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spk01: Good morning, ladies and gentlemen. Thank you for attending today's The Hartford Third Quarter Earnings Call. My name is Alex, and I'll be your moderator for today's call. If you'd like to ask a question at the end of the presentation, you can press star 1 on your telephone keypad. If you'd like to withdraw your question, you may press star 2. I would now like to pass the conference over to your host, Susan Spivak, with The Hartford Group. Susan, please go ahead.
spk11: Good morning and thank you for joining us today for our call and webcast on third quarter 2022 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 Elliott, President. Following their prepared remarks, we will have a Q&A period. Just a final few comments before Chris begins. Today's call includes forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and actual results could be materially different. We do not assume any obligation to update information or forward-looking statements provided on this call. Investors should also consider the risks and uncertainties that could cause actual results to differ from these statements. A detailed description of those risks and uncertainties can be found in our SEC filings. Our commentary today 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 supplements. Finally, please note that no portion of this conference call may be reproduced or rebroadcast in any form without the Hartford's prior written consent. Replays of this webcast and an official transcript will be available on the Hartford's website for one year. I'll now turn the call over to Chris.
spk07: Good morning and thank you for joining us. Hartford produced a strong third quarter with core earnings of $471 million, or $1.44 per diluted share, which includes the impact of Hurricane Ian and the ongoing effects of a dynamic macroeconomic environment. Before discussing our results in detail, I wanted to extend our thoughts and prayers to all those impacted by Hurricane Ian a powerful and devastating storm. It is in moments like this that I am especially proud of our Hartford claims team. To date, we have inspected approximately 95% of all claims submitted and have issued initial payments on 50% of those claims. Over the coming months, our team will continue to work tirelessly to help all our customers affected by the storm. Nearly a year ago at our investor day, I told you how confident I was in our portfolio, capabilities, expertise, talent, and our ability to deliver consistent and sustainable returns. As we look back, the clearest proof point that our strategy is working is our financial performance. In the first nine months of 2022, we delivered core earnings growth of 18%. and core EPS growth of 27 percent, top line growth in commercial lines of 12 percent, a commercial underlying combined ratio of 88.6, a group benefits core earnings margin of 5.9 percent. We returned approximately $1.6 billion to shareholders and yesterday announced a 10 percent dividend increase and We also produced a trailing 12-month core earnings ROE of 14.3%. These are terrific results that reflect our Hartford's performance-based culture and demonstrate why, despite the continued headwinds of inflation and economic uncertainty, we are confident in our ability to continue to execute at a high level. In commercial lines, we remain disciplined and prudent in establishing loss picks. We continue to have approximately 100 basis points of spread between renewal written pricing and loss trends, excluding workers' compensation. Our small commercial results continue to be exceptional. NextGen Spectrum, our market-leading business owners' product, is fueling much of our new business success as we gain market share at very favorable margins. The digital customer experience we provide in small commercial is a significant competitive advantage for customers, agents, and brokers as it provides a fast, intuitive, and efficient platform for doing business. The most recent small commercial Kinova study ranks as number one in digital capabilities for the fourth consecutive year. Our score climbed four points and we are now 20 points higher than our closest competitor. Middle and large commercial is benefiting tremendously from the combination of deep industry specialization and product breadth, leading to new business growth and improving loss and retention ratios. We are confident that our data science, pricing segmentation, and claims execution will continue to support underwriting discipline. In global specialty, results are outstanding. Underwriting margins have improved materially over the last three years. Execution has never been stronger, and the enhanced underwriting expertise we bring to the market is strengthening our competitive position and driving market share gains. In personal lines, we continue to take pricing actions as higher inflation impacts results. As Doug will describe, we continue to file for increasing rate changes across our book to restore profitability. Overall, I am confident we have the right strategy in execution in personal lines. Turning to group benefits, in the quarter, core earnings were $117 million, with a margin of 7.2%, reflecting lower excess mortality and strong disability results. Long-term disability trends are stable and within our expectations for incidence rates and recoveries. Modestly higher expenses reflect increased investments and capabilities, including digital, claims automation, and administrative platforms. Fully insured ongoing premiums were up 6% compared with the third quarter of 2021, driven by an increase in exposure on existing accounts as well as strong persistency in sales. Fully insured ongoing sales were $106 million in the quarter, up 29% with increases in both group disability and group life. In many ways, the fundamentals of the group benefits business are stronger than prior to the pandemic. Product awareness is greater as both employers and employees are highly engaged on benefit offerings with growing demand for supplemental products. This is an opportunity for us to deliver higher value and create a differentiated experience for our customers. And lastly, investment results were healthy in the quarter and are beginning to reflect the rising rate environment, which will earn in more meaningfully in 2023. Taking a step back, I want to touch upon some overarching themes. The impact of inflationary pressures and changing weather patterns on pricing and loss costs. Second, the positive impacts of the current interest rate environment. And third, the importance of a healthy and balanced insurance regulatory system that ensures stability and predictability for all. As we have discussed over the last several quarters, across the industry, carriers are dealing with elevated inflation, related to goods, services, and most components used in manufacturing. These inflationary pressures are likely to remain as the Fed continues to tighten monetary policy and despite some early signs of reduced demand and economic output. At the same time, changing weather patterns continue to drive increased frequency of events and associated claims severity. while there is no silver bullet to fix this problem, ongoing efforts to build more resilient homes, communities, and commercial properties needs to be an ongoing focus of policymakers, insurers, agents, and carriers. Taken together, these trends point to the need to maintain underwriting discipline and ensure pricing keeps pace with lost trends and reserving