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Text: Last night, 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.
Just a few final comments before Chris begins.
These statements are not guarantees of future performance, and actual results could be materially different.
A detailed description of those risks and uncertainties can be found in our SEC filings.
Our commentary today include non-GAAP financial measures.
Explanations and reconciliations of these measures to the comparable GAAP measure are included in our SEC filings as well as 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.
Last quarter, I shared that I had never been more excited about the future of The Hartford.
Our second quarter results support that optimism.
All the components of our strategy are coming together to deliver growth, margin expansion and operating efficiencies.
In the second quarter, we reported core earnings of $836 million or $2.33 per diluted share; 8% growth in year-over-year diluted book value per share, excluding AOCI; and a trailing 12-month core earnings ROE of 13.1%.
In addition, we returned $694 million to shareholders in the quarter from share repurchases and common dividends.
The outstanding financial performance of The Hartford reflects strong execution and success of our strategy to focus on high-return businesses where we have market leadership and sustainable competitive advantages.
Economic growth, as measured by GDP, reached a record level in the second quarter.
And while moderation is expected, the overall trend will remain elevated through 2021.
This economic expansion will grow the premium base of our employment-centric businesses and other lines as they benefit from job creation and new business formations.
Meanwhile, we are closely monitoring the recent elevated inflation data and remain confident that our loss ratio assumptions are sufficient against this backdrop in 2021.
At the same time, we are considering pricing actions as we gauge inflation trends going forward.
Finally, our investment portfolio is well diversified and positioned for the evolving macroeconomic environment.
As we enter the second half of '21, while watching developments with COVID-19 and inflation, I am very confident that The Hartford franchise has never been better positioned to continue to generate industry-leading returns and enhance value for all our stakeholders.
Let me now make some high-level comments about the results within the business.
In Property & Casualty, improved results were driven by higher investment income and a very strong contribution from Commercial Lines with double-digit top line growth, underlying margin expansion and reduced COVID impact.
For nearly 40 years, we have been a leader in the small commercial market and have consistently generated highly profitable margins.
Results continue to be exceptional.
Our differentiated products and digital capabilities are driving a superior customer experience, which contribute to higher written premium levels as we capture more profitable market share.
For the second consecutive quarter, our next-gen Spectrum, new sales reached record levels.
In Middle & Large Commercial, our team has done a tremendous job improving margins while growing the top line, as demonstrated by new sales and written premium levels.
As the country invests in new infrastructure over the next decade, our specialized verticals are well positioned as a go-to-market for risk products and services.
In Global Specialty, we are growing in targeted lines that provide very attractive risk-adjusted returns.
Cross-selling within The Hartford's retail distribution has been very successful, and the feedback from our distribution partners has been exceptional regarding product breadth and teamwork.
As Doug will discuss further, we expect to exceed our cross-sell targets a year ahead of plan.
I am extremely pleased with what the team has accomplished in a short period of time since the strategic transaction of Navigators closed.
The timing was ideal given the growth in this market segment and the robust pricing environment.
Just two years ago, this business was generating combined ratios above 110%.
We thoughtfully developed a plan to improve the financial performance and the results are self-evident, and we believe there is more improvement to come.
We have nearly $2.5 billion of annual premium in Global Specialty, and I am very optimistic about the future as we realize the full potential of the products and capabilities of this business.
Across Commercial Lines, our technology investments have improved the speed and effectiveness of the underwriting process.
We continue to further leverage data and analytics to make more informed underwriting decisions and respond to the needs of our distribution partners and our customers.
Overall, our Commercial Lines businesses are well positioned to compete and win in the marketplace.
Turning to Personal Lines.
We are the fifth largest direct writer of personal auto through our partnership with AARP, one of the largest affinity groups in America.
Over the next decade, this mature market demographic is estimated to grow three times as fast as the rest of the U.S. population.
To capitalize on this growing segment, we are modernizing our products in both home and auto and further enhancing our already strong digital capabilities.
This transformation provides greater ability to grow in the 50-plus demographic that has become more reliant on digital technologies in the way they live and work.
Before turning to Group Benefits, I would like to briefly comment on the bankruptcy of the Boy Scouts.
Earlier this month, the Boy Scouts filed an amended plan, which included a request to be released from its settlement agreement with The Hartford.
We are vigorously contesting this request and have filed strong opposition with the bankruptcy court.
That said and consistent with our policy regarding active litigation, I am not going to comment further on this matter.
Turning to Group Benefits.
We posted solid results for the quarter, driven by excellent investment returns as well as continued favorable disability trends, offset by elevated excess mortality.
