Q4 2023 Earnings Summary
- The Hartford delivered outstanding commercial results, with their best commercial and Group Benefits performance ever. CEO Christopher Swift emphasized their growth orientation and commitment to resetting the bar higher, stating, "I would never ever bet against us."
- The company expects continued strong growth in Commercial Lines, benefiting from a favorable macroeconomic environment. Swift noted that early indications in January show continuation of double-digit growth, and they perform well when the economy is strong. Additionally, Small Commercial is positioned as a growth and earnings engine, with healthy new business starts and 14 consecutive quarters with a combined ratio of 90 or below.
- The Hartford is in a stronger capital position than in previous years, with a prudent balance sheet. They plan to continue share buybacks and have sufficient capital to fund expected growth, as operating companies are well-capitalized and expect increased dividends in 2024.
- Analysts are concerned that current exceptional margins may represent peak levels that are not sustainable. When asked about the possibility of margins being at their peak, CEO Christopher Swift acknowledged the concern but expressed confidence in pushing to perform better.
- Environmental remediation costs are increasing, particularly related to PFAS (per- and polyfluoroalkyl substances), and the company's Adverse Development Cover (ADC) for asbestos and environmental liabilities is nearing exhaustion. CFO Beth Bombara noted increases in remediation costs and acknowledged the need to consider the impact as the ADC is closer to being used up.
- The company is significantly growing its property insurance book, increasing exposure to catastrophe and weather-related losses. CEO Christopher Swift mentioned plans to increase property premiums to about $3 billion next year, up from $2.5 billion (a 20% growth over the prior year), which could pose risks if catastrophic events occur.
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ROE Guidance Increased
Q: What did you mean by anchoring ROE at 15%?
A: Management clarified that anchoring ROE at 15% represents a new floor, reflecting higher expectations compared to the previous 14-15% range. They are confident in achieving this and see potential upside, as evidenced by strong 2023 results and a good start in 2024. -
Capital Management and Buybacks
Q: Will share buybacks increase given higher operating dividends?
A: Management plans to continue executing the existing share repurchase authorization, with $350 million of buybacks expected in Q1, consistent with Q4 levels. While operating company dividends are increasing by $100 million in 2024, they do not plan to alter their current share repurchase plans. -
Sustainability of Margins
Q: Are current strong margins sustainable or at peak levels?
A: Management believes in continuous improvement and does not see current margins as peak. They are focused on resetting the bar higher and pursuing profitable growth opportunities to enhance shareholder value. -
Commercial Lines Margin Outlook
Q: How will you maintain margins amid social inflation trends?
A: Management acknowledges social inflation in casualty lines but remains confident. They've been securing high single to low double-digit rate increases to stay ahead of loss trends. The goal is to keep underlying margins in Commercial Lines consistent with 2023. -
Property Growth and Exposure
Q: What are your plans for property growth in 2024?
A: Management aims to expand the property book to $3 billion in premium next year. They are pleased with the 20% growth to $2.5 billion in 2023 and see a constructive market for further building a diversified national portfolio. -
Group Benefits Margin Outlook
Q: Why is the core earnings margin target lower for 2024?
A: While Group Benefits had an exceptional year with an 8.1% core earnings margin in 2023, management maintains a 6-7% long-term target. This accounts for market conditions and rate guarantees, but they expect continued strong contributions from the business. -
Small Commercial Growth Prospects
Q: What is the outlook for growth in Small Commercial?
A: Management expects continued growth driven by healthy new business starts, low unemployment, and strong small business sentiment. In 2023, they wrote $913 million in new premium, growing every line and achieving exceptional underlying results. -
Personal Auto Rate Increases
Q: Will you seek further auto rate increases in 2024?
A: Yes, after achieving a 21.9% pure rate increase in 2023, they plan to secure an additional 20 points of rate in 2024. This is crucial for improving the auto underlying combined ratio from 110 to 104 in 2024, aiming for 95-96% by 2025. -
Adverse Development Covers
Q: Are you planning new adverse development covers?
A: Management feels current balance sheet strength reduces the need for new covers. While past covers were appropriate due to different circumstances, any future deals would have to make economic sense for shareholders. -
Reserving and Construction Liability
Q: Any concerns about reserves in construction liability?
A: Management is not significantly concerned, having addressed reserving issues from prior years. They adjusted their underwriting and loss picks several years ago, positioning them well in this area.