assumptions. As long as these trends continue, Rates will need to rise, and in some cases, will re-accelerate pricing increases over the near to medium term. Hartford is committed to maintaining price discipline, and we have clearly communicated to all our underwriters the need to expand or maintain margins ex-workers comp while prudently growing our book of business. Because interest rates are expected to remain elevated, anticipate our portfolio yield, excluding limited partnerships, will increase by approximately 50 to 60 basis points in 2023 compared to full year 2022, which will benefit earnings. Finally, on the regulatory front, our state-based system of insurance regulation has generally served customers and the industry well, although at times has experienced instability in certain jurisdictions and across certain product lines. At its core, the mission of insurance regulation is to protect consumers while ensuring a stable market, one that fosters market competition and safeguards carrier solvency. Balancing these two aspects of the regulatory mission is critical to ensuring widely available and affordable insurance. Recently, we have seen instances where regulation has become politicized, creating instability in the market and upsetting the balance the regulatory system is designed to achieve. We call on policymakers to respect the insurance regulatory framework, take the necessary steps to address rising legal system abuse, rate inadequacy, and persistent underinsured exposures, while working with the industry to support a well-functioning marketplace where insureds get the coverage they need and carriers secure an appropriate return for the risk they undertake. As a company whose purpose is to underwrite human achievement, Hartford stands ready to engage on these issues actively and constructively. Before I close, last month we announced the retirement of Doug Elliott, as the Hartford's president at the end of the year. Beth and I have worked together with Doug and the entire Hartford team over the past decade to transform the Hartford and build the foundation for our company's future success. Doug was instrumental in expanding our product suite of products, developing industry-specific verticals within our property casualty business, overseeing the integration of the navigators group, and elevating our underwriting excellence. Thanks to Doug's strong leadership, the Hartford is well positioned for profitable growth in the years ahead as we build on the momentum created to best serve all of our agents and brokers and customers. I want to thank Doug for his many contributions to our company. Thank you, Doug. Doug leaves us many gifts, including a seasoned group of executives who are going to continue our high-level performance. I have tremendous confidence in the talents, skills, and focus of this leadership team. In closing, let me leave you with some concluding thoughts. These results demonstrate our strategy and the investments we have made in our businesses have established the Hartford as a proven and consistent performer. We have outstanding execution capabilities and exceptional talent, that drives my confidence in our ability to continue to produce superior returns. We are managing the investment portfolio prudently and all holdings are well balanced across diversified asset classes. And we are proactively managing our excess capital to be accretive for shareholders. All these factors underpin my confidence that we will continue to meet or exceed our core earnings ROE objectives. Now I'll turn the call over to Beth.
spk12: Thank you, Chris. Core earnings for the quarter were $471 million, or $1.44 per diluted share, with a trailing 12-month core earnings ROE of 14.3%. Before reviewing the results by segment, I will cover the impacts in the quarter of catastrophes, and specifically Hurricane Ian. We recognized catastrophe losses of $293 million, with Hurricane Ian losses of $214 million. In commercial lines, Ian losses were $133 million, including $35 million in global rates. In personal lines, losses were $81 million, of which about 72% were auto losses, which reflects our market share in the regions impacted, as well as a higher average loss per claim due in part to inflationary pressures. Moving on to segment results, In commercial lines, core earnings were $363 million and written premium growth was 10%, reflecting written pricing increases and exposure growth, along with an increase in new business in small and middle and large commercial, as well as increased policy count retention in small commercial. The underlying combined ratio of 89.3 was up 2.1 points from the prior year third quarter, primarily due to several non-catastrophe property losses. In personal lines, core loss was $28 million, and the underlying combined ratio was 95.9, reflecting continued increased severity in both auto and homeowners, partially offset by earned pricing increases and a lower expense ratio in both lines. P&C prior accident year reserve development was a net favorable $53 million, with workers' compensation being the largest contributor. Turning to group benefits, core earnings of $117 million and a 7.2% core earnings margin reflect a lower level of excess mortality losses and growth in fully insured premiums. The disability loss ratio was flat to the prior year quarter, reflecting lower COVID-19-related short-term disability losses and in long-term disability, higher estimates of claim recoveries were more than offset by less favorable incidence trends compared to the prior year quarter, but in line with our expectations. All-cause excess mortality was 26 million before tax compared to 212 million in the prior year quarter. The 26 million included 14 million with dates of loss in the third quarter and 12 million of losses related to prior quarters. Turning to Hartford funds, core earnings were $47 million, reflecting lower daily average AUM, which decreased primarily due to equity market declines and higher interest rates. Net investment income was $487 million. The annualized limited partnership return was 6.3% in the quarter. We have been very pleased with the performance of LPs in the first nine months of the year, and expect the full year return to be at or above the high end of our 8% to 10% range. The total annualized portfolio yield, excluding limited partnerships, was 3.3% before tax, a 30 basis point increase in the second quarter, and we expect another 10 to 20 basis point improvement in the fourth quarter. The investment portfolio credit quality remains strong with an average rating of A+. During the quarter, we recognized minor losses on sales of fixed maturities as we reduced portfolio duration and modestly reduced risk in the portfolio. So while interest rates and capital markets may remain volatile, we are confident that our high-quality and well-diversified portfolio will continue to support our financial goals and objectives. During the quarter, we repurchased 5.4 million shares for $350 million. As of September 30th, we have $3.1 billion remaining on our share repurchase authorization. We were also pleased to announce a 10% increase in our common quarterly dividend payable on January 4th. This is the 10th increase in the dividend in the last decade and another proof point of the consistent capital generation of the company. In summary, we had strong performance in the first nine months of the year, and believe we are well-positioned to continue to deliver on our targeted returns. I will now turn the call over to Doug.
