Yahoo Finance The Hartford Financial Services Group, Inc. (NYSE:HIG) Q1 2024 Earnings Call Transcript
The Hartford Financial Services Group, Inc. (NYSE:HIG) Q1 2024 Earnings Call Transcript April 26, 2024
The Hartford Financial Services Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hartford Financial First Quarter 2024 Results Webcast. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions] At this time, I would like to turn the conference over to Susan Spivak, Senior Vice President, Investor Relations. Please go ahead.
Susan Spivak: Good morning, and thank you for joining us today for our call and webcast on first quarter 2024 earnings. Yesterday, we reported results and posted all the earnings-related materials on our website. Now I'd like to introduce our speakers. To start, we have Chris Swift, Chairman and Chief Executive Officer; followed by Beth Costello, our Chief Financial Officer. After their prepared remarks, we will begin taking your questions. Also with us to assist with your questions are several members of our management team. Just a 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 measures are included in our SEC filings as well as in the news release and financial supplement. Finally, please note that no portion of this conference call may be reproduced or rebroadcast in any form without the Hartford's prior written consent. Replays of this webcast and an official transcript will be available on The Hartford website for one year.
I'll now turn the call over to Chris.
Chris Swift: Good morning, and thank you for joining us today. The Hartford had a strong start to the year, outstanding financial results through the first quarter. Our strategy and ongoing investments, combined with disciplined underwriting and pricing execution, exceptional talent and innovative customer-centric technology continue to drive outperformance. Let me call your attention to some highlights achieved in the quarter. Top line growth in Commercial Lines of 8% and with an underlying combined ratio of 88.4%, strong renewal written pricing increases in Commercial and Personal Lines, Group Benefits core earnings margin of 6.1% and solid performance in our investment portfolio, all these contributed to an outstanding and industry-leading trailing 12-month core earnings ROE of 16.6% reflecting consistency of our margins and continued growth generated by our businesses.
Now let me share a few details from the quarter. Commercial Lines performance reflects strong top line growth at highly profitable margins. In the marketplace, we are prudently taking advantage of elevated submission flow, in part driven by the investments we have made to expand our product capabilities and the efficiency of the broker and agent experience. From that flow, we are using our data science advancements, pricing expertise in industry-leading underwriting tools to drive profitable double-digit new business growth in each of our three businesses. In addition, retention is steady and exposure growth remains solid although moderating from the elevated levels seen in the past couple of years. In Small Commercial, we are shattering previous quarterly written premium records while sustaining underlying margins.
New business growth was 11% in the quarter, driven by strong submission flow and growth in E&S binding. We are particularly pleased with E&S binding, a key area of focus, which is on track to grow annual written premiums by approximately 50% in 2024 to nearly $300 million. I remain incredibly pleased with the overall performance in Small Commercial and bullish on its outlook. We expect to sustain outstanding financial results by reliably serving agents and customers with industry-leading products and unmatched ease of conducting business and unrivaled pricing accuracy. Moving to Middle & Large Commercial. The financial performance continues to be exceptional. Written premium growth reflects strong renewal rate execution and new business growth of 18% with an especially good quarter in guaranteed cost construction and general industries.
We are building a track record of delivering meaningful growth, while consistently maintaining underlying margins. The stellar performance in this business is a direct result of our underwriting discipline, enabled by the investments we have made to enhance our capabilities. Combining these advantages with our best-in-class talent and the strength of our distribution relationships, we remain well-positioned to profitably grow this business. In Global Specialty, results were excellent with underlying margins consistent with last year and solid top line growth reflecting our competitive position, breadth of products and strong renewal written pricing. Written premium growth was propelled by a 20% increase in our wholesale business with significant contributions from primary and excess casualty lines.
We are particularly pleased with wholesale construction activity found in the quarter as well as overall increased submission flow, both meaningful drivers of new business growth. We remain excited about the Global Specialty business, including our position in wholesale and reinsurance market and from a broadened product portfolio. Looking across Commercial Lines, we continue to grow our property book, another key area of focus. We are capitalizing on favorable market conditions with a disciplined approach, including no change in our catastrophe risk appetite. Property written premium for the quarter was approximately 17% higher than in 2023. Turning to pricing. Excluding workers' compensation, Commercial Lines renewal written pricing rose seven-tenth from the fourth quarter to 9% with strong low double-digit pricing in property and auto and high single-digit in general liability.
