%.
The underlying trends in disability remained positive with lower long term disability claim incidence and stronger recoveries related to prior year reserves.
The disability loss ratio in this years quarter was $3 one point higher at the prior year loss ratio benefited from favorable short term disability claim frequency due to fewer elective medical procedures. During the early stages of the pandemic.
As Chris commented the incidence of excess mortality claims going forward, it's hard to predict as it is dependent on a number of factors, including the vaccine vaccination rate the potential spread of new COVID-19 variance the percentage of those and in fact, it who are in the workforce and the strain on the health care system impact in the treatment of non Covid related.
Chronic illnesses.
Improving operating efficiencies and a lower expense ratio from Hereford Max have contributed to margin expansion.
The program delivered $306 million in pre tax expense savings in the nine months ended September 32021, compared to the same period in 2019.
We continue to expect full year pre tax savings of approximately $540 million in 2022 and $625 million in 2023.
Turning to Hartford funds core earnings for the quarter were $58 million compared with 40 million for the prior year period, reflecting the impact of daily average AUM increasing 27%.
Total AUM at September 30 was 152 billion.
Actual fund net inflows.
That was approximately 300 million compared with net outflows of $1 3 billion in third quarter 2020.
Hartford funds continues to produce excellent returns with growth in assets and 45% since 2018.
Yeah.
The corporate core loss was lower at $47 million compared to a loss of $57 million in the prior year quarter, primarily due to a $21 million before tax loss in third quarter 2020 from the equity interest in Talcott resolution, which was sold earlier in 2021.
Turning to investments our investment portfolio delivered another outstanding quarter of results.
Net investment income was 615 million up 32% from the prior year quarter benefiting from very strong annualized limited partnership return of 40% driven by higher valuations and cash distributions within private equity funds and sales of underlying investments in real estate.
Limited partnership returns continue to exceed expectations.
We continue to manage them.
The investment portfolio with a focus on high quality public investments, while leveraging our capabilities to take advantage of attractive private market opportunities.
The total annualized portfolio yield excluding limited partnerships was 3% before tax compared to three 3% in the third quarter of 2020, reflecting a lower interest rate environment.
We expect pressure on the portfolio yield to continue in the fourth quarter.
The portfolio credit quality remains strong with no credit losses on fixed maturities in the quarter.
Net unrealized gains on fixed maturities before tax or $2 5 billion at September 30th down from $2 8 billion at June 30th due to higher interest rates and wider credit spreads.
Book value per diluted share, excluding a OCI rose, 8% since September 32020 to $49 64.
And our trailing 12 month core earnings ROE was 12, 5%.
During the quarter, the Hartford returned 634 million to shareholders, including $511 million of share repurchases and $123 million in common dividends paid.
Yesterday, the board approved a 10% increase in the current dividend and increase our share repurchase authorization by $500 million.
With this increase and the $1 2 billion of repurchases completed through September 30th.
Named $1 8 billion of share repurchase authorization and a fact through 2022.
From October one through October 27, we repurchased approximately one 5 million common shares for $108 million.
Cash and investments at the holding company were $2 1 billion as of September 30th which includes the proceeds from our September issuance of $600 million of two 9% senior notes.
These proceeds will be used to repay our 600 million seven 875% junior subordinated debentures, which are redeemable at par on or after April 15th 2022.
During the third quarter, we received 443 million in dividends from subsidiaries and expect approximately $445 million in the fourth quarter.
With top line growth improving underlying margins operating efficiencies strong cash flow and ongoing capital management, we are positioned to consistently generate market, leading returns and enhanced value creation for shareholders.
Now I'll turn the call over to Doug.
Thanks, Pat and good morning, everyone.
Across property and casualty I continue to be extremely pleased with our execution and performance.
In the quarter the underlying combined ratio was an outstanding $88 three <unk>.
Commercial lines achieved double digit written premium growth for the second consecutive quarter.
Britain pricing remains strong largely consistent with second quarter, and our new personal lines product launch is accelerating with five new states rolled out in October.
As Beth mentioned commercial lines produced a terrific underlying combined ratio of 87 point to with over five points of improvement coming from the loss ratio and another point from expenses.
I've been doing these calls for a long time and this is one of the stronger.
Underlying quarters I have presented.