spk02: Thanks, Beth, and good morning, everyone. Across our property and casualty business, we continue to be well-positioned to sustain industry-leading financial performance. The strength of our broad product portfolio and underwriting execution are evident in our excellent year-to-date top-line growth of 9% and sub-90 underlying combined ratios. In addition, the relative size of our E in loss is further proof of that underwriting discipline. In commercial lines, we achieved double-digit written premium growth for the sixth consecutive quarter, and underlying results remain strong, even with some volatility in our non-CAT, non-weather property results. Diving deeper into third quarter growth, U.S. standard commercial lines written pricing, excluding workers' compensation, was up about half a point to 6.7%. Pricing increases in auto and property correspond with comparable inflationary increases, and in the coming months, we may see further improved pricing in these lines. Workers' compensation pricing remained positive, benefiting from wage rate growth. Within global specialty, rate for the quarter of 3.2% was down about two points from the second quarter, driven primarily by excess public D&O. For most of global specialty lines, pricing was in the mid to high single digits and in the aggregate ahead of loss trends with very strong accident year results. As Chris highlighted, in total for commercial, excluding workers' compensation, renewal-written pricing is still about 100 basis points above long-term loss trends. In addition to positive pricing, commercial lines' top-line growth benefited from strong new business in small commercial and middle markets. up 15% and 8% respectively. Our industry-leading products and digital capabilities within small commercial continue to drive excellent organic growth, as evidenced by a terrific $190 million new business quarter. Retention remains strong across markets, and continued audit premium momentum from customer payroll growth was another bright spot. Within small commercial, as further evidence of our broadened appetite, We're particularly proud of the capabilities we're building in the excess and surplus line space. By the end of this year, written premiums will likely exceed $100 million. Going forward, we expect to become a leading destination for binding opportunities, a strong complement to our existing retail offering. In addition, we're leveraging small commercial's underwriting and digital expertise to capture a lower complexity business in both middle market and global specialty, and expect to take advantage of the growing technological developments implemented by our top brokers. Turning to the loss ratio, results were largely in line with our range of expectations. In property, coming off a favorable third quarter of 2021, fire loss frequency was a bit elevated in the quarter. With respect to workers' compensation, indemnity severity remains in line with wage rate growth and actual medical severity trends are well within our long-term assumption of 5%. Our liability lines continue to perform consistent with our expectations, and we are dialed in on social and economic inflation trends. Closing out the commercial discussion, I'm really pleased with the results we posted this quarter. Small commercial continues to deliver superior operating results. Global specialties underwriting Underlying margins improved 2.4 points from a year ago to a strong 84.5, and middle and large commercial delivered a solid 93.7. We move into the fourth quarter from a position of financial strength, both in terms of accident year performance and balance sheet adequacy. Let's switch gears and move to personal lines. Our third quarter underlying combined ratio of 95.9 reflects continued autophysical damage severity pressure, driven by elevated repair costs related to supply chain and higher labor rates. In response to those lost trends, we have been increasing pricing since the fourth quarter of last year to ensure rate adequacy and overall profitability. Auto rate filings have averaged mid-single digits through the first nine months of this year, with renewal pricing of 5% in the quarter, up a point from second quarter. Filed rates will move to double digits during the fourth quarter, and we expect mid-teens for the first half of 2023. In home, overall loss results were in line with our expectations. Non-cat weather frequency continues to run favorable to long-term averages, mitigating material and labor costs, which remain at historically high levels. We continue taking written pricing actions with home at nearly 12% for the quarter. Turning to production, written premium grew 5% for the quarter, largely reflecting pricing increases from both auto and home. Auto policies in force were flat to the third quarter of 2021 and up 1% from this year's 2Q. We will be prudent with growth, balancing rate adequacy, quality of new business, and marketing productivity. Before I close, let me share with you a few thoughts about our recent participation in the annual CIAB conference. Common feedback centered on the complementary strategies across our businesses, strong cross-sell execution, and excellent risk collaboration. Our position and engagement with the top brokers has never been stronger, and there are many exciting initiatives underway as our teams pursue deeper penetration with these partners. In closing, I remain bullish about the future of our property and casualty business. As I shared with you last quarter, my confidence comes from our broadened and responsive product portfolio, the enhanced underwriting and data analytic capabilities we've built, and our state-of-the-art technology and digital tools. As I leave the organization at the end of this year, I could not be prouder of the nearly 12 years I've spent here at the Hartford. I'm confident my teammates are well prepared to successfully tackle the challenges ahead while delivering consistent, industry-leading, profitable growth. I look forward to watching their success in the coming years. Let me now turn the call back to Susan.