Public D&O pricing is still pressured, though relatively stable with the fourth quarter. All-in, ex-comp renewal written pricing in commercial lines remained comfortably above loss cost trends. In workers' compensation, renewal written pricing remained slightly positive in the quarter. In summary, Commercial Lines delivered an outstanding first quarter results with ongoing momentum in the market. Moving to Personal Lines. Our first quarter financial performance demonstrates progress towards restoring targeted profitability in auto, as we continue to address current loss trends. Auto renewal written price increases of nearly 26% have likely peaked given our view of moderating loss trends for the remainder of the year. In addition, we have achieved new business rate adequacy in the vast majority of states and as a result have resumed national advertising this month.
In homeowners, renewal written pricing of 15% during the quarter comprised of net rate and insured value increases outpaced underlying loss cost trends. This year, we are celebrating our 40th anniversary with AARP. In 1984, we embarked on this journey with a shared vision and commitment to serve mature market customers. Our focus on this preferred segment, coupled with our modern innovative and digitally enhanced product and platform prevail is a competitive advantage. Our updated offering is currently available in 42 states and represents approximately 60% of our new business premium this quarter. With pricing gains, enhanced risk segmentation and moderating loss trends, I expect Personal Lines to meaningfully contribute to core earnings as it returns to profitability in 2024 and reaches target margins in 2025.
Turning to Group Benefits. Our core earnings margin of 6.1% for the quarter included improved mortality trends from the prior year and continued strong long-term disability claim recoveries. Fully insured ongoing premium growth of 2% reflects strong, but slightly lower persistency and a 6% decline in sales primarily driven by group life, where we are being disciplined with pricing and underwriting in this competitive marketplace. We continue to strengthen our capabilities for customer service, with an extensive suite for HR platform integration, member enrollment, process simplification and analytics. As part of our strategy to grow amongst small and midsized businesses, we are investing in our platform. This includes strengthening distribution relationships and actively seeking out new partnerships.
Employers are more focused than ever on the needs of their employees and our products and services are a key part of that value proposition. Moving to investments. The portfolio continues to support The Hartford's financial and strategic goals performing well across a range of asset classes and market conditions, and Beth will provide more details. In summary, The Hartford delivered another strong quarter with sustained momentum heading into the remainder of the year. Let me reiterate why I am so bullish about the future. First, our financial results continue to prove the effectiveness of our strategy and the impact of ongoing investments in our business. Second, Personal Lines results are showing improvement. We are achieving necessary rate increases and expect 2024 margins to progress towards targeted profitability.
Third, with our disciplined underwriting and pricing execution, exceptional talent, an innovative customer-centric technology, we will continue to sustain superior results. Fourth, investment income remained solid, supported by elevated yields and a diversified and durable portfolio of assets. And finally, we remain dedicated to enhancing shareholder value through supporting organic growth, continued investment in our business and proactively managing our excess capital. All these factors contribute to my excitement and confidence about the future of The Hartford and our ability to extend our track record of delivering industry-leading financial performance. Now I'll turn the call over to Beth to provide more detailed commentary on the quarter.
Beth Costello: Thank you, Chris. Core earnings for the quarter were $709 million, or $2.34 per diluted share with a trailing 12-month core earnings ROE of 16.6%. Commercial Lines had an outstanding quarter with core earnings of $546 million and an underlying combined ratio of 88.4, in line with our expectations and slightly better than the prior year first quarter. Small Commercial continued to deliver excellent results with written premium growth of 8% and an underlying combined ratio of 89.6 and further building on its impressive track record of delivering an underlying combined ratio below 90. Middle and Large commercial also delivered outstanding results with 9% growth over the prior year and this marks the fourth consecutive quarter of written premium exceeding $1 billion.