Before providing more color on commercial pricing and loss trends, let me spend a few minutes detailing another quarter of exceptional top line performance.
<unk> commercial written premium of just as anticipated we continue to benefit.
From an improved economy with increases in payroll and wages.
So the quarter's topline result.
Small commercial new business of $165 million was up 28%.
Fourth consecutive quarter of double digit growth.
Our workers' compensation and market, leading BOP product spectrum contributed equally to the result.
I'm, particularly pleased with the growth we're achieving across each of our small commercial distribution channels, new business from agents payroll programs alliances and direct all delivered double digit growth and will meaningfully contribute to continued topline performance.
Breadth and depth of this distribution balance is unmatched by competitors.
In middle and large commercial we produced our second consecutive.
Excellent quarter with written premium growth of 18%.
Middle market, New business of 139 million was up 6% in the quarter driven in large part by our industry.
Three verticals.
Policy retention increased 8% or eight points to 87% one of the strongest retention quarters in quite some time.
We continue to balance the rate and retention trade off while maintaining disciplined underwriting and leveraging our segmentation tools to drive profitable growth.
Global specialty produced another strong quarter with written premium growth of 14% new business growth of 26% was equally impressive and retention remains strong in the mid eighties.
In the quarter the breadth of our written premium growth was led by 14% in wholesale and 19% in U S financial lines.
Mobile reinsurance also had an excellent quarter with written premium growth of 39%.
Execution to fully leverage our expanded product portfolio. These past two years has been excellent across our franchise.
Especially in middle and large commercial.
It was $15 million.
With this result, we have now exceeded our initial transaction goal of $200 million more than a year early.
After years of development, our product portfolio has become a competitive strength and our execution will only get stronger.
Let's move to pricing metrics.
USDA entered commercial lines pricing, excluding workers' compensation was six 5% consistent with the second quarter.
Middle market ex workers' compensation price change of eight 1% was essentially flat to quarter, two and continues to exceed loss cost trend.
In standard commercial workers' compensation renewal written pricing was in line with quarter two at one 2%.
Global specialty renewal written price remains strong in the U S at 10% and international at 17%.
Turning to commercial loss trends are casualty current accident year loss ratios are in line with expectations was.
It was a pretty quiet non cat weather quarter in small commercial property.
In addition, we continue to monitor the adverse impacts of supply chain disruptions on loss costs and.
I would expect property severity trends to be elevated for the rest of the year and into 2022.
Earned pricing is still exceeding loss trends within most lines and we remain confident in our full year 2021 loss ratio expectations.
Before I move to personal lines, let me comment on the commercial pricing environment over the past two to three years.
No question, we've experienced a healthy pricing environment and in several lines one of the hardest markets I've experienced the.
The combination of these rate actions and disciplined underwriting decisions are central drivers of our strong performance continued.
Continued pressure from weather supply chain and inflation lead me to believe that the current pricing environment will remain healthy well into 2022.
Moving to personal lines, the third quarter underlying combined ratio rose 10, four points to 91 eight.
Auto frequency is up with increasing vehicle trips and miles traveled but still modestly below pre pandemic levels.
Auto severity is elevated driven in part by the rising cost of used cars.
Parts and labor these.
These inflationary factors will continue to be in.
Industry headwinds as we expect them to persist into 2022.
In home, we continue to experience favorable frequency versus our initial expectations.
More than offsetting higher claims severity from elevated building.
Material and labor costs.
Turning to the top line written premium declined 2%.
Policy retention was relatively stable at 84% and new business premium was up 6% in the quarter.
This new business uptick occurred this growth was driven by higher marketing spend and improved conversion rates I am pleased with this quarter's momentum.
We're also encouraged by the early results from the launch of our new contemporary personal lines auto and home products prevail.
Through the third quarter written premium responses expectations. Both products are now available in seven states launch in early October we also.
So enhanced our auto and home bundling and telematics capabilities.
On the latter.
Excited to be partnering with the industry leader, Cambridge Mobile telematics. This is an important change as we continue to argue.
Augment our models based on driving behavior.
The prevail product will be in two more states over the next 90 days.
Before turning the call back to Susan for Q&A, Let me conclude.
Strong pricing is earning into the.
Brook, driving lower current accident year loss ratios.
Global especially is delivering strong execution.