Higher year-over-year earned premiums, excluding buyouts, reflect expanding payrolls as well as new sales and strong persistency.
The group life industry has been impacted by excess mortality over the past five quarters.
During the second quarter, our excess mortality losses have dropped significantly versus the first quarter.
U.S. COVID-19 deaths have declined rapidly since peaking in January, but continue to drive elevated mortality in our book of business and across the industry.
Consistent with U.S. trends, the average age of our COVID-19 life claimant has decreased.
Since younger age cohorts tend to carry higher face amounts, the average claim severity has increased relative to earlier periods in the pandemic.
We are optimistic about the efficacy of vaccines.
However, we are closely monitoring variant strains and the slowing rate of vaccinations, particularly among the younger age cohorts.
That said, we do expect lower excess mortality in the second half of '21 compared to the first half of this year.
We are a top three carrier in the group benefits industry with strong market share, a diverse product portfolio and capabilities across customer segments from small business to national accounts.
We continue to invest in our technology platform to extend our service offerings, including digital access for employers and employees to improve the overall customer experience.
The workplace remains an important access point for many people to obtain desired protection products, and we see that relationship growing stronger in the years ahead.
In addition, the pandemic created new focus on the products and services we provide.
We are confident that our innovative mindset positions us well to maintain our competitive advantages and grow in Group Benefits.
To conclude, we are executing with confidence and precision.
Our top line is benefiting from strong macroeconomic tailwinds.
Margins are expanding with a positive renewal rate environment, and excess mortality losses are expected to decline.
With enhanced underwriting capabilities, broad product offerings and strong distribution partnerships, we are positioned to grow and capture more profitable market share.
Last quarter, we shared our target of a core earnings ROE of 13% to 14% in 2022 and into 2023 driven by top line growth across the businesses, margin improvement with strong earned pricing trends in excess of loss costs, operating efficiencies and proactive and prudent capital management.
I am optimistic and confident we will continue to deliver on our financial objectives and enhance value for all stakeholders.
Overall, we are very pleased with the results for the quarter and our progress on our priorities to enhance value creation for shareholders.
Second quarter core earnings were $836 million or $2.33 per diluted share and up 91% from last year.
We had strong performance across all our businesses, excellent investment results and significantly lower COVID losses as compared to the prior year period.
In P&C, the combined ratio of 88.5 improved 8.4 points from the second quarter of 2020, including improvements in both the loss and expense ratios.
The expense ratio in the quarter improved by 220 basis points to 31%, reflecting earned premium growth as well as cost savings from Hartford Next and a lower provision for doubtful accounts.
In Commercial Lines, we produced an excellent underlying combined ratio of 89.4, which included ex COVID loss ratio improvement in Middle & Large Commercial and in Global Specialty and expense ratio improvement across all businesses.
Results in Commercial Lines also improved year-over-year due to lower direct COVID losses of $3 million compared to $213 million or 9.9 points in second quarter 2020.
Written premium was up 15% with growth in all lines of business, including the effect of higher audit and endorsement premiums reflecting the economic rebound.
Personal Lines generated an underwriting gain of $96 million and an underlying combined ratio of 88.2%.
Results were down from second quarter 2020 as last year benefited from significantly lower auto frequency due to the pandemic.
Across Property & Casualty, catastrophes were $128 million in the quarter, $120 million lower than second quarter 2020, which included $110 million for civil unrest.
P&C prior accident year reserve development within core earnings was a net favorable $188 million, including an $82 million reduction in catastrophe reserves as well as decreases in workers' compensation, personal auto liability, package business and bond.
This compared to $322 million of net favorable reserve development in second quarter 2020, which included a $400 million decrease in catastrophe reserves, including the subrogation benefit from PG&E.
In second quarter 2021, we ceded an additional $39 million of unfavorable Navigators reserve development to the adverse development cover primarily related to U.S. financial lines.
Although these losses are economically ceded, the reserve development resulted in a deferred gain, representing a charge against net income in the quarter.
Group Benefits core earnings were $149 million, up 46% over prior year.
Earnings for the quarter reflect strong investment results, the lessening effect of excess mortality related to COVID-19 and an increase in fully insured ongoing premium as our customers emerge from the pandemic.
Sales were nearly $100 million in the quarter, and we experienced a continuation of strong persistency at 91.1%.
All-cause excess mortality in the quarter was $25 million, which includes $88 million for second quarter death dates, offset by $63 million of favorable development for prior period excess mortality estimates, predominantly related to the first quarter.