spk11: Thank you, Doug. Operator, we are ready to take our first question.
spk01: Thank you. As a reminder, if you'd like to ask a question, you can press star 1 on your telephone keypad. If you'd like to withdraw your question, you may press star 2. Please ensure you're unmuted locally when asking your question. Our first question for today comes from Alex Scott of Goldman Sachs. Alex, your line is now open.
spk15: Hey, good morning. Thanks for taking the question. First one I had is on the commercial underlying loss ratio. Just on the year-over-year comparison, I think even adjusting for some of the non-CAT items that you mentioned, it didn't improve all that much. I think it even deteriorated a touch. And I just wanted to see if you could unpack what some of the drivers are. I think there was some mention of workers' comp in the 10Q as at least a partial driver. So I was just looking to see if you could add some color around how we should think through the year-over-year comparisons there.
spk12: Thanks, Alex. I'll start, and I'll let Doug provide some additional cover. So first, I just You know, Doug said this in his comments, and I think it's always important when we start a conversation on small commercial is by any measure, I think their results are outstanding. As Doug discussed, you know, we did see some impact from property losses, non-cat, non-weather related that obviously impacted the compare year over year. But when we look at year to date, where we are compared to what we saw at the beginning of the year, we are right in line. As it relates specifically to the workers' compensation point, again, if you go back to what we were expecting from the beginning of the year, we're very much right in line. We did not make any changes in the quarter as it relates to workers' comp in our loss picks from where we've been from the beginning of this year. And we had said at the beginning of this year that in this line, we expected a small amount of compression in workers' comp, and that's exactly what we've been booking to. And I say small, less than half a point. Part of the compare to last third quarter and why that was called out was in last year's third quarter, we had some true-ups in the quarter related to just some favorable frequency and rate coming in a bit higher than we had anticipated. So it's really more about last third quarter, this year, and what we're producing overall, completely in line with what our expectations were and no changes.
spk15: Got it. Thanks for that. And maybe just a more broad question with my second. I think we've heard a couple of your peers discuss standard lines becoming a bit more competitive. And I think Another was commenting on casualty pricing needing to re-accelerate and sort of highlighting the economic exposure potentially beginning to decline and being less of a tailwind. Could you frame for us the way you're thinking about the competitive environment and pricing and what you see needing to happen on the casualty and property side from here?
spk02: Alex, I would start by saying that we look at overall performance and we feel very positive about what we've produced for nine months and look at our position in the quarter and just very pleased about that performance level. Now, given the challenges that we all face, as I commented in my script, we're very conscious of both social and economic pressure inside our loss trends and are watching them carefully across all our lines, across all our segments. The other thing I would say is we're coming off a significant natural peril disaster in the southeast part of this country. So we expect that the property market will go through some changes in the coming quarters, starting very shortly. So we're in market with our CAT reinsurance program that renews 1-1. Our folks have been in Bermuda all week and expect over the next several weeks that we will talk about I do not expect anything material to change relative to our reinsurance structure, but I think between property and social and economic changes, it's a really critical time that you stay on top of your trends, and we're trying to do exactly that here at the Hartford.
spk15: Got it. Thank you.
spk01: Thank you. Our next question comes from Elise Greenspan from Wells Fargo. Elise, your line is now open.
spk10: Thanks, good morning. I wanted to go back to the commercial discussion, right? So you guys just a bit above the full year guidance here to date. I know there is moving pieces and when I say a bit right at 10 basis points, would you given you know the Q4 I think seasonally does tend to run better than some of the other quarters. Would you expect to be within that guided range for the full year?
spk02: At least we do so, you know, We're expecting to hit guidance. You're right, there is seasonality in our book of business, and so we're mindful of that. But based on what we see today and the early start with October, very early start of October, we expect to be in that range.
spk10: Okay, thanks. And then my second question is on the group benefits business. Chris, I think you mentioned some higher expenses there, but if I look at the core margin, excluding COVID, That was nearly 9% in the quarter versus the 6% to 7% target. And you mentioned long-term disability trends are stable. So if we think about the run rate of that who benefits business ex-COVID, do you think you guys could exceed that 6% to 7% target margin?