And in underwriting performance and we continue to be excited about the launch.
Launch of prevail in personal lines.
We're clearly seeing the positive results of our multiyear road map with deeper and broader products improve risk selection and outstanding execution.
This quarter is another demonstration of those capabilities.
Our technology invest agenda has been significant and the results are clear and sustainable.
Thrilled with our continued progress and look forward to sharing more details with our business heads and the November at Investor Day, Let me now turn the call back over to Susan.
Yes.
Thank you, we'll now take questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our Ross.
Our first question will come from Elyse Greenspan with Wells Fargo. Please go ahead.
Hi, Thanks, good morning.
My first question is on the incremental $5 million buyback.
The two year capital plans, so is that expected to come thank you.
For next year, and then is that being funded.
Just with higher dividend, the holdco or Hugh.
Holding a little bit less of a buffer or maybe a combination of both.
Lisa I'll start and then I'll ask Beth to add her.
Commentary so yes, as we sit here today, it's a sign of obviously the increased confidence in our business performance, our cash generation capabilities coming out of our <unk>.
It will eventually flow.
The holding company.
Haven't relaxed any of our standards as far as a holdco liquidity, we still want to hold generally one times.
Interest in the future interest and dividends, but it's more as we sit here today and look at the performance of our businesses here in 'twenty, one heading into 'twenty two.
We're highly confident in their performance and we took the action we did but that's what would you add.
Yes, so what I would add is you know as we.
Think about the timing of the share repurchases. If you recall under the $2 5 billion of authorization. We had said that we anticipated 1 billion five in 'twenty, one with a $1 billion in 2022, so increasing by $500 million.
It gives us the opportunity in 'twenty two to be relatively consistent with 21, so not looking to significantly change the timing of it later already laid out for 'twenty one.
But again as Chris said as we look at underlying business performance and levels of capital at the holding company and we felt this was the appropriate action.
Thanks, and then my second question.
Within your App stickier underlying loss ratio improvement within commercial how much pain.
Right.
Friend.
You can stay in your commercial book and then can you update us on what you're assuming for loss trends across the promotional Balkan has that changed recently.
Sure. So let me start and Beth will still around the edges for sure. So as I mentioned over five points of commercial loss improvement you've got to adjust for Covid right. So COVID-19 is appointed.
A point and a half of that change year over year, but then across our core lines essentially all of our lines are earning in.
Positive rate and so as I think about that the adjustments and the variables that drive those changes.
Are all coming from that positive earned rate change so.
I think it's sustainable as we look into the fourth quarter.
We had a little bit of good news on non cat weather property, primarily in small commercial but the other lines comp GL, our specialty lines, it's basically earn rate driving the improvement.
Okay. Thanks for the color.
Our next question will come from Derek Hahn with K B W. Please go ahead.
Good morning. Thanks.
My first question is on workers comp one of your competitors talked about.
The competitive environment.
Driving rates to not really inflect until year end 2022 can you just talk about what kind of frequency and severity trends that you're seeing with wage inflation.
And the potential for medical inflation to pick up as well.
Yeah, a few pieces to that question I'd start by saying that the competitive environment to us in quarter, three and tier four not a lot different than what we saw earlier parts of the year. So I think a fairly consistent competitive environment.
The comment about.
The 22 extension towards the end of the year I think is a fair comment that we see based on the filings that are moving through state regulatory bodies now do think.
We're looking towards the end of 'twenty two to see a turn towards that positive sign that people have been expecting now for a couple of years of remind you that our performance in these lines across our businesses, particularly small excellent. So our workers' comp performance continues to perform and then relative to trends yes.
The long term trend of frequency favorable variances, we expect long term to continue we had a little bit of a period that will be unlike any other period prior because of the pandemic and yes medical inflation has.
Ben rather tame the last couple of years, but our long term expectations have not come off site, which are in the five plus range for medical inflation, we see that long term and we've not adjusted our fixed because of that expectation.
Okay. That's really helpful. And then my second question is on the reserves.
Or are you feeling about the navigators reserves given the quarter.
Quarter wave from maybe blowing through the top of the adverse cover it looks like you did $400 million average development over the last two years.
Yeah, It's Eric I'll start and.
Just to remind you that we purchased that.