The underlying combined ratio was excellent at 89.2, a 0.7 point improvement over first quarter 2023, primarily due to a lower expense ratio driven by the impact of strong earned premium growth. Global Specialties underlying combined ratio was an exceptional 85.3, relatively flat to the prior year. Written premiums growth of 8% was driven by accelerating renewal written price increases and new business growth of 17% excluding Global Re. In personal lines, core earnings for the quarter were $33 million with an underlying combined ratio of 96.1, including a strong homeowners underlying combined ratio of 77. The auto underlying combined ratio of 104.4 was in line with our expectations and is a year-over-year improvement of 3.7 points. Once the reported ratio for the first quarter of 2023 is increased for the 3 points of development that occurred in the second quarter of 2023.
This result is consistent with achieving the 5 to 6-point full year improvement we previously discussed. Written premium in Personal Lines increased 13% over the prior year, driven by steady and successful rate actions. In auto, we achieved written pricing increases of 25.7% and earned pricing increases of 19.1%. In homeowners, written pricing increases were 15.2% for the quarter and 14.4% on an earned basis. The total Personal Lines expense ratio improved by 1.2 points, primarily driven by the impact of higher earned premium, partially offset by higher direct marketing costs as we increase our marketing spend to drive new business growth in those states where rates are adequate. With respect to catastrophes, P&C current accident year cat were $161 million before tax or 4.2 combined ratio points, which compares to $185 million in 2023 or 5.3 points on the combined ratio.
Total net favorable prior accident year development within core earnings was $32 million, primarily due to reserve reductions in workers' compensation, which were partially offset by reserve increases in general liability, assumed reinsurance and ocean marine. In addition, we had $7 million of favorable development in personal auto physical damage. We also recorded $24 million before tax in deferred gain amortization related to the Navigators ADC. This positively impacted net income with no impact on core earnings. Based on our estimate of payment patterns, we expect total amortization of the deferred gain in 2024 will be approximately $125 million before tax with the remaining balance amortized in 2025. We have provided additional information in the appendix of our earnings slide deck on both this ADC and the A&E ADC for your reference.
Turning to Group Benefits. Core earnings in the first quarter of $107 million and a 6.1% core earnings margin reflect improved Life results, continued strong disability performance and fully insured premium growth. As a reminder, from a seasonality perspective, we tend to experience higher underlying loss costs in the first quarter. The group disability loss ratio of 70.1 improved 0.3 points from 2023, driven by continued strong claim recoveries, partially offset by higher incidents in paid family leave and short-term disability products. The group life loss ratio of 82.6 improved 4.1 points versus prior year, reflecting improved mortality. Fully insured ongoing premium growth of 2% was driven by exposure growth, which remained positive, albeit at a lower rate than in the prior year.
Book persistency in the first quarter of 2024 was strong at over 90%, but approximately 1.5 points below record high levels in 2023. Turning to investments. Our diversified investment portfolio continues to produce solid results. For the quarter, net investment income was $593 million. The total annualized portfolio yield, excluding limited partnerships was 4.3% before tax, consistent with the fourth quarter of 2023. Our annualized LP returns were 1.3% and included positive returns from our private equity portfolio. Our real estate equity portfolio returns were impacted by lower valuations and the absence of real estate JV equity sales. Given the current macroeconomic backdrop, limited partnership returns in the second quarter are likely to be similar to first quarter results with private equity returns being offset by declines in real estate valuations and property depreciation with no sales activity.
We continue to believe our real estate holdings are durable, and we will be patient as it relates to any sales in order to maximize value. Although, we anticipate LP returns for the full year could be below 2023 results, we continue to believe that over the long-term, results will continue to add value and be consistent with historical returns. The overall credit quality of the portfolio remains high with an average credit rating of A+. Net credit losses remain insignificant. Turning to capital. During the quarter, we repurchased 3.8 million shares under our share repurchase program for $350 million and we expect to remain at that level of repurchases in the second quarter. At the end of the quarter, we had approximately $1 billion remaining on our share repurchase authorization through December 31st, 2024.
To wrap-up, our first quarter results reflect another quarter of delivering on our targeted returns to enhance value for all of our stakeholders. I will now turn the call back to Susan.
Susan Spivak: Thank you. We will now take your questions. Operator, could you please repeat the instructions for asking a question?
Operator: Thank you. We'll now begin the question-and-answer session. [Operator Instructions] We'll take our first question from Andrew Kligerman at TD Securities.
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