The Hartford Insurance Group - Q2 2023
July 28, 2023
Transcript
Operator (participant)
Good morning, and welcome to The Hartford's second quarter 2023 financial results conference call and webcast. All participants are in a listen-only mode. After the speaker's presentation, we will conduct a question-and-answer session. To ask a question, you'll need to press Star, followed by number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Susan Spivak Bernstein. Thank you. Please go ahead, ma'am.
Susan Spivak Bernstein (Senior Investor Relations Officer)
Good morning, and thank you for joining us today for our call and webcast on second quarter 2023 earnings. Yesterday, we reported results and posted all the earnings-related materials on our website. For the call today, our participants are Chris Swift, Chairman and CEO of The Hartford, Beth Costello, Chief Financial Officer, Jonathan Bennett, Group Benefits; Stephanie Bush, Small Commercial and Personal Lines, and Mo Tooker, Middle and Large Commercial and Global Specialty. 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 commentaries today include non-GAAP financial measures. Explanations and reconciliations of these measures to comparable GAAP measure are included in our SEC filings, as well as in the news release and financial supplement. Finally, please note that no portion of this 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.
Chris Swift (Chairman and CEO)
Good morning, and thank you for joining us. Last night, we reported strong financial and operational performance for the second quarter, completing a successful first half of the year. While we in the industry continue to navigate a dynamic market environment, including elevated catastrophe losses and persistent inflationary pressure in personal auto, once again, we achieved exceptional results in commercial lines and outstanding performance in Group Benefits. Highlights of the second quarter include top-line growth in commercial lines of 12%, including double-digit contributions from each business, with an underlying combined ratio of 88.3. Group Benefits fully insured premium growth of 7%, with a core earnings margin of 7.6%. Strong investment performance with increasing fixed income portfolio yields and a trailing 12 month core earnings ROE of 13.6%, while returning $484 million of capital to shareholders.
These results only strengthen my confidence in our ability to deliver a 2023 core earnings ROE in the range of 14%-15%. Now, let me dive deeper into our second quarter performance for each of our businesses. Momentum is strong in commercial lines. I expect continued top-line growth at highly profitable margins during the second half of 2023, with full-year underlying combined ratio targets unchanged. In small commercial, written premium of $1.3 billion and new business of $237 million continue near record high levels. Our best-in-class package product, which we call Spectrum, continues to outperform in a competitive marketplace. Spectrum new business premium of over $100 million was up 23% over prior year.
Our unmatched ease of doing business with agents and customers and our unrivaled pricing accuracy and consistency remain important drivers, as demonstrated by strong sales and retention and a 6% year-over-year increase in policies in force. In addition, written premium for our excess and surplus lines binding product eclipsed $50 million in the quarter, up nearly 60% from a year ago, with new business growth of just over 85%. Our expanding wholesale broker relationships are expected to drive continued robust growth and profitability for this important line. In short, small commercial continues to deliver outstanding results with industry-leading products and digital capabilities and is on track to exceed $5 billion of annual written premium in the near term. Middle and large commercial had an exceptional quarter.
Written premiums were at their highest levels ever, up 12% in the quarter, driven by strong momentum in new business, with elevated submissions and hit rates, along with increasing average account premium. Cross-sell activities remain in full force and are helping to drive new business results. Written premium grew across almost all lines, with excellent growth in our construction, energy, and entertainment verticals. In addition, we are particularly pleased by the 24% top-line growth in middle-market property lines, which remains a key area of focus and a creative part of this business.... Looking across the enterprise, as discussed in prior quarters, we are taking thoughtful and disciplined steps using industry-leading tools to grow our property book within favorable market conditions. These efforts should put us in a position to expand commercial property written premium to approximately $2.5 billion or up 25% by year-end.
Underlying margins in middle and large commercial were also at record levels, reflecting advancements in data science capabilities, industry-leading pricing and underwriting tools, and exceptional talent, all of which position us well to maintain profitable growth in this business. Global Specialty continues to deliver outstanding results, with net written premium growth of 15% in the quarter. New business growth and improving renewal written pricing were important contributors. In addition, we remain excited about our position in the wholesale market and the ongoing benefits to the top line from our broadened product portfolio. U.S. Ocean Marine, Environmental, International, and Global Reinsurance all achieved double-digit top-line increases. Our underwriting discipline, along with enhanced capabilities developed over the past few years, are driving targeted market share gains with a stellar underlying combined ratio that has hovered in the mid-80s for the past five quarters. In short, our execution has never been stronger.
Turning to pricing, Commercial Lines renewal pricing of 5.2% compared to 4.5% in the first quarter. Excluding workers' compensation, renewal pricing rose to 7.5%, up 8/10th sequentially, with accelerating pricing in property and auto. Across commercial, property pricing is well into the double digits, with auto in the high single digits. Pricing and other liability and casualty lines also remain strong, while public D&O pricing remains challenged. In addition, workers' compensation pricing remains slightly positive. All in, our strong written pricing performance in Commercial Lines, combined with stable loss cost trends, bolsters my confidence in our ability to maintain or slightly improve margins going forward. Moving to Personal Lines, persistent severity loss increases in auto have had a meaningful influence on overall industry results. We continue to respond with significant pricing actions.