spk07: Elise, you're focused on forward guidance. And we've obviously talked about what we think we could do, but I would just share with you Yeah, we feel good with the overall performance of all our businesses really through the first nine months, and that's why I sort of called that out. Investment results have been very favorable across our portfolios, particularly with the strong LP contributions, but rates are rising. So we still like our long-term view of six to seven on sort of a normalized basis, if you're going to look at it that way. But we'll always continue to try to outperform and exceed expectations. But I still would have you anchor in that six to seven range.
spk10: OK, thanks for the color.
spk01: Thank you. Our next question comes from David Motemaden from Evercore ISI. David, your line is now open.
spk14: Hi, thanks. Good morning. Chris and Doug, you both mentioned that you have approximately 100 basis points of spread between renewal written pricing and loss trends if we exclude workers comp. Just wondering what that is if we include workers comp, given how big that is within the commercial line business.
spk07: I'll just reinforce what Beth said, David, is that going into the year, You know, our pricing plan compared to what we thought loss trend was, was going to have a modest negative effect, probably to, you know, half a point on sort of combined ratios. I think through, you know, the first nine months, we're outperforming that half a point negative, you know, pressure. But that's the way I would frame it. And, Doug, I don't know if you would add anything else. But I'd like to just have you think of comps in its own different sort of sphere as far as historical performance, the regulatory oversight in that line. David, and that's why we just talk about an ex-comp spread.
spk02: David, I would just add that even inclusive of comp, our total commercial spread is still about the same. So the calculus is plus or minus 100 points. And yes, to Chris's point, comp continues to perform for us across our markets.
spk14: Okay, great. Thanks. That's helpful. And then also, just a follow-up for Beth. Beth, you had said that there were some true-ups in the third quarter of 2021 related to favorable frequency and rate coming in a bit better than you had anticipated. I was wondering if you could just size the favorable impact that that had on the third quarter of 2021 in commercial lines.
spk12: Yeah, so I guess the way I would characterize it is that when you look at the delta between last third quarter and this third quarter for small commercial, that delta in workers' comp was probably a bit over a point. And again, that really is coming from the favorability we saw last third quarter. And as I said, we were sort of anticipating when we set our loss picks for the year, that we'd see, like I said, about a half a point deterioration. So I think that helps size a little bit of just kind of the delta in what we're seeing.
spk07: And the remainder then would be property.
spk12: Yeah.
spk14: Great. I appreciate that. Thank you.
spk01: Thank you. Our next question comes from Brian Meredith of UBS. Brian, your line is now open.
spk03: Yeah, thanks. A couple questions here for you. First, I want to drill in a little bit on the middle and large commercial lines, underlying combined ratios here. If we take a look at you today, they're flat, you know, in the last couple quarters, been up year over year. I'm just curious, what's kind of surprised you relative to what you were kind of expecting coming into 2022? And what are you doing potentially to address some of those surprises you're seeing in that market or that one?
spk02: Brian, this is Doug. The only real aberration through either nine months and also in the quarter is our non-CAT, non-weather property volatility. So I look at the rest of the lines. I look at our performance essentially right on target. So that little volatility in the quarter is the only thing we're looking at year-to-date against our expectations.
spk03: Would inflation maybe be a little bit higher than you expected on some of the property stuff? Is that potentially it?
spk02: There's a little inflation. We've talked about inflation, but our pricing has been at or right on expectations as well. I think we're matching what we're seeing on the economic loss trend side with our performance on the pricing end. I feel good about that.
spk03: Gotcha. Then within your global specialty business, I'm just curious. Do you all have the capacity or the desire to potentially take advantage of what could be a much better pricing environment for cat-exposed property business? What's your appetite for that?
spk02: I don't think you're going to see us in the next six months become a major cat rider. We don't have that as an ambition. But our growing ambition over the past decade has been to be a stronger, more thoughtful, deeper business. bigger property writer. And that goal remains and we're doing it selectively. So in our middle and large commercial business, we've got a large property segment. We've got a growing property book and our core middle book. And then we also have a really neat specialty business, property business in our global specialty. So I look at property across the franchise and I think that on the optimistic side, you will see that grow over time, but I don't think we're going to step right in and try to take advantage of timing moment right now with cap property.
spk07: Brian, that's been one of our strategic themes Doug and I have talked about for years is just to have a broader property skill set in all our business segments, whether it be small, middle, large, E&S and specialty. And then the only color I would add on our reinsurance operations is it's a global property casualty Focus Reinsure that has some specialty orientation also to it. It's about $500 million of total premiums. Doug, I would say its profitability and execution has been outstanding the last couple of years. It did obviously suffer some impacts this quarter that we called out, but generally it's a nice specialty orientation in that global specialty area.
spk02: Yeah. very disciplined, very thoughtful, and maybe some selective opportunity here that in global RE, Brian, they will take advantage of. I was more referring to the primary space, but it's been a strong complement to our property capabilities and our thought process. So, you know, I think it'll be opportunistic. We'll be thoughtful about what we do relative to Cat Pearl.