Adverse loss to overcome or cover for a reason.
And it was part of our views of how we're going to finance the acquisition.
All of those.
Additional capabilities that are now in.
House I think there is.
Part of how we view that we were going to.
Yes.
And then the changes that we made this quarter.
In.
Wholesale construction and really just increase some of the factors that we had in that in that book and overall.
Overall, when I think about the the navigators reserve and even think of the action that we took this quarter, you know with or without the ADC.
A relatively small movement when you think about the overall balance sheet and reserves that we have.
Got it I appreciate all the color.
Okay.
Our next question will come from Gary Ransom with Dowling <unk> partners. Please go ahead.
Good morning.
The aggregate cat reinsurance cover.
Wondering if you could help us understand where you are in terms of reaching the attachment point.
And how that might affect the fourth quarter.
Or limit.
Yeah. So great question. So yes, we do have an aggregate cover.
That kicks in when when losses that get.
Does that cover exceed $700 million. It provides $200 million of protection and then when you look at the cat losses that we've had through September 30th.
We probably have about little less than $50 million to go before we would start to hit that that $700 million attachment point.
Alright, Thank you very much.
And then.
I believe this is probably for Doug on the tone of the market and how rates are.
Less stabilizing.
If I compare how I was thinking about it maybe even you were thinking about it earlier in the year.
We would see some deceleration of those rates its actually it seems to have.
Leveled out a bit more and there may be a lot of fat.
Factors involved in that but do you have a view.
Glen.
What is causing that and I assume that's part of the reason you think its going into 'twenty, two or deeper into 'twenty two.
Gary I agree with you right. So for looking at the core of our guarantees very stable compared to earlier in the year.
Within our expectations for the reasons you suggest.
As we look at property drivers and the weather, we think about the inflation risk.
Supply chain.
I mentioned them in my script I think that those types of factors will be further drivers to make sure that we as underwriters are covering our cost of risk and so.
That would be my commentary around.
The core guaranteed cost non specialty book, and then in especially area, where we're seeing rather dramatic changes in the pricing. The last couple of years dramatic in the sense of positive yes, there's been some moderation, but I think as you know.
Correlating to improve price adequacy in those books of business in those particular lines. So.
I think in total not major surprises, but I do think these these threat factors relative to.
Particularly whether in the property area and supply chain and others, we'll keep prices kind of where they are we see a steady as you go for a period of time now.
Alright Thats helpful. Thank you. Thank.
Thank you.
Our next question will come from Josh Shanker with Bank of America. Please go ahead.
Thank you very much.
So I'm looking at.
Gross written and in global.
And in international we know when you're talking about the navigators acquisition, you want to increase your shelf space a lot of your.
Producing agents and whatnot, but.
International and global real kind of fall out of the sidewalk, having a shelf of products what are the strategy.
Those two sub segments, but what do you hope to achieve and how does it fit in with your business model.
Let's start with global reach it's really a niche segment for us. It's a small group of very seasoned thoughtful underwriters selective in their portfolio matching.
This is a smaller quarter for them. So the 39, you have to put in context, but it's been a successful growth.
They have added to our risk expertise here within the place and we're very pleased about their approach and their success. So I see them very much a part of our strategy, but a little bit separate from that our primary focus on global rate.
And then relative to international or <unk>.
David mentioned the first couple of years was absolutely to regain an R. R.
Our contribution to shareholder.
Success. If you are right. We have had a very disappointing couple of years of performance internationally not unlike others in the Lloyds marketplace and so we've worked hard at that and now feel much better about our financial performance and as we look forward, we're exploring and debating amongst ourselves about how we grow that portfolio. So I'm bullish about the future really pleased that we have the past behind us.
And I think we have a very solid platform to work from and obviously it is a specialty platform not unlike most of our competitors in the Lloyds marketplace, but we're talking across our product families about what we can do there and I think an area that we'll talk more to you about over time.
Alright, and then on personal lines, obviously, its a real tough period for auto right now with the reopening of used car prices.
Sure I think about the loss ratio content on new business being written under the new underwriting model, where we're not.
It's stuck with the business compared to the previous relationship with AARP, where you've kind of had to be sure in order to pick up a customer so the new business have a lower loss ratio than the than the legacy business or a higher loss ratio.
Okay.