During the quarter, we achieved renewal written price increases of 13.8% and expect acceleration to above 20% by the fourth quarter. As loss cost trends emerge, we will aggressively push for appropriate rate actions. In homeowners, renewal written pricing of 14.4% in the quarter, comprised of net rate and insured value increases, outpaced underlying loss cost trends. We are very selective and actively manage our homeowners book at a state and territory level, diligently managing risk and growth with sophisticated underwriting capabilities that allow us to effectively manage new business risk selection. A few examples of our risk management include the action we took many years ago to stop writing new homeowners business in Florida, a conservative stance on coastal CAT risks, and wildfire mitigation efforts that have yielded strong outcomes.
We are on the right path in Personal Lines, driving towards appropriate pricing and managing exposure and growth while continuing to serve our customers with award-winning service. In Group Benefits, I am pleased with both top-line and bottom-line performance, including an outstanding core earnings margin of 7.6%. Group Disability continues to post strong results, driven by favorable long-term disability incidence trends and claim recoveries. In Group Life, the loss ratio was up versus prior year. Mortality losses in the second quarter continued to run above pre-pandemic levels, but improved sequentially. Looking at the top line, growth was driven by book persistency above 90%, plus strong year-to-date new sales. Overall, the strength of our diversified product portfolio, as well as our commitment to outstanding customer experience through the use of data and technology, resonates in this marketplace, giving us a leadership position.
Moving now to investments, I want to highlight another quarter of strong performance as fixed income yields continue to trend higher with solid credit results. Thus, we'll provide further details. Before concluding, I would like to comment on the advances we continue to make in technology and the competitive advantage it brings to our businesses and distribution partners, along with a superior customer experience. At our Investor Day in November of 2021, I highlighted the significant investments we had made in our core technology platforms, which were allowing us to extend our digital and data capabilities.... Back then, we were already focused on leveraging artificial intelligence to enhance execution, and today, AI is mainstream at The Hartford.
The breadth and depth of our data and analytics and AI has grown into all parts of our business and is enabling greater agility and faster decision-making while improving and streamlining the experiences of our customers and distribution partners. While some organizations talk about what they expect to do in the future, we are already doing this at scale. With several hundred AI models in production and driving business results, we believe our capabilities are leading-edge. Let me give you just one example of how we are already using what we call our information advantage, fueled by advanced analytics and AI to drive results. We developed an award-winning medical record digestion and extraction tool that has transformed the way we conduct our workers' compensation business. This tool ingests and translates medical records into digital content, characterizes the data, and highlights relevant information.
In workers' compensation, we are streamlining the adjudication process by suppressing 30% of the extraneous information contained in medical records that otherwise results in significant distraction or lost time to our claim handlers. Since inception of this tool, we have processed more than 500 million pages of medical records, and perhaps more importantly, established a foundation for next-level AI use cases across our business. When it comes to generative AI, we are actively experimenting with this technology in a highly controlled environment. Now, The Hartford understands the potential of this technology, and we believe we're at the forefront in piloting use cases that will augment the capabilities of our employees. All the transformational work we have done over the past three or four years has put us in a strong position to accelerate our market-leading competitive advantage, driven by technology, data science, and our experienced workforce.
In closing, we have a unique portfolio of diverse, yet complementary businesses that contribute to our industry-leading returns. As we have reached the midpoint of 2023, it's a good time to reiterate our strategic priorities that we believe will continue to drive our success. First, leveraging our product breadth and competitive advantage across the P&C and Group Benefits platforms will drive profitable organic growth. Second, underwriting discipline will guide a balanced risk profile, supporting long-term book value growth. Third, we will continue to prioritize digital, analytics, and data science investments that enhance the customer and agent experience to improve underwriting and claims decision-making. Finally, we believe ROE is the ultimate measure of quality underwriting, execution on priorities, and prudent capital deployment. As such, we will continue to focus on exceptional ROE performance.
We will continue to deploy excess capital in a thoughtful manner, prioritizing shareholder return and investments in future growth. Results over several successive quarters affirm that this strategy is working. With our strong track record, we are confident in our ability to deliver core earnings ROEs in the 14%-15% range. Now, I'll turn it over to Beth to provide more detailed commentary on the quarter.
Beth Costello (CFO)
Thank you, Chris. Core earnings for the quarter were $588 million, or $1.88 per diluted share. In commercial lines, core earnings were $493 million. Our commercial book posted a very strong quarter and first half of 2023, with an underlying combined ratio of 88.3 and 88.4, respectively. Small Commercial continues to deliver excellent results, with premium growth of 11% and an underlying combined ratio of 89.7. The quarter included higher non-cap property losses within our package product as compared to the prior-year quarter. Overall, we are pleased with the performance of the entire book, evidenced by the 12th straight quarter of an underlying combined ratio of below 90. Middle and large commercial delivered both a record for written premium of $1 billion and an underlying combined ratio of 88.7.
This was a 4.2 points improvement from the prior year, including favorable non-cap property losses and expense ratio improvement. Global Specialty's underwriting margin was a strong 85%, a 1.9 points increase from a year ago, primarily due to slightly elevated losses in a run-off line with our international book and a higher expense ratio due to a business mix in Global Re and higher underwriting and technology costs. In Personal Lines, core loss for the quarter was $57 million, with an underlying combined ratio of 101.7%. Homeowners' underlying combined ratio of 79.6% was in line with expectations. Auto results reflected continued liability and physical damage severity pressure.
The auto underlying combined ratio was 111.8 for the quarter, which is 11.8 points higher than the prior year quarter, and is five points above our revised expectations from April, and includes three points related to losses in the first quarter. This increase to our expectations is attributable primarily to a higher than anticipated number of large bodily injury and uninsured motorist claims. For auto liability, we recorded no net increase in prior year reserves, as increases of about $60 million for accident year 2022 was offset by improvement, primarily in accident years 2019-2021. As Chris indicated, we continue to pursue rate increases to offset the loss cost trends we are experiencing. Written premium and Personal Lines increased 6% over the prior year, driven by steady and successful rate actions.
