Hartford Financial Services at AIFA Annual conference - Final

Mar 13

Hartford Financial Services at AIFA Annual conference - Final

UNIDENTIFIED SPEAKER: We’re very pleased to have with us today, Neal Wolin from The Hartford. Neal is the President and Chief Operating Officer of The Hartford’s Property Casualty operations. In 2007, The Hartford’s P&C business generated over $10 billion in premiums and roughly half of the overall Company’s earnings. Neal is here to tell us more about the outlook for The Hartford’s Property Casualty operations.

NEAL WOLIN, PRESIDENT AND COO, PROPERTY AND CASUALTY, THE HARTFORD FINANCIAL SERVICES GROUP: Thank you, Jay. Thank you so much. Good morning, everyone. So, it’s great to be here this morning to talk a little bit about The Hartford’s Property and Casualty operations and, in particular, our personal lines business.

Before I do that, I want to share with you the obligatory Safe Harbor Statement.

And, I also want to give a little background about The Hartford and give some context to our personal lines business. So, let me start by just by reviewing very quickly some of that background.

In 2007, as a company, we delivered a net income record of $2.9 billion across our diversified insurance and investment businesses. On an enterprise-wide basis that represents a 15.5% net income return on equity. And, our record core earnings were $3.5 billion. As you see on the slide, quite well distributed between the life and P&C businesses on a core earnings basis. On a net income basis, this is even a better split, almost exactly 50/50.

With respect to the P&C businesses, very strong results in ‘07. Record core earnings of $1.6 billion. $1.5 billion of net income. And, across our segments, personal lines, small commercial, middle market, a growth in our policy count. You can see on the left side, premium at $10.4 billion in ‘07 with a calendar year combined ratio of 90.8, still very, very good results in ‘07.

With respect to how that was decomposed within our Property and Casualty operations, you can see on the left, our underwriting results very well distributed amongst our various segments — personal lines, 44%; small commercial, a third; middle market and specialty commercial the rest.

And, the real key from our perspective is the diversification of that portfolio giving us multiple opportunities really to succeed across those various segments. Each of those segments met or exceeded our targeted returns of 13% to 15%. And, our strategies really are drawn a segment-by-segment basis, as you know. We believe ourselves to be the leading provider of small commercial insurance with independent agents. And, on the back of our AARP relationship about which I will speak a little bit more in a few minutes, we are the fifth largest direct writer of personal insurance.

So, today’s agenda really about personal lines. I want to talk a little about how we view the marketplace. What’s going on there. Where we see the trends and the opportunities. Give an overview of our personal lines business as we see it today. Talk about our positioning in the industry. And then, give you a sense of some of the initiatives that we have been working on from last year into this year ongoing into ‘08 and beyond, which, we think, are keys to driving our business forward and to our ongoing success.

So, first with respect to the marketplace itself. Really, underlying profitability and attractive margins, especially, in ‘07 have really exerted downward pressure on rates through ‘07. As we pivot now to ‘08 and look forward, as you can see on the graph on the bottom right, it’s clear that margins are under pressure, while the cost trends picking up and expected to rise in ‘08. That’s our view. At a lower rate, we think than, they have — they did in ‘07, but nonetheless, increasing and, as you can see on that graph, the gap between loss cost and pricing is widening and, we believe, will continue to rise at moderate rates through ‘08.

In the face of those pricing and loss cost environments, insurers have turned, and you heard it in the last panel, obviously, and you know it in any event, turned very substantially to brand advertising. There are now, we think, four personal lines competitors that are spending in excess of $0.25 billion a year on advertising. Also, a key focus on pricing sophistication, on expansion of distribution and an awful lot of product enhancements across the space. These are really the areas in which the competition in personal lines have been most intense. And, we do believe it to be a very, very competitive marketplace.

As we begin ‘08 and we listen to some of the calls of our competitors, we see some indications of repricing going on in the marketplace and likely to see it continue — perhaps, likely even to pick up steam through this year in the face of clearly rising loss costs.

Another characteristic of the personal lines marketplace we think is important to take note of is the shift in buying patterns amongst channels. So, the data here, although 80% of personal lines insurance buyers are buying through agents of one sort or another. It is nonetheless the case that more auto insurance customers — consumers shop direct than through any other channel in the last 12 months. So, our data is that 60% of shoppers used a direct channel in way or another to get a quote in the last 12 months and that this is a phenomenon that is occurring across all age cohorts.

And, direct capabilities, in our view, are becoming increasingly important to carriers of all sorts, not just the direct players. So, you see independent agency, and for that matter, captive agency competitors with all kinds of new efforts at some form of direct capabilities, whether it’s through the internet or 1-800 numbers, but allowing their customers to shop for and even purchase their insurance in a direct fashion in one fashion or another.

The third observation about the marketplace that we think is important to observe — to note is the extent to which maturing baby boomers are really driving a demographic shift in the marketplace. The 50 plus age cohort is projected to grow