Well I would start by answering your question, saying, we have spent a lot of time with our pricing approach state by state as we launch these new products.
Products and.
Probably slightly different answers by state based on where we are and what we see as the opportunities in a given state. So I would not jump to the fact that we see and expect lower loss ratios in the new than we do in our current book, we have a very solid season book that continues to season out and over time that it has been and will continue to be a significant contributor to our.
Our earnings, but we're excited about what we can do with this new product platform and as much more contemporary it's got features as underwriters, we like a lot and obviously ive talked to you about what we're doing with the auto space with our telematics program. So as I think about the new launch of prevail in time that will continue to be a key driver of our profits that will be.
Increasing as we roll through the rest of the country in 2022 with Rollouts.
At the moment, it's rather immature and we're watching the early states and so I think it's too early to call, but excited about early progress.
Industrial House.
Yes.
And then Doug described it well I would just add again remember.
Part of the inherent strategy there is to serve more AARP members and the 50 <unk>, particularly in the 50 to 65 year old So our base plans our base rates in the various states that we do expect.
Our broader.
Population set to underwrite, but again given the flexibility we have with six months policies.
<unk>.
Lifetime continuity agreements, meaning they're not guaranteed renewable it does give us.
I think added flexibility to experiment and various various states.
And as the new product direct or multichannel.
Alright.
Correct right now AARP dedicated I mean, you've seen our agency business, it's very small compared to where it was years ago, but this is.
Our direct to consumer channel.
Thank you.
Okay.
Yeah.
Our next question will come from Mike Zaremski with Wolfe Research. Please go ahead.
Yes.
Okay, Great Happy Friday, good morning.
I guess just sticking as a follow up to <unk> question since your portfolio mix is still.
It is a little different than many of the peers, we follow in terms of demographics.
And your results are still.
Good I'm just curious are you.
Are you looking to push a lot more rate there or or is it given kind of the inflationary trends or.
Or just how should we kind of think about kind of rate versus potential loss trend over the coming.
So I think I think in your commentary it sounded like we should be kind of baking in some.
Some continued pressure.
Mike Thats Fair, Ryan I would say that we are satisfied with our financial return in that business is very solid.
Rate adequacy is.
Basically strong across the board, but we're not immune from the risks and supply chain and used auto prices et cetera that the industry is facing so we are active on the pricing front, we are working state by state across the country.
I have more flexibility as Chris.
The numerator relative to prevail, but even in our current product construct.
Say its an active product.
Area upstairs working.
What we think are the supply chain issues that we're going to be facing into 2022 as we work through that year. So yes active on the actuarial front.
Yes.
It looks like great switching gears, maybe just to kind of the workers' comp and maybe stepping back to see the forest for the trees at that site.
Some investors are focused on kind of the soft pricing environment for a while which might be improving but as workers comp results have really been excellent.
It looks like much better than expected for for years now despite pricing maybe you can kind of talk to you.
What what's been driving the loss cost trends, what specifically has been much better than expected.
Over the over the recent years, especially for some of your older vintages.
Yes, I can't give you all of our secret sauce, the way that would.
That would be a good day for other people listening, but I will share. This with you right. We have a very sophisticated series of pricing modules across our markets. I think we work workers' compensation and think about strategy and think about segmentation.
And in deep.
Geographic cells industry sales etcetera, so what we do down in the the <unk> of our business really strong fundamentals relative to workers' compensation.
I will share with you and you know this well that the trends have been rather moderate over the past five years to six years right. So understanding that as we talked before our medical severity has been.
Pretty moderate these last three to five years.
Generally the long term frequency numbers are in good shape, but our performance has.
I'd say exceeded those tailwind and.
When I think about our execution on the front lines and the combination of a data science data analytics inside this company. The use of third party data. They are just a lot of competitive strength that we think drive our success in workers comp and I think those are here for the long term and getting better every quarter.
Doug.
Again, I know, we talk about it internally I would just add.
Our ability to interface with our agents and brokers and in just a more efficient way of these days given our digital capabilities that we've built.
I think does provide a competitive advantage for agents or other.
Other forms of distributions to interact with us.
Easier basis with great data fast turnaround time so.
The competitive advantage that Doug talked about from the analytical side I think is equally matched with our go to market digital capabilities.