In auto, we achieved written pricing increases of 13.8% and earned pricing increases of 8.5%. In homeowners, we achieved our highest written and earned pricing increases in over a decade of 14.4% written and 12.7% earned for the second quarter. The expense ratio decrease of 2.7 points was primarily driven by lower marketing spend. With respect to CAT, the industry experienced another quarter of elevated losses, resulting in our property and casualty current accident year CAT losses of $226 million, which includes the impact from tornado, wind, and hail events across several regions of the United States. While catastrophe losses were significantly elevated for the industry, our results were only slightly higher than expectations.
Our effective aggregation, management, and underwriting discipline, especially in certain higher-risk states, helped limit our losses from convective storms in the quarter. Total net favorable P&C prior accident year development was $39 million, with $38 million in commercial lines, as reserve reductions in workers' compensation and catastrophes were partially offset by modest reserve increases in general liability, assumed reinsurance, and bond. In Group Benefits, core earnings in the second quarter were $133 million, with a core earnings margin of 7.6%, reflecting strong premium growth and long-term disability results. The year-to-date margin of 6.4% is at the midpoint of our full year range of 6%-7%. The group life loss ratio of 84.1% increased 5.5 points versus prior year.
Approximately four points of that increase is due to favorable prior period reserve development recorded in second quarter 2022. The remainder of the increase is primarily due to higher severity in the current quarter. Group disability continues to deliver strong results with a loss ratio of 67% for the quarter. The expense ratio improved 70 basis points and reflects strong top-line performance and expense reductions related to the Hartford Next initiative, somewhat offset by the continued investment in new capabilities to meet our customers' evolving needs and drive greater efficiency. Fully insured ongoing sales in the quarter of $151 million contributed to a year-to-date sales total of $625 million. This, combined with the excellent persistency Chris noted in his comments, resulted in fully insured ongoing premium growth of 7% for second quarter.
The economy remains quite resilient, with solid employment levels and wage growth, both of which continue to have positive effects on the business. Our diversified investment portfolio produced strong results. For the quarter, net investment income was $540 million. Our fixed income portfolio is continuing to benefit from higher interest rates. The total annualized portfolio yield, excluding limited partnerships, was 4% before tax, modestly higher than the first quarter. Our annualized limited partnership returns were 2.9% in the quarter. Results within the first half of 2023 were stronger than expected, given the resiliency of private equity returns, and we remain on track to achieve our expected full year 2023 target of 4%-6%. The overall credit quality of the portfolio remains high, with an average credit rating of A+.
Given the interest in the real estate sector, we wanted to provide an update regarding that portion of our investment portfolio, which remains consistent with what we discussed in our first quarter earnings report. As we mentioned, less than 10% of our commercial mortgage loan portfolio is in office exposures, all of which we view to be top-tier properties. During the quarter, two loans were fully repaid for approximately $90 million, and manageable maturities are expected in the second half of 2023 and 2024. All loans remain current with respect to principal and interest payments with no delinquencies. CMBS holdings and credit quality are also largely unchanged, given lower new issuance and limited trading activity. Our high-quality, non-agency CMBS portfolio is primarily conduit-focused and has limited exposure to office loans.
Holdings are supported by diversified underlying pools of property and have significant credit support to absorb individual loan losses with manageable near-term maturities. Turning to capital management, during the quarter, we repurchased 5 million shares for $350 million. At the end of the quarter, we have $2 billion remaining on our share repurchase authorization through December 31, 2024. Our second quarter results demonstrate that our franchise is well-positioned to deliver consistent, sustained, industry-leading results. We believe that we have the strategies, talent, and technology in place to continue to succeed. I will now turn the call back to Susan.
Susan Spivak Bernstein (Senior Investor Relations Officer)
Thank you, Beth. Operator, we have about 30 minutes for questions. We will take our first question.
Operator (participant)
Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Thank you. Our first question comes from Alex Scott from Goldman Sachs. Please go ahead. Your line is open.
Alex Scott (Equity Research Analyst of Insurance)
Hi, good morning. First one I had is, is just on the, the comments you made on, on property growth, earlier in the, the commentary. I was just interested in, you know, how your catastrophe budget and, and what you expect from, from CAT losses will shift, over the next year. You know, certainly the CAT performance this quarter was quite good, so just, just trying to get a feel for how that's going to think, if at all.
Chris Swift (Chairman and CEO)
Yeah, Alex, thanks for joining us. Yeah, as we talked about, improving and growing our property, you know, book and capabilities, was, was paramount. I'm pleased to, you know, report on a quarter-over-quarter basis, you know, our property totals are up about 23% on a, on a written premium basis. Pricing for the portfolio is up 15%. You know, a couple standout, you know, data points there. Large property is up almost 70%, you know, with 18 points of rate. Wholesale property is up 25% with 29 points of rate. Our global the reinsurance business is up about 50% with its property component and 30 points of rate.
You can see, I think we're executing well in an attractive marketplace, and, you know, and we feel good about what we're producing. I would just share with you that we're not taking on consciously sort of CAT-exposed property. I mean, we want, you know, broad-based property coverages, primarily the fire peril. If it comes along with some incremental or limited CAT exposure, you know, we'll take it and price the CAT risk appropriately. You should not think that this is a CAT play for us, but rather a broad-based, you know, property approach. Every year, we provide our CAT loads, you know, to you. We feel good about our CAT loads for this year, even with, you know, some slight elevation in the first half of the year. That's what I would share with you, Alex.