spk01: Great. Thank you. Thank you. Our next question comes from Greg Peters of Raymond James. Greg, your line is now open.
spk13: Great. Good morning, everyone. I guess for my first question, I'll focus in on the expense ratio. And obviously, there's a broader expense ratio across the entire enterprise, but I was Looking at the commercial lines expense ratio, I think it's on slide seven, and it was 31.5 versus 31.8 a year ago. And I know you've been working on initiatives to improve it. So I guess with the growth that we're seeing, I guess I'm kind of surprised we're not getting a little bit more improvement. So maybe you can unpack what's going on with the expense ratio and where the improvements are coming from and you know, the good guys and bad guys, I guess, in the expense ratio.
spk07: Brian, let me lay it in context, and then, you know, Bob, you and Beth can add their capabilities. As Beth said in her prepared remarks, and you can see in our deck, I'm really pleased with the execution of our Hartford Next program over a multi-year. That program and the savings that it generated is allowing us to think differently about investing going forward, And, you know, we've maintained sort of our view that we still want to build, you know, the organization in certain capabilities areas, whether it be digital, whether it be APIs. So we still are investing in the organization at a healthy clip. You know, that is sort of muting, you know, the underlining, you know, efficiencies that we're gaining. I would call out the investments we're going to continue to make sort of in our cloud journey as a big initiative over a multi-year period of time. We've got large initiatives in global specialty over the next couple of years from a data science side. And then lastly, from a group benefit side, we are going to develop a new administration system with an outside service provider to modernize that 40-year-old tech stack. So I think you know we're builders, we're growers, and that's part of why you're seeing maybe less benefit on the expense ratios as you sit here today. But Beth, what would you add?
spk12: Yeah, I would agree with those comments. I think specifically as it relates to third quarter, I believe in the third quarter of last year we had a little bit of a release in bad debt. So that made last year's number, you know, maybe 30 basis points better. So that obviously affects the compare a little bit. And then also, you know, we also look at our commission ratio has picked up just a small amount as well, which again, some of that reflective of just the strong profitability in the book and how that comes through in some of the supplemental comps. So those Those, I think, help to explain why maybe you wouldn't see more of a benefit just quarter over quarter.
spk13: Great. Thanks for the color. I'm going to pivot, and I know you spent time talking about this in your prepared remarks, but on the personal line side, you look at the rate increase trend. It's all moving up. I recall Traveler's comments on their call where they were talking about mid-teens type of rate increases for their book of business next year. And I know you have a specialty auto book, but maybe you could spend a little bit more time just telling us how you see the rate trend moving over the next several quarters in the context of all the inflationary pressures we're reading about.
spk02: Sure, Greg. So maybe I'll build on what I shared in my script. Again, fourth quarter, as I said, we expect that change of five to move our rates, move up into the 10 category, and then move into mid-teens. Our expectations in the second half of the year that our FISDEM loss trend would abate a bit did not come to pass. So the world we see today and the trends we're experiencing at this moment, we're expecting... those to continue into 2023, which are driving our assumptions inside our rate plan activity. I would describe, you know, the first half of 23, you know, an active rate process for us, and I think mid-teens will allow us to get on top of those trends, and I expect as we, you know, move through the first quarter into the second quarter, we'll be at very adequate terms for our book of business. keeping in mind that, you know, as we introduce Prevail into the marketplace, which is a six-month policy, we still have lots of policies out there that are 12 months. You know, our old Hartford auto and home product is a 12-month product. So there is a mix that will head towards six months the quicker we work our way through Prevail. But at the moment, we still have a lot of 12-month policies there.
spk07: Greg, it's Chris. You characterized your question as a specialty product. Auto carrier, I would push back on you that. I mean, we consider it a preferred segment, you know, through our ARP relationship over 30 plus years. So maybe you just confused thoughts in your head, but it's not a specialty orientated auto book. It is a preferred class of customers, at least in my mind.
spk13: right i i understand that um wrong poor word choice but um thanks for the additional color and congratulations on your retirement dog thanks greg thank you our next question comes from andrew kliegerman from credit suisse andrew your line is now open hey good morning um reading through the press release uh you talked about a decrease in new specialty business
spk08: Could you share a little color on what lines you were pulling back on and perhaps what lines you were seeing some strength in new business growth?
spk02: Andrew, our comments relate to competition and especially space primarily in the professional lines area. So our thin lines area, as I commented, seen depressed pricing. In fact, our pricing went negative. in the second quarter, I'm sorry, the third quarter for D&O. But it's an area that has gone through significant profit opportunity, and now as the lines are very adequate for us and probably many others in the industry, a lot of competition has gathered. So we see that competition. We are not going to chase poor pricing. We're going to keep our discipline. And I attribute the lack of growth compared to prior periods in that global specialty space, really to competition and us keeping our discipline, which we intend to maintain as we move into 2023.
spk08: So could you see a further decline in sales, new business?
spk02: So hard to predict, and we always give you our best view of the future when we talk to you on the fourth quarter call. But I think the fourth quarter probably will not be a lot different in behavior than what we saw in the third quarter. A little early to talk about 23, I think, at the moment.