Through the first six months of the year, our results include excess mortality of $210 million.
As Chris mentioned, although we were encouraged by the trend of declining excess mortality from first quarter to second quarter, we continue to watch a variety of factors, including vaccination rates and the impact of variants.
While uncertainty remains, we would expect excess mortality trends in the second half of 2021 to improve significantly.
Disability loss trend for the quarter remained favorable, though up slightly from the prior year quarter.
The disability loss ratio for the quarter was 64.2%, up 1.6 points as the prior year benefited from favorable short-term disability claim frequency due to the deferral of elective medical procedures at the beginning of the pandemic.
Long-term disability claim incidence was favorable to prior year.
And claim recoveries, although down from the prior year, remain strong.
At Hartford Funds, core earnings for the quarter were $51 million compared with $33 million for the prior year period, reflecting the impact of daily average AUM increasing 36%.
Mutual Fund net flows were very strong at $2.4 billion of net inflows for the quarter.
The Corporate core loss was higher at $52 million in second quarter 2021 compared to a loss of $6 million in the prior year quarter due to income from our investment in Talcott in the second quarter of 2020 of $68 million before tax.
On June 30, 2021, we received $217 million from the sale of our ownership interest in Talcott, resulting in a realized capital gain of $46 million before tax in the quarter.
As a reminder, within core earnings, the Corporate category primarily includes interest expense on debt and investment management fees and expenses related to managing third-party business, including management of the invested assets of Talcott.
Net investment income was $581 million for the quarter, up 71% from the prior year quarter, benefiting from very strong annualized limited partnership return of 33%, driven by higher valuations and sales of underlying investments within private equity funds.
The total annualized portfolio yield, excluding limited partnerships, was 3.1% before tax compared to 3.4% in the second quarter of 2020.
The portfolio credit quality remains strong with no credit losses on fixed maturities in the quarter and a $10 million gain from the partial reduction of the valuation allowance for credit losses on mortgage loans due to improved economic scenarios.
Net unrealized gains on fixed maturities before tax were $2.8 billion at June 30, up from $2.3 billion at March 31 due to lower interest rates and tighter credit spreads.
Improving operating efficiencies and a lower expense ratio from Hartford Next have been a contributor to margin expansion.
The program delivered $195 million in pre-tax expense savings in the six months ended June 30, 2021, compared to the six-months period in 2019.
We continue to expect full year pre-tax savings of approximately $540 million in 2022 and $625 million in 2023.
Book value per diluted share, excluding AOCI, rose 8% since June 30, 2020, to $49.01.
And our trailing 12-month core earnings ROE was 13.1%.
During the quarter, The Hartford returned $694 million to shareholders, including $568 million of share repurchases and $126 million in common dividends paid.
For the 6-month period, we returned $933 million with $691 million of share repurchases and $242 million in common dividends paid.
From July one to July 27, we repurchased 1.9 million shares for $116 million.
There remains $1.7 billion available under our $2.5 billion authorization through 2022.
Resources at the holding company as of June 30 included a total of $1.7 billion in cash and investments.
During the quarter, we received $337 million in dividends from subsidiaries and expect approximately $725 million to $900 million over the second half of 2021.
All in all, we had very strong results for the second quarter, which puts us well on our way to achieving the financial goals we shared with you in April.
Six months into the year, I couldn't be prouder of our performance.
Within Property & Casualty, we're meeting or exceeding expectations on nearly all our key financial metrics.
In the second quarter, Property & Casualty produced an outstanding underlying combined ratio of 89.2.
Premium growth accelerated in commercial.
Pricing remains [Technical Issues] The yield on bindable business is particularly strong, and the efficiency leverage is equally important.
The sophistication of our proprietary pricing model gives us confidence in the quality of our bindable business and is reflected in Small Commercial's underlying profitability.
Middle & Large Commercial accelerated into the second quarter, producing superior written premium growth of 20%.
Middle Market new business of $147 million, up 48%, was at its highest level in two years.
I'm particularly pleased we achieved this result while maintaining underwriting discipline as measured by our pricing metrics and risk scores.
Policy retention in Middle Market increased four points to 82% while maintaining disciplined risk-by-risk underwriting decisions using our increasingly refined segmentation tools.
Like Small Commercial, increased payroll and rising wages contributed to the second quarter Middle & Large Commercial written premium growth of 20%.
Global Specialty produced another strong quarter with written premium growth of 16%.
New business growth of 27% was equally impressive, and retention is up significantly from prior year.