Our next question will come from Tracy and GT with Barclays. Please go ahead.
Thank you and good morning.
Underlying margin expansion in commercial lines is quite impressive and I appreciate the color on the Hungary had a trend just another question. There could you comment on the direction of your 2021 accident year loss pick how does that compare to 2020 and your five year out rates.
So Tracy let me start or.
When we think about.
Current accident year picks and maybe we'll just refer to the supplement because we've got a year to date.
The supplement.
Our numbers.
Underlying on the loss side are really strong. So if you look at nine.
Nine months of 'twenty, one versus nine months of 'twenty I think they are very healthy and that really does guide back to the thoughts of death, and I shared a bit ago about stronger and pricing.
As a result of written pricing in 2020 and 2021. So we're encouraged the other thing that we have not talked about on the call. This morning. They are still a number of actions, we're taking relative to segmentation and industry focus across our businesses that are contributing to that number. So I know in our middle and large commercial book Moe Tucker and his team have a number of ines.
<unk> that are also drivers of improving performance so.
What's happening in the core underwriting but.
Some of those drivers are in addition to what I would describe very positive pricing trends.
I would add I would add just the Tracy comment there's nothing fundamentally that's changed in our philosophy.
We'd like to be thoughtful predictable consistent.
With loss picks with.
Anything related to our business. So Tracy I mean, we have a great deal of pride in being very consistent and predictable. So that's the only color I would add yeah, I would agree with that Chris and maybe just as a closure.
In two weeks when we're together on Investor day, one of the initiatives of that day is to take you inside and to give you a sense of how different are competing engine is today than it was five years ago.
There are a lot of things, we've done organically, which will highlight on the 16th and there are things that we've been able to do with the addition of some more product on the specialty side. So.
It's hard I know, we go quarter to quarter with the folks we're going to attempt to spend.
Spent some time in the 16th to look back and give you a sense of of why our optimism is as strong as it is with our company going forward.
Now looking forward to seeing that journey on Investor Day, I also have a follow up on the auto pricing, Brian comment I guess in those efforts with re filing I just wanted to get a better sense of when you think earn rate, we'll be meeting higher loss trend in those efforts.
See that inflection point next year in 2022 or 2023.
Tracy well, Doug thinks is that a commercial or personal lines comment personal auto.
Just understand there is a delay with some regulator actually getting those filings.
Wasn't that long ago, when theyre thinking about rebate.
Just that process of getting the rate filings in Peru and in the knee.
You just have accumulation of loss trend I just wanted to know when do you think that will all come together.
So the exact date is going to be hard to predict but let me just start with where we were 15 months ago.
One of the things we did not do was to Tinker with our new business pricing in the second quarter of 2020, so when we return.
Money to customers, we did that based on kind of an enforced.
Rate of return and did not change our appetite for our pricing on new going forward I think that has.
<unk> provided a much more stable profitable base that has not changed that we obviously because of driving habits changing radically in the second quarter of 2020, we return money appropriately given that but I'd start with the premise that our book remains intact and feeling very healthy about it second point I'd make is that.
To answer that question you'd have to talk about and predict the supply chain dynamic and that is very difficult to do right. So we suggested we think some of the the Kingston supply the pressures, we're feeling the labor dynamic unemployment et cetera are all feeding into this we think those trends will continue into 'twenty two I hope they will ease as we get into the middle part of the 22.
But that is an ongoing.
Component and then lastly, really is a state by state dynamics. So it's so hard for me to suggest we looked across our states are some states that we're filing in the next 30 days or some states. We have filed in the last 100 days that we won't be filing for another three to six months. So.
It is a very active process and.
You know, we do think supply chain will ease a bit but we don't think that will happen in the short term. So we expect to kind of live on through the current conditions as we see them as we move into the latter half of 'twenty, two we will get to a better spot.
Thank you I appreciate that.
Yes.
Our next question will come from Andrew <unk> with Credit Suisse. Please go ahead.
Good morning.
Questions.
Around well first great.
Great to see the repurchase authorization go up.
But I'm also curious with the M&A environment.
Are you seeing any opportunities any areas, where you'd like to get bigger.
Could that eventually preclude some of this.
Upward authorization, what are you thinking about M&A and how that might play out over the next two years.
Andrew Thanks for the question.