spk07: Hopefully, Andrew, maybe there's a little more rationality that comes back into the market in 23, but time will tell. Got you.
spk08: And then shifting back to personal lines, it was interesting to me that you cited autophysical damage here. as a real pressure on the loss ratio, but no mention of the medical cost inflation. And I think Allstate had highlighted some pretty severe movements in their reserving for medical on the auto line. So any thoughts on where medical is trending?
spk12: Yeah, so included in our loss picks in auto, A component of that is medical. We have seen some uptick, and that's reflected in our estimates and has been. And we haven't called that out because it hasn't been a significant driver of the changes that we were anticipating for the year, which has really been on the physical damage side. Because as you recall, we had anticipated to see some relief in inflationary pressures in the second half. that have not obviously materialized. Okay.
spk08: Maybe if I just sneak one quick one in there. You wrote some new business as you cited in the release in the personal auto area. Are you given the rate increases that you need? Are you comfortable with that new business that you're putting on the books? Or could that be a little weak in year one?
spk02: Andrew, good question. We are spending a lot of time on the quality of the new business we're writing in first lines. And I think our team today still feels very solid about the quality, but we are moving on the pricing side and will continue to move. And it's one of the reasons that we have slowed the Prevail rollout, still moving forward, but slow slightly to make sure that our rate adequacies as we introduce the new product into market are where they need to be, given our view of current trends. And as you know, and as we've discussed, that trend has been moving on us throughout the year or so. Yeah, I'm very confident about where we are today and know that quality is something we've got in our front viewfinder day in, day out.
spk01: Thanks a lot. Thank you. Our next question comes from Michael Phillip of Morgan Stanley. Michael, your line is now open.
spk04: Thanks. Good morning. I guess I want to continue with auto for a second. I scratched my head with some auto results of some companies, and I've got to put yours in that category. I'm a little confused on something. Um, and that is, you know, if I look at your auto core results and you've been north of a hundred, even the back half of last year, your pricing back then was low single digits. Now five, it's going to get better. That's good. It's going to get better. Um, but I guess what I don't get is, you know, your average and north of a hundred percent last year. Um, the question might be just kind of, when did you start seeing, maybe you saw it differently. When did you start seeing the high physical damage? Maybe you saw it a little bit later. But despite north of 100% and low single-digit pricing even back then, today you're taking favorable development. So I'm confused on that and how long that might last. Thanks.
spk02: Yeah, Michael, we started seeing adverse FIS dam pressure to our book and our expectations by mid to late summer last year. So our filings ramped up in the September timeframe, and they have continued to ramp throughout the year. Many of these states are now in the double dip stage, so we're taking two bites at that apple inside the year. And our expectation for 22 was that we would see some of those physical damage trends contain themselves a bit in the back half of the year, which we have not seen over the third quarter. So as we project forward, Our activities will deal with the climate we see today. And as such, our fourth quarter pricing activities are going to be in the 10% range. That is reflective of where we think those rates need to be filed at. And as we continue to 23, as I said, it'll go north from there.
spk12: And then the only thing I add, because you did mention the favorable prior year development that we saw in the auto line. That was, you know, primarily related to 2018 and prior, just to put context on where we were seeing that benefit.
spk04: Yeah, okay, that's helpful. So it was prior to 2021. But I guess who's concerned, maybe the numbers you were putting up in the back half of last year had some padding for it, despite the fact that, as you just said, you even start to see the higher trends last year. Well, you must have put some pattern in for 2021 actually here.
spk12: Yes, we had increased our views on physical damage in the second half of 21. Again, our expectation was that those were going to start to level off and we start to see some improvement in the back half of this year, which obviously we've not seen and we've been responding accordingly each quarter as we book the current quarter activity.
spk02: And, Michael, I think it goes without saying, but obviously that activity quarter by quarter now is rolling into our filings. So what we experienced in the fourth quarter became a big part of, you know, the first and second quarter filings and the first quarter. So as we think about the experience, we have tried to reflect it in our loss pick calls, but also in our filings as we move ahead.
spk04: Okay. Thank you for the call. Go ahead. Appreciate it.
spk01: Thank you. Our next question comes from Josh Schenker of Bank of America. Josh, your line is now open.
spk06: Yeah, thank you. Looking at the healthy increase in the dividend, I'm just trying to understand the idea about a permanent 10% increase in the dividend versus extra gunpowder for share repurchase for the lower increase of the dividend. How are you balancing those two things?
spk12: Yeah, well, I think we've been consistently balancing those things. We do think that it's important for us to maintain a competitive dividend. And I think the dividend really, in my mind, speaks to just the ongoing earnings power as we see of the organization. And as I said, we've found a path of increasing that each year as our earnings continue to increase. I think we've got a very healthy repurchase authorization that allows us to execute on deploying our excess capital. So I feel very good about the balance that we create in both of those items.
spk06: And then I didn't catch it in the prepared remarks. Maybe I missed it. But did you give us a gross loss for Ian so we can compare it to the net loss and how much our reinsurance picked up?