In the quarter, the breadth of our written premium growth was led by 25% in wholesale and 18% in U.S. financial lines.
Global Reinsurance also had an excellent quarter with written premium growth of 26%.
As I've mentioned previously, cross-sell activities are an important component of our growth strategy.
During the quarter, cross-sell new business premium between Global Specialty and Middle Market was $28 million or 11% of related new business sold by these segments.
Since the Navigators acquisition, this effort has delivered $185 million in new business and is on pace to eclipse our initial goal of $200 million a year early.
We now have close to 2,500 accounts with policies that record premium in both Middle Market and Global Specialty.
We're also particularly encouraged by the success of our industry specialization strategy built both organically and through the Navigators acquisition.
For example, the acquired retail excess and U.S. financial lines are significant contributors to our cross-sell execution.
The combined new business growth from these two lines has increased more than 50% since the acquisition.
After years of development, we view our product breadth as a competitive strength.
Let's move on to pricing metrics.
U.S. standard lines and Global Specialty commercial pricing, excluding workers' compensation, was 9.2% in the quarter.
Middle Market ex workers' compensation price change of 8.2%, although down 1.1 points, continues to exceed loss cost trend and reflects improved profitability performance.
In the workers' compensation, renewal repricing was 1% in the quarter.
A key indicator of future pricing includes the impact of the 2020 pandemic trends on 2022 bureau loss cost filings.
We will be closely monitoring these filings in the coming months on a state-by-state basis.
Global Specialty renewal written price remained strong in the U.S. at 11% and international at 24%.
All in, I'm very pleased with our pricing this quarter.
Turning to commercial loss trends, the second quarter current accident year loss ratio was largely in line with expectations.
We are intensely watching inflation and have been particularly dialed in to recent building repair costs and rising wage trends.
Within Large Commercial property, Small Commercial recorded a few large fire losses in the quarter.
And in Global Specialty international, we incurred a large offshore energy loss.
Both were within a normal range of expected volatility.
Overall, Middle Market property loss ratios were slightly favorable to expectations in the quarter.
Favorable claim frequency was partially offset by an increase in severity related to labor and material costs.
While we believe property severity trends may be slightly elevated for the rest of the year, we remain confident in our initial full year Middle Market property loss ratio expectation.
Shifting to workers' compensation, the economic recovery is driving wage growth for our worker population.
This wage growth translates into higher premiums and wage replacement benefits.
Generally speaking, the net impact is a minor improvement in the workers' compensation loss ratio.
Combining earned pricing and loss trends, I'm pleased with the continued strong current accident year performance.
In the quarter, the Commercial Lines underlying ex COVID loss ratio was 57%, 1.3 points better than Q2 of last year.
Let's now turn to Personal Lines.
As expected, the second quarter underlying combined ratio rose 7.5 points to 88.2.
Auto frequency is elevating with increasing vehicle trips and miles traveled, but our book is still favorable to pre-pandemic levels.
As expected, home losses were higher versus a very strong prior year.
Overall, we had favorable claims frequency in the quarter, which was offset by higher claim severity, driven by modestly higher-than-expected large ex CAT fire losses and a provision for elevated building material and labor costs.
Written premium declined 5% after adjusting for both the second quarter 2020 extended billing grace period and the $80 million -- $81 million refund.
According to J.D. Power, auto shopping rates among the 50-plus age segment are down approximately 5% from third quarter 2020 when they first initiated the survey.
Persistency of the shopping trend may continue to pressure new business growth for our customer base.
However, increased marketing spend in the quarter drove June new business premium above expectations, and policy retention was up one point as compared to prior year.
We're also encouraged by the early results from the launch of our new contemporary Personal Lines auto and home product, Prevail.
Through the second quarter, yield, average issued premium and policy counts all met or exceeded expectations.
Both products are now available in Arizona and Illinois.
Seven additional states, along with advanced capabilities, will be online by year-end.
And we remain confident in our long-term growth plan for Personal Lines.
Property & Casualty achieved another outstanding quarter.
Our top line outperformed, providing confidence we will achieve our Commercial Lines 4% to 5% multiyear CAGR guidance.
Strong pricing is earning into the book driving lower current accident year loss ratios, and the expense ratio continues to benefit from our ongoing Hartford Next initiatives.
We are seeing the positive results of our multiyear road map with deeper and broader products, improved risk selection and outstanding execution.
I'm thrilled with our continued progress and look forward to updating you in 90 days.
Operator, we'll take questions now.

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continue to expect full year pre-tax savings of approximately $540 million in 2022 and $625 million in 2023.

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