Alex Scott (Equity Research Analyst of Insurance)
Got it. That's helpful. In commercial on underlying, anything you'd call out in terms of, like, normalizing items? I mean, you know, I guess pretty squarely in, in your range that you guided to, but, you know, just trying to think through where our baseline is and how the acceleration in pricing can benefit underlying from here.
Chris Swift (Chairman and CEO)
Yeah, I will share with you, and re- and sort of reprise what we talked about in the first quarter. At a high-level summary, nothing's really changed from what we've, you know, talked about in, in the first quarter. We still feel good about the, you know, the guidance that, you know, we put out. We're executing, you know, well. Remember, you know, the, the fundamental thesis of, of the improvement, you know, between years, you know, was loss ratio improvement, expense ratio and improvement, and, you know, we were going to fight some headwinds in our, in our workers' comp business. All three of those components are playing out, almost exactly as we've foreseen.
There's also... You remember, we talked about an earned premium impact, that it was slightly more leveraged on the second half of the year. Earned premiums will continue to increase through the compounding effect of, of rates. I still see that and expect that in the second half of the year. The second point we talked about was a, a mix more towards property and other lines that have just lower loss ratios, that would, you know, mix in, you know, to help in, in improvement. The third thing that, again, you know, we see every month when we review results with the team, our underwriting initiatives and how we're looking at terms and, and conditions, in, in a thoughtful way, continue to produce a, a loss ratio benefit.
You put all that together, it, it, it is still what we believe will emerge on a full year basis. To your specific point, Alex, on any unusual items in the quarter, I would say there's probably 5/10s, excuse me, 5/10s of a point, or 1/2 a point in total headwinds, primarily from the non-CAT property losses that, you know, Beth talked about. We had favorability in middle, had some offsets in, in small, and then, you know, we have a runoff line of business, aviation war in our international book. That business had been run off in the last three quarters, but we did have $5 million of losses there. I put those two pieces together, and I, I would, I would normalize a full 1/2 a point off of what we printed right now.
Alex Scott (Equity Research Analyst of Insurance)
Got it. Thanks so much.
Operator (participant)
Our next question comes from Mike Zaremski from BMO. Please go ahead. Your line is open.
Mike Zaremski (Managing Director of Senior Equity Research Analyst)
Great. A question on, on workers' comp. A couple, it's, it's been interesting hearing a couple competitors, but also brokers talk about seeing a bit of an inflection in healthcare inflation, on the medical side. I'm very cognizant, and we are, that, you know, Hartford has a extremely strong franchise in comp, highly profitable line of business. We just heard your comments too, about kind of your confidence in margins. Just curious if you are seeing anything there on the margins in terms of an uptick in medical inflation impacting? Yeah, I guess, I guess it could be Group Benefits, too. Thanks.
Chris Swift (Chairman and CEO)
Yeah, I, I would say it's easier on, on Group Benefits because we're not exposed to medical inflation there. Remember, our, our Group Benefits business, we replace wages, you know, and don't have any, any exposure to sort of medical cost in total. Then, you know, what I would say, you know, Michael, on comp, obviously, we, we have a lot of data points. We operate in all 50 states, but, you know, generally, our medical severity trends are consistent with what we talked about in the first quarter, and lower, you know, than the 5% that we assume in our pricing and reserving. I'd say they're probably 50% lower at this point in time.
Obviously, we're well aware of what's happening with broad-based medical CPI, but we're somewhat insulated from that, and we've talked about the reasons before, whether it be, you know, contracts on a, on a state-by-state basis, our, our ability to challenge appropriate, you know, medical bills that are, you know, established to us. Remember, you know, our biggest, you know, component of, of medical is usually physician visits. We're not paying for a lot of hospital stays and, you know, really big, you know, medical procedures. It's behaving very well, but we do keep an eye out for it, for any, you know, changes or adjustments we need to make.
Mike Zaremski (Managing Director of Senior Equity Research Analyst)
Okay, that's helpful. My, my follow-up is just, you know, on, on loss cost trends on the-- more on the commercial side, not on the personal line side. You know, it's good to see there's been some pricing momentum for, for Hartford as well. Just, just curious if, if, if loss costs are, are also inching higher, and, and talking to there's still probably a, a good delta between pricing above loss trend. Curious, you know, we're, we're continuing to see a bit of reserve deficiencies for many in commercial auto and GL, and I don't think Hartford's been fully immune to that. Curious if, if, loss cost trends also kind of may be inching higher, too.
Chris Swift (Chairman and CEO)
Well, you're, you're right to, to say that, you know, generally, loss cost trends have, have had a, or our pricing has had a healthy, you know, margin above trends, and that, you know, trend, you know, continues here into, into the second quarter. We're pleased with, you know, with the margin. I would say for us, again, given our book of, of business, which is, you know, geared towards small and middle-market enterprises, our loss cost trends have been fairly consistent. I don't, I don't see anything in aggregate, you know, that is, you know, putting, you know, too much pressure on our, on our trends at, at this point in time. I, I would just say they've been consistent, Michael.
Mike Zaremski (Managing Director of Senior Equity Research Analyst)
Thank you.
Operator (participant)
Our next question comes from Mike Ward from Citi. Please go ahead. Your line is open.