spk12: I did not, but I would say that from a reinsurance perspective, it's like $15 million to $16 million of recoverable that we booked within those estimates for Ian loss.
spk06: That's perfect. Thank you.
spk01: Thank you. Our next question comes from Yaron Kinnar from Jefferies. Yaron, your line is now open.
spk16: Thank you. Good morning, everybody, and congratulations to Doug on the retirement. I guess first question, just with your plan of really keeping the reinsurance structure unchanged next year, I realize nothing's really set in stone yet, but assuming you're able to do that, And with reinsurance costs probably going up, and I think you guys are mostly in the admitted markets, and maybe you see the ability to offset that through price lag a little bit. I guess all this said, is it reasonable to think that all else equal margins could see a little bit of pressure, at least in the early half of next year?
spk02: I think that's a little bit big step to take right now. Our property pricing moved up in middle and large commercial toward the end of the third quarter. Our underwriters across the franchise on property know that they've got to look hard at insured-to-value numbers on all of our accounts. I think they're understanding and looking back at their cap models given what happened in the last 30 days. So we're moving on the primary side, and our experience – Certainly from a cat perspective, reinsurance has been generally very, very solid over the last decade. So it is too early to tell, but I'm not thinking about property compression right now. I'm thinking about it in terms of making sure we get needed rate on our book of business across every line that is writing the property.
spk16: Okay.
spk07: I think you said it well, Doug. To me, Yaron... We'll always think about, you know, economics and what does it mean and sort of that risk, you know, return tradeoff. But as Doug said, our historical performance, you know, our deep partnerships with our reinsurers and the fact that we do have, you know, multi-year rate guarantees on different layers, I think it immunizes us a little bit from any pressure on rates that we might face. So time will tell and we'll report back to you early next year.
spk16: Understood. And then on the DNO competitive pressure commentary, can you maybe add a little more color on where this pressure is coming in more? Is it more in the primary layers? Is it more access? Are you seeing it more from new entrants or incumbents?
spk02: Well, I would share, you know, our book is approximately 80% access in the U.S. DNO space. So, you know, I can comment on what we're seeing there, which is where the pressure we're seeing, we're also seeing on the primary side, but our book is primarily excess. So I'd start with that. There have been a series of new entrants over the past 24 months. As we all have talked about, the IPO market has slowed and the SPAC market has slowed as well. So the new, new opportunities in the marketplace are not where they were one and two years ago. So lack of upside opportunity and Very solid, strong rate adequacies has led to quite a bit of competition, which I think is fueling inside this book. And on us, it's hitting primarily in our excess area.
spk16: I understand that you're mostly excess, but ultimately, if the primary layer is coming in at a lower price, it also reflects on the excess price, I think. So I guess there's more of the pressure coming from the primary layer coming in, or is it more from the excess layer pricing diminishing?
spk02: I think there's pricing pressure up the tower. There is some pressure in the primary, but I'm really speaking to primarily excess where we've seen quite a bit of new capacity come in, easier to come in in the excess area, and that's where we're experiencing that pressure today.
spk16: Got it.
spk01: Thank you.
spk02: Thank you.
spk01: Thank you. Our next question comes from Michael Ward of Citi. Michael, your line is now open.
spk05: Thank you, guys. I was just wondering, you cited volume-related staffing costs for commercial. Just curious, is that related to workers' comp claims, or I guess what does that pertain to? You know, I think we had heard about this in group in the past, but not necessarily for P&C.
spk12: Yeah, I would call that more on the production side, not on the claim side. So, you know, again, as you can see from our very healthy top line, from a dollars perspective, we also just, you know, see some more costs relative to that production, just which reflects that volume, but not claims related.
spk05: Okay. The rest of my questions are asked. Thank you very much.
spk01: Thank you. Our next question comes from Jimmy Bullard from JP Morgan. Jimmy, your line is now open. Hey, good morning.
spk09: So first, I just had a question on the development in the commercial side. I think you mentioned adverse development in commercial auto. If you could just go into detail on what years it related to and what the driver was.
spk12: Yeah, so in commercial lines, auto... It really relates to accident years 2017 to 2019, and specifically we had one claim that had an adverse verdict during the quarter that we reacted to.
spk09: Okay. And then on personal auto, obviously you're raising prices. It'll take a while to flow through your results given your 12-month policies. Do you have any views on states that are not allowing price hikes right now, like California, and whether the companies are making some sort of headway in convincing regulators to approve price hikes?
spk07: Yeah, Jimmy, I'm not going to comment on the regulatory environment because it's pretty dynamic in various parts of the country. And you mentioned one particular state. So, you know, we pride ourselves on, working with all our regulators in a constructive fashion, and hopefully that can continue in some of these problematic areas.
spk09: Okay, that's all right. Thank you.
spk01: Thank you. This concludes the Q&A for today. I will hand back to Susan Spivak for any further remarks.
spk11: Thank you all for joining us today and as always, please reach out with any additional questions. Have a great day.
spk01: Thank you for joining today.
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