We've.
<unk> been pretty consistent of late.
It's just a low priority principally because.
I think our portfolio.
Capabilities products.
It is robust and we want to mature that grow it organically.
Focus on the <unk>.
Activities.
More from an organic mindset as opposed to M&A. So.
Consistently shared with you and others, it's just a low priority so and Thats why again.
We feel.
Is it appropriate to make a.
Repurchase commitment through the end of 'twenty, two with that $500 million increased.
Thanks, Chris and then and then just moving over to the group benefits business.
Again, a real solid on ongoing premiums growth of 4% in the third quarter it seems to be that.
Italy moving up.
Whats what products are driving that are you seeing movement in voluntary products and.
Can you sustain that growth rate because its very compelling if we could just kind of get out of the COVID-19.
And just continue to see these really nice underlying benefits ratios.
I believe we can Andrew.
We've I think.
Demonstrated that consistently during the year as had.
Had been recovering from.
From Covid, so I think the opportunity.
Particularly as more people come back into full.
Full time employment or part time employment.
With a little wage inflation, that's occurring in most industries I think that sets up well and that's what I was trying to say in my commentary that.
The environment for group benefits broadly defined is very healthy.
Our highest growing product line as our voluntary product set that we've built over the last five years, so really pleased with all the.
Critical illness hospital sub <unk>.
Products that we have at our disposal now so that is a.
Deep growth area, and then I would just give you one last point, Andrew I think people's attitudes, meaning employees' attitudes to benefits has changed I think theyre more focused on it given what we're living through I think they're more thoughtful about.
Thinking about risk and protection they need for themselves or their family. So.
There's a broad awakening of benefit type products.
Voluntary products that is occurring across America.
Excellent. Thank you.
Our next question will come from Jimmy <unk> with Jpmorgan. Please go ahead.
Hum.
I had a couple of questions both on workers comp and I think first on pricing in workers' comp.
Everyone's sort of been.
<unk> prices to go up next year for the last couple of years, but hasn't happened yet so and wondering if you could comment on if that's because of competitor behavior or is it because the pushback from the states.
And what gives you the confidence that things might actually turn at some point in 2022.
So I'd start by saying that the overall performance line is pretty solid and that would be my my place to start secondly, you now have the COVID-19 year.
Entering its way into the <unk>.
States are three year experienced periods, so accident year 'twenty is now becoming.
Part of the experience periods and accident year 'twenty has a period of time relative to frequency where people were home and frequency rates were very favorable so with that entry into the experience period, we're going to see some downward pressure on pricing that is y.
It's just where the market is right now and why I'm. So pleased that our performance continues to be strong and we will make sure that we're working the levers that we have here to be thoughtful about our underwriting and risk taking throughout 'twenty two.
Okay, and then as you think.
About margins in Workers' comp I think in the past there have been cases, when the economy is running pretty hot.
Pick up in losses, sometimes it doesn't seem like that's happened this time around but if you could comment on what you've seen in that respect and whether that's a concern as you are looking at the economy overall.
We're certainly watching that carefully or watching frequency because just as you described sometimes when you see a pickup in the economy.
Youll have less experienced workers on the job that may lead to injuries and injuries. Obviously are a driver in workers' compensation. So as I reflected both in the second quarter and third quarter are frequency user in healthy shape, but it is a high watch item for us and if we see something we will we will share that with you and deal with that in our numbers.
But right now fairly quiet.
Okay and.
And just lastly on the group business on the non Covid mortality being high if you could talk about whether you think that's more of an anomaly or could that be a trend given that.
More younger people are being affected overall, which obviously affects your book.
More so than was the case initially.
Yes.
Yes, Jimmy the non Covid mortality has been very bouncy.
Over the last six quarters, so I don't.
I don't see.
<unk> per se just given what we've seen in the data.
Thank you.
<unk>.
View is yes.
During COVID-19.
Particularly the early days there might have been.
Lack of.
People seeing their health care providers for routine health care.
And whether it be annual physicals.
Normal checks and screenings.
So we have seen particularly in this quarter.
With that elevated non COVID-19 mortality.
A little bit more heart stroke.
Cancer.
It causes of death that seem to indicate maybe a second order effect with COVID-19 and people not taking care of themselves, but beyond that I don't.