Mike Ward (Managing Director and Financial Analyst)
Thanks, guys. Good morning. Maybe just on non-CAT property in small and middle, would you characterize that as a net benefit or a net headwind for commercial lines in the quarter?
Chris Swift (Chairman and CEO)
Yeah, I would say it was a net headwind. That's what I said about that 50 basis points or 1/2 a point of higher than expected property, you know, non-CAT property losses. Then if you put the aviation war losses that we booked in there, and that's in the international vision, not small or middle, that's, that's the, you know, the 50 basis points of pressure, I would normalize out.
Mike Ward (Managing Director and Financial Analyst)
Got it. Got it. Thank you. maybe on, on personal auto, just curious, you know, do you feel like the pricing that you've gotten in the quarter, was it what you expected, Is there, you know, is it more difficult with the regulatory environment, you know, or is it just severity is, is, is just higher than expected?
Chris Swift (Chairman and CEO)
Well, well, where do we begin? Again, if, if, if I look at how we thought about how the year was going to play out, it's totally different. You know, honestly, I, I think the level of inflation pressure, the stickiness of it, particularly in, in physical damage, has just overwhelmed many, many industry, you know, participants. Then, you know, the, the BI component, the severity, you know, ticked up a little bit for us. We had a little bit more uninsured motorist, you know, claims, you know, this quarter. It's just really been, been a challenge. What I would say on the positive side, though, is we're getting rate.
You know, we're, we're, the team's pushing really hard for rate that we could just file and use or use and file in those states that we need to get pre-approval. We're working the, you know, the system as, as hard as we can. Both Beth Costello and I talked about the, you know, the rate increases that we got in this quarter, and, you know, we expect to, to have a written rate increase of 20% by the end of the year. I suspect once we plan for 2024, we'll probably be in that range of, of written rate need in 2024 to get the, you know, the book back to target profitability. When it put it all together, it's overwhelmed our judgments and estimates.
Our judgments turned out to be too light, as, as, as we're halfway, you know, through the, you know, through the year. If you look at really what we printed on a six-month basis, we're probably, eight, eigth points above our guidance, you know, for the full year. That's probably a minimum of where the full year is, you know, gonna come out at this point in time. Again, the positive news I want to leave you with, and the optimist side, is, we're executing well on our rate plans. We're really proactive with making the needed adjustments in a, in a timely fashion, and that will continue into 2024 aggressively, you know, to get our, our, our book to targeted profitability probably in early 2025 now.
Mike Ward (Managing Director and Financial Analyst)
Got it. Thank you.
Operator (participant)
Our next question comes from Elyse Greenspan from Wells Fargo. Please go ahead. Your line is open.
Elyse Greenspan (Managing Director of Equity Research)
Thanks. Good morning. Chris, maybe, building off of that last comment, 'cause that was gonna be one of my questions on personal auto, recognizing, right, that's obviously been, been a hard business line for everyone in the industry. When you say you're gonna get back, you know, potentially back to target profitability in early 2025, what do you envision needing, you know, double-digit rates, between, between now and then? Or how are you seeing, you know, price and severity trend, playing out over the, over, you know, the next year plus?
Chris Swift (Chairman and CEO)
Yeah. With, with, with respect to sort of our, our prior views, I'm, I'm gonna sorta hesitate to forecast too much, just given how just dynamic, you know, things are, Elyse. You know, what I would share with you, you know, two, two important points. We do expect in the fourth quarter, written rate increases in the book of about 20%. Again, an early view into 2024 from a written price side is probably in that general range and vicinity. We still see the stickiness on an inflationary pressure on, on physical damage, and we're still cautious on, you know, what the BI, particularly the BI tort trends, you know, will be. Then now the uninsured motorist trends, you know, given where rates are most likely.
It's, it's hard to predict, but, as we sit here today, you know, we think we need, you know, back-to-back years, about 20 points of rate increases in 2023 and 2024 into the book to get us to a place to be in a position to have targeted profitability in early 2025.
Elyse Greenspan (Managing Director of Equity Research)
Thanks, Chris. Within commercial lines, you know, in response to Alex's question, right, you confirmed, right, that the year is kind of trending as expected. You know, you did highlight, right, some, you know, unearned, you know, unearned rate, right, in the book. Is the right way to think about it, that there could be a tailwind on the, on the loss ratio just from that rate earning in in the back half of the year, especially if loss trend is stable, like you said?
Chris Swift (Chairman and CEO)
Yes. Yeah, I, I do believe the compounding effect of rate increases will increase. That's what our math shows, particularly in the second half. Yeah, I think you've got that right. Plus then the mix change, and then the underwriting initiatives, and then we're still forecasting improved expense ratio in the second half of the year. Those are all the pieces, Elyse.
Elyse Greenspan (Managing Director of Equity Research)
Okay. Thank you.
Operator (participant)
Our next question comes from Meyer Shields from KBW. Please go ahead. Your line is open.
Meyer Shields (Managing Director)
Thanks so much, and good morning. Chris, I'm just trying to clarify, is the 1/2 points of non-CAT weather, is that the consolidated or commercial loss ratio?
Chris Swift (Chairman and CEO)
On commercial.
Meyer Shields (Managing Director)
Okay. What about on the Personal Line side?
Chris Swift (Chairman and CEO)
That wouldn't be a fair comparison to talk about commercial losses and how that impacts, you know, the personal lines. But I, I think you could, you could do the math and add, you know, both pieces together if you're looking for a total P&C impact of, of those higher non-CAT losses. Is that what you're looking for, Meyer?
Meyer Shields (Managing Director)
Yeah, just the, or just the Personal Lines impact.
