All material subject to strictly enforced copyright laws. © 2021 Inside P&C is part of Euromoney Institutional Investor PLC.
Accessibility | Terms & Conditions | Privacy Policy | Modern Slavery Act | Cookies | Subscription Terms & Conditions

The Hartford investor day: Red light, green light

IPCD nov 17 2021 main image.png

Yesterday, The Hartford held its long-awaited Investor Day, reiterating some of its previously discussed objectives and attempting to prove it can succeed independently.

Recall, on March 11, Chubb announced its unsolicited offer for The Hartford of $65 per share, subsequently improving first to $67 and finally to $70. The deal made sense on paper for Chubb, although The Hartford swiped left on the sale.

As it fought to retain its independence, The Hartford laid out ambitious objectives for 2022, and scheduled an investor day for November to reset investor expectations and not lose the re-rated stock multiple. The last time The Hartford held a deeper dive on commercial lines was in June 2015.

If you have been to a lot of investor days, you learn to keep your expectations in check. Investor days for insurance companies are challenging to pull off. Some investor days feature a C-suite-heavy discussion, while others move beyond financial metrics to really show what's behind the curtain. Option two is challenging and risky to pull off but holds the most value-add.

Unfortunately, The Hartford's investor day took option one. As a result, the presentation mainly focused on building on the prior discussion and previous comments made on earnings calls, leading to an incremental value add at best.

It was a confidence-building exercise where the main message was: "Hey guys! The fixing and cleaning-up phase is over. It's time to think of the future and time to look beyond the past."

If one were to summarize the segmental takeaways in a sentence, they would be as follows:

  • Commercial: Small commercial chugs along, while specialty (including Navigators) hasn't missed the E&S boat!

  • Group benefits: The Aetna acquisiton is paying off and post-Covid, things will go back to a normalized return.

  • Personal: Our differentiated book has held up okay, but we aren’t immune to loss-cost trends.

In terms of specific metrics, The Hartford expects to earn an overall ROE of 13%-14%, with P&C at 14%-15%, and group benefits at 10%-11%.

Since these metrics are a continuation of the recent years' trendline, in theory, it is tough to argue against them.

But what caught our attention in response to a question – also discussed previously on the Q3 earnings call – was CEO Chris Swift's insistence that loss costs are on a steady trajectory. And (to paraphrase) there is nothing out there that gives the company cause for concern.

Another question focused on the growth (which we discuss later) and why the new business penalty was less apparent.

If one were to surveil the broader commercial insurance space, your confidence levels would vary on whom you think will get the loss costs right and who could falter.

The Hartford has had several stumbles in the past. Consequently, we find this insistence on loss costs remaining stable interesting. But, perhaps, our concerns are clouded by the volatility of the past.

We understand management's focus on this new trend line of the double-digit ROEs of recent years as the "Great Reset”. But we remain cautious of the view that the company will be a double-digit ROE machine in the 2020s.

The stock closed down 1.4% yesterday with peers flattish, potentially indicating some skepticism given the strength of its trading since Chubb’s interest emerged. Below we examine some of the key points discussed at yesterday's investor day.

IPCD nov 17 2021 image 1.PNG

Middle and large commercial account growth could come with underwriting difficulties.

Like its peers, The Hartford’s commercial lines segment has recently benefited from rate increases and recorded strong growth and underwriting improvement. As a result, the firm is anticipating commercial lines growth of 11% in 2021 and 4%-5% in 2022. Management also provided an optimistic view of rates outpacing loss cost trends beyond 2022.

Growth beyond the company’s historically strong small commercial book will test its underwriting abilities. The middle and large commercial segment has historically posted much more volatile results, with the combined ratio surpassing 100% more often than not over the past few years.

The chart below shows that the underlying margins have improved along with the favorable pricing environment. If loss costs spike earlier than broadly discussed this earnings season, margins might come under pressure sooner than anticipated.

IPCD nov 17 2021 image 2.png

The firm’s small commercial product, Spectrum, is better positioned than InsurTechs.

Small commercial lines have generally garnered less InsurTech attention than other lines, including home and personal auto. But some InsurTech firms, such as Next, Corvus, and Pie, have tried to break into the traditional-insurer-dominated sector.

They have attracted attention and outside funding. Next Insurance, founded in 2015, raised over $500mn in multiple funding rounds this year. Corvus Insurance similarly brought in $100mn this past spring. Workers’ comp-focused Pie raised a $118mn Series C round in March, and as revealed by Inside P&C’s news team earlier this month, is in the early stages of preparing to IPO.

But the newcomer InsurTechs are facing stiff competition from The Hartford, which is known as a leading small commercial insurer.

Small commercial accounts for 31% of The Hartford’s premiums. The firm is the second-largest workers’ comp carrier and the fifth-largest commercial multi-peril carrier by premiums. While it has been writing small commercial policies for over 200 years, it introduced a technology-focused small commercial insurance product called Spectrum in 2019.

This offering was also discussed yesterday at The Hartford’s Investor Day to highlight additional untapped avenues that could help drive growth on the commercial side.

The Hartford noted that Spectrum (equating to 18% of premiums in 2020) has tech-enabled sign-ups, which has allowed 73% of its new policies to require zero human intervention. Although an innovative product, it remains to be seen what level of traction this gets over time.

AARP mix has allowed the firm to avoid the extent of personal auto loss cost trends experienced elsewhere but has not spurred growth.

The firm anticipates that the personal lines underlying combined ratio will deteriorate 2-4pts from 2021 in line with pre-pandemic levels. This deterioration will, in part, be a result of worsening auto trends.

The chart below shows the company has fared better than its peers, which had more significant impacts from recent catastrophes and deteriorating loss trends in their personal auto books. This outperformance is primarily due to the benefits of the AARP drivers making up the company’s business mix. Chubb’s unique high-net-worth business mix appears to be outperforming the past two quarters.

ipcd nov 17 2021 image 3.png

In summary, The Hartford used the Investor Day to provide incremental discussion in hopes of cementing its previously discussed expectations of a double-digit ROE for the next couple of years. That said, it remains to be seen if the recent years are a new normal or a temporary positive blip in the long-term trendline.

    We use cookies to provide a personalized site experience.
    By continuing to use & browse the site you agree to our Privacy Policy.
    I agree