Been very bouncy, that's all I'll say, so I don't think its trend at this point.
Okay. Thank you.
Okay.
Our next question will come from David <unk> with Evercore ISI. Please go ahead.
Hi, Thanks, good morning.
Thanks for taking my question.
And letting the call go a little longer.
Wanted to also just asked about the group benefits the adverse mortality.
This quarter I was wondering if you could just give a breakdown how much of that was <unk> versus actual reported deaths in the third quarter, and then and then Relatedly and I know Theres a lot of uncertainty here, it's hard to predict.
But as of now the IHS estimates that total COVID-19 mortality will remain near a 100000.
<unk> in the fourth quarter.
If it does in fact stay that high.
Would you expect similar sensitivity as an <unk> or I guess, how should we think about the puts and takes there.
Yes happy to take your question David.
And importantly get you in.
Tom some cancers.
So let me just give you the context.
On on sort of mortality here, how we approach. It is obviously, we have a great deal of data and history.
In this area that sort of complete our lag studies to make an estimate.
Incurred but not reported deaths during the quarter.
Obviously with the Covid happening, we've overlaid CDC data into our analysis.
<unk>, obviously see their trends both on a COVID-19 and non COVID-19.
You know factor so the blending of those two came up in essence with our our conclusions for this quarter.
Yeah.
At the end of the quarter I would share with you.
July was fairly developed.
Meaning you can have a higher degree of confidence on.
The ultimate that we see in July a little less so in August and September is sort of the freshest months and that's the one that's the most.
Challenge to sort of predict the future when you put it all together, though for the quarter.
The incurred losses that we have 53% of it is still held in <unk>.
So if thats the data point, you're looking for I think the other point.
That you referenced is I would I would share with you.
More deaths in under 65 year olds is really driving up our severity and if you look at severity on a nine month basis. This year compared to nine months basis last year, our severities are up 49%, which tells US again younger younger age cohorts higher insured value active lives at work.
When we look at sort of regions the region that sort of stands out for us is the southeast.
They are experiencing the most elevated.
David.
Historical expectation side so.
And as you say that the fourth quarter.
I assume he's got some data out there is a lot of data out there I would just share with you in all my years in the life business.
It's been most difficult to get our arms around a model that really effectively protect predict this.
Some models are high some are low you have seen or experienced.
Even this year, where first quarter.
We were significantly overestimated on our IP and our.
So I'm going to refrain from making any predictions both on frequency and severity because theres a wide range of outcomes.
What I would share though is that we do have some ft friendly events coming up in December.
And we'll provide our analysts and investors a view of <unk>.
Where we see fourth quarter mortality Cohen, who.
We might even ask what about 'twenty to 'twenty two is even harder to predict so when we're back together in February.
We'll give you our best thinking but.
As we sit here today I think these next two quarters you could still have some lingering COVID-19 effects that will emerge in everyones numbers.
Yeah.
Got it.
Very helpful. Thanks, Chris I appreciate that detail.
And totally understand there is a lot of uncertainty and youre not alone in terms of.
No.
Predicting the impact obviously so.
If I could just switch gears and sneak one more in for Doug.
I just wanted to ask it look like in small commercial.
Talked about underlying loss ratios ex COVID-19 actually improving.
Could you talk about the drivers there because I had thought that was a place where pricing was under a little bit more pressure.
So is that more a benefit of just wage inflation coming through.
Or something else.
Yes, and I think about small commercial year over year in the quarter.
I mentioned that we had a pretty good non cat quarter.
Our quarter. So we have some good news in loss ratio there and then yes to your question on Workers' comp our experience has been favorable there.
We're slightly outperforming our expectations around pricing and small so thats against our where we thought we would be through the third quarter. Obviously, that's you know.
Thats in the books right now, but in general still feel good about our calls we've not come off our severity calls R&M nickols and encouraged by what we see in the performance of the line. So I don't think there is a major story there, but it's just another really solid performance by our small commercial com team.
Thank you.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Susan Spivak for any closing remarks.
Thank you Matt. We appreciate you all joining us this morning for the review of the third quarter earnings as a reminder, our virtual investor conferences on November 16th of one to four P. M and you can register right on our website.
Yes.
The conference has now concluded.
You for attending today's presentation you may now disconnect.