Beth Costello (CFO)
Yeah. I guess what I would say is on, on personal lines, especially if you look at homeowners, as I said, where we came in was pretty much in line with expectations. I wouldn't point to any unusual non-CAT activity in that line.
Meyer Shields (Managing Director)
Okay. That's helpful. Second question also on Personal Lines. Expense ratio is actually doing well, and I was hoping you could just help us understand how much of that is reduced marketing and how much of it is incentive related?
Chris Swift (Chairman and CEO)
Meyer, you were breaking up a little bit on me. I heard a question regarding expense ratio and what's driving the expense ratio improvement?
Meyer Shields (Managing Director)
Yeah, in personal lines.
Chris Swift (Chairman and CEO)
In per- in Personal Lines?
Meyer Shields (Managing Director)
Yeah, marketing. Perfect. Okay.
Chris Swift (Chairman and CEO)
Both mostly marketing.
Meyer Shields (Managing Director)
Yes.
Operator (participant)
Our next question comes from Greg Peters, from Raymond James. Please go ahead. Your line is open.
Greg Peters (Managing Director of Insurance)
Good morning, everyone. Chris, Beth, and the team, maybe we can go back to the success you've been able to register in your commercial business from a new business production perspective. You know, I was struck by your comments around the small business spectrum's growth. I think you called out E&S binding as another area of strong growth. You know, I'm curious about the, the effect of law of large numbers, where, you know, incremental growth becomes more challenging. How do you think about market conditions as you look, not today and what you've just reported, but you look going, you know, out into 2024?
Do you feel like the, the, your, the, the customer strength is substantial enough that you can continue to put up these type of numbers, or, or is there the potential that they could slow down if the economy sort of adds?
Chris Swift (Chairman and CEO)
Yeah, no, I, I, I would say, and I'm gonna ask Mo and Stephanie just to talk about what they feel in, in the market, market conditions, and, and their ability to execute. But, you know, clearly, I, I, I believe through the end of this year and into, you know, 2024, I think will be a market environment, you know, that is still robust from a, a rate in terms and conditions perspective. I, I, I think particularly in the property area, broadly defined, commercial property, homeowners, you know, property. And then if you look at some of the, you know, the casualty lines, you know, particularly commercial auto and some of the longer-tailed liability lines, I, I think it'll be a conducive environment to grow and maintain or slightly expand, you know, margins, you know, going forward.
I'm pretty bullish on the next 18 months. Stephanie first, and then Mo, what would you say?
Stephanie Bush (Head of Small Commercial and Personal Lines)
Sure. In Small Commercial, from a macroeconomic perspective, we continue to see signs of a healthy economy. Unemployment's low, new business starts in the Small Commercial space continue to be strong and still better than pre-pandemic levels. We still see strength in overall exposures, so we do not see any meaningful change, more of the same. We're really pleased with the quality of our submissions and our submission flow, so I feel very positive. In the quarter, we grew policies in force in every single line. As I've mentioned in the past, you know, our agents, our distribution, really respond to our overall business model. Then finally, I would add in the E&S Small Commercial binding space, very, very pleased with our results.
We continue to see this to be a growing and profitable part of our business, and we apply the same rigor and analytics, to that book that we do to our admitted line. We're really riding the business on our terms and price. I'm very pleased with our execution and our position in the market.
Chris Swift (Chairman and CEO)
Mo?
Mo Tooker (Head of Middle and Large Commercial and Global Specialty)
Greg, maybe I'll, I'll take the two pieces. For middle and large commercial, I think submission activity is up, so we feel good about that. Then that continuing throughout the course of the year. What's exciting, I think, is a lot of the capabilities we've been putting in the market over the past couple of years are... We're feeling good about our ability to grow scale there, and Chris highlighted three in his script. Talked about construction, energy, entertainment. These are the verticals in, in middle and large commercial that we think on the back of that submission activity, we hope that the, the growth can continue through year-end. Similarly, for global specialty, the, the growth is broad-based, and that gives me great confidence for our ability to, to maintain them.
Chris Swift (Chairman and CEO)
Greg, last point. I do think the E&S market will continue to be a market that's attractive from a risk-return perspective and ultimately, a pricing side. You know, again, I see, you know, the E&S market remaining healthy over the next 18 months.
Greg Peters (Managing Director of Insurance)
Fair enough. That's good detail. I wanted to pivot for my second follow-up question to your comments around technology. You, you spoke about generative AI, you spoke about, you know, the, the initiatives ongoing at the company. Then I'm, I'm looking at the Hartford Next slide, too. I guess what I'm curious about is just the, the view on technology spend inside the organization. Seems like there's always a lot more projects that you could spend money on, but you have to exercise some discipline. Can you talk to us about how you expect the, the, the budget for technology spend to evolve over the next, you know, 18 months or so?
Chris Swift (Chairman and CEO)
Yeah, I'm happy to just give you high-level commentary. Obviously, you know, we will plan appropriately, you know, over the next, you know, three-year, you know, time horizon. I, I would say, you know, The Hartford Next program actually helped fund a lot of the investments that, that we continue to make today. Beth, I, I would say, you know, it's been a successful program. It's nearing its, its end. We do have a continuous improvement, you know, mindset, so there will always be opportunities to, to reduce, you know, expense and, and create greater efficiency, while, you know, continuing to invest thoughtfully in the next generation of technologies. You know, broadly defined, you know, Greg, I mean, we, we run a, you know, sort of a constrained model.
Everyone needs to compete for capital with appropriate, you know, IRs on, on their projects over a multi-year period, and that's generally, you know, how we do it. I think, I think we've shared with you, we do expect significant structural savings over a longer period of time, as particularly as we take all our data and applications to the cloud. We'll move about 100 apps to the cloud this year. Our global specialty business is completely in the cloud right now with all its business and data and apps. That will generate, you know, meaningful savings. I would say probably, Beth, more 2025 and beyond, 'cause there is a little bit of a upfront invest. Yeah, we're... I'm really proud of the team and how thoughtful they are on creating the business strategies and then the linkage to technology to create that differentiation for us in the marketplace.
Greg Peters (Managing Director of Insurance)
Got it. Thank you for the answers.
Operator (participant)
Our next question comes from Brian Meredith from UBS. Please go ahead. Your line is open.
Brian Meredith (Managing Director)
Thanks, Chris. One quick numbers question, clarification on the commercial line side. Chris, I believe you said you think that the underlying margins in commercial line should, should be stable or improve on a year-over-year basis. I looked through six months at about 60 basis points deterioration year-over-year. Do you still think that's achievable?
Chris Swift (Chairman and CEO)
You know, Greg, or excuse me, Brian, you know, I'm, I'm looking at an underlying combined ratio on a six-month basis of 88.4 compared to 88.2 last year. I don't know where your math is, but that's 20-
Brian Meredith (Managing Director)
No, I'm talking about loss ratio. I'm talking about loss ratio.
Chris Swift (Chairman and CEO)
Oh, excuse me.
Brian Meredith (Managing Director)
Underlying loss ratio.
Chris Swift (Chairman and CEO)
I'm sorry. I'm putting, I'm putting the two together because-
Brian Meredith (Managing Director)
Okay.
Chris Swift (Chairman and CEO)
as we just talked about, we, we are focused on expenses, so to not give us credit for it, Brian, I think is just not, not proper.
Brian Meredith (Managing Director)
Yeah.
Chris Swift (Chairman and CEO)
I'm putting the two together.
Brian Meredith (Managing Director)
Okay. Yeah.
Chris Swift (Chairman and CEO)
Yeah, as I said in my opening comments, when I put the two together, we are going to have year-over-year improvement from 88.3 last year to, you know, somewhere, you know, below that, on a, on a full year basis. That's all I'll say.
Brian Meredith (Managing Director)
Perfect. Sorry. No, that's, that's perfect. I appreciate that. Second question, just moving over to Personal Lines. I'm just curious, from a claims perspective in personal auto, you know, is there anything that you're doing or can do to maybe help mitigate some of these inflationary trends that you're seeing or catch it quicker in data and analytics? Also on that, are you seeing any difference, I know it's really new, but any difference in the Prevail experience versus your, you know, legacy book?
Chris Swift (Chairman and CEO)
You know, I will, I'll add some commentary, and then maybe I'll ask Stephanie to add commentary, Brian. I, I would say we feel good about our data and analytics, you know, that we have, you know, deployed. But again, the, the inflationary pressures, you know, here is, you know, time to repair, is, you know, wages in, in these, you know, repair shops. There's just a lot of, a lot of pressure, on the, on the, I'll call it, the economic system. I don't, I don't think it's a, a backlog. I don't think it's a, a surprise or anything that is, sort of unusual that you could, you know, sort of detect with, with trend lines.
It's just more expensive to repair cars these days, 'cause they have more technology in them, and there's been more severe accidents. It's driven by higher speed, and then you put the labor constraint onto it. You know, that's what I see. I, I think our claims team does a, you know, a, a, a fine job, a good job. We got a network of claim specialists that, you know, we, we use, that helps out, out our economics, that if, you know, to, to stay in the network. Our, our customers and our, and our claim handlers are incented, you know, to stay within there, but there's freedom of choice of where, you know, a customer would want to get, you know, their, their car repaired too. That's what I would say, Stephanie, but what would you add?
Stephanie Bush (Head of Small Commercial and Personal Lines)
I agree with your points on the claim. From a Prevail perspective, a couple of additional points I would make. One, we're live in 22 states, and we're going to roll out... We've been rolling out additional four in the month of July. It's a small portion of our total book because, as you know, it's new business. We are very pleased with the attributes and the quality of that business that we're writing. It is meeting our expectations. The third piece that I would share is, as we move forward, as, you know, we've built that on a six-month auto chassis, and so our ability to continue to get rate and get it in at a bit faster clip is also assisting, not only now in this environment, but over the longer term. Overall, we're really pleased with the business that we're writing.
Brian Meredith (Managing Director)
Great. Thank you.
Operator (participant)
Our next question comes from Tracy Benguigui from Barclays. Please go ahead. Your line is open.
Tracy Benguigui (Director and Equity Research Analyst)
Thank you. Good morning. Just to follow up on Mike's question on loss cost trends, even though you're seeing stability in loss trends, what kind of margin are you building for stuff you're not seeing now, but maybe on the horizon? Like, you already spoke about seeing medical severity below your pricing reserving assumption. Any color on stuff like social inflation, a rise in latent liabilities, and claims frequency reverting back, feels like it's down post-pandemic.
Chris Swift (Chairman and CEO)
Yeah, Tracy, yeah, I'm, I appreciate the question. You know, obviously, we, pick a loss trend that, contemplates a lot of the stuff, you know, that, that you talked about, so, I can't break it down by, by product line, you know, for you. Just, just know that, you know, when we pick, pick trend, particularly by line of business, particularly within GL, it does contemplate, a lot of the, the social aspects, you know, that you, you talked about. Litigation financing is always, you know, top of, you know, our mind in, in some of these areas. You look at particularly terms and conditions and, you know, things that we're just not going to be, be exposed to.
You know, the classic e-example is, you know, what we've done with pollution over the years, with asbestos, how you exclude that on an absolute basis. Even the PFAS, you know, chemical these days, there's, you know, exclusions in, in our policies, you know, for those types of exposures, again, going forward. So, again, I think our team is thoughtful from a risk side, in, in trying to, you know, manage those, long tail... either mass tort exposures, you know, that you, I think you're referring to.
Tracy Benguigui (Director and Equity Research Analyst)
I'm curious, when did you put that PFAS exclusion in your policy? What year?
Chris Swift (Chairman and CEO)
I would say, Mo, four or five years ago.
Mo Tooker (Head of Middle and Large Commercial and Global Specialty)
It's for, for those, Tracy, it's for those industries where we think we have the exposure, there might be implicit exposure there. We started in the beginning part of 2022.
Tracy Benguigui (Director and Equity Research Analyst)
Okay. Would you think that pollution exclusion in GL is broad-based enough that it could include PFAS?
Chris Swift (Chairman and CEO)
You know, what I would say in PFAS is obviously it's nothing new. We've been monitoring, you know, the exposures, for, for, for many, many years. All the known exposure, you know, we have in, you know, discussion with our clients is included in our evaluation quarterly for, for reserving, and we make adjustments, as, as we deem, you know, necessary. Also part of our A&E cover that we've done with, National Indemnity, the pollution portion of PFAS, not the, not the bodily injury portion, but the pollution portion is, available to be ceded to that cover.
Tracy Benguigui (Director and Equity Research Analyst)
Awesome. Just a really quick numbers question. It looks like personal auto, your PIF decline, year-over-year sequentially, and that makes sense given all the price increases. Why then is your retention going up? Is that a timing difference or something else?
Chris Swift (Chairman and CEO)
Yeah, the honest answer is, it's obviously it's a, it's a calculation. Some of it could be influenced by our six month, you know, policy, you know, trend versus, you know, 12 months. I'll, I'll have Susan follow up with you on the, on the details of the calculation.
Tracy Benguigui (Director and Equity Research Analyst)
Thanks a lot.
Operator (participant)
Our last question will come from Yaron Kinar from Jefferies. Please go ahead. Your line is open.
Yaron Kinar (Equity Research Analyst)
Thank you. Good morning. Chris, in, in your opening comments, you reiterated confidence in the 14%-15% ROE. Obviously, we talked about the pressure we're seeing in personal auto, so it sounds like you do have some offsets or areas where you think you'll be better than original guidance. I, I realize you don't really like talking or updating guidance over the course of the year, but would be curious as to where you are seeing... where, where you're more optimistic relative to your kind of original targets.
Chris Swift (Chairman and CEO)
You know, what I would say is, you know, there's a lot of good things, you know, that, that are happening, you know, across the, you know, the platform. You know, two of our, our biggest lines are performing well and probably better than, you know, we expected, workers' comp and, and disability. You know, if I look at our investment, you know, portfolio, you know, as far as, you know, yield, maybe slightly above, you know, where we, where we, we planned, I think that'll, you know, contribute. I think there will be a, a normalization of, of our non-CAT, you know, property losses that we talked about. You know, we're out of the aviation war business, so, you know, that, that tail should be, you know, less, less impactful.
I put those, you know, components to there. Even, you know, with the ongoing pressures, which I admit are, are continuing longer than we thought in personal lines, you know, personal lines is still a relatively small business, and its overall contribution to ROE would be, you know, muted by it, just by its size. We continue to buy in shares, you know, that we find attractive from, from a valuation side. Those are the component pieces I would, I would share with you, Yaron.
Yaron Kinar (Equity Research Analyst)
Okay. I appreciate it. I, I would just note that I, I think the two larger businesses, as of today, at least first half of the year, seem to be tracking in line with full year guidance. I guess it would suggest further improvement or maybe in some cases, even significant further improvement from here.
Chris Swift (Chairman and CEO)
I'm going to resist talking about the future much more than I typically would.
Yaron Kinar (Equity Research Analyst)
Fair enough. Maybe a quick one for Beth. I think new money rates have actually been coming down the last two quarters, if I look at slide 13 of the presentation. Can you maybe talk about that?
Beth Costello (CFO)
Sure. I think it's, it's kind of mixed. As you said, it's been coming down from December. One thing I would just point out is that, you know, when you think about our investment portfolio, and as we've said, we've not made any significant changes in how we think about asset allocation and so forth, but in any given quarter, what we're purchasing can, can change a bit. If we look at where we are in second quarter versus first and first quarter and fourth quarter, a little bit lower in duration, a little bit higher in credit quality. That mix can sometimes have an impact on how you just look at the sequential.
What we're really pleased about is the differential between our reinvestment rate and the sales and maturity yield, still very healthy, and that contributing overall to the improvement that we've seen in the fixed maturity yield.
Yaron Kinar (Equity Research Analyst)
Thank you. I appreciate the answers.
Operator (participant)
We are out of time for questions. I would like to turn the call back over to Susan Spivak Bernstein for closing remarks.
Susan Spivak Bernstein (Senior Investor Relations Officer)
Thank you. Thank you all for joining us today, and as always, please reach out with any additional questions. Have a great day.
Operator (participant)
This concludes today's conference call. Thank you for your participation. You may now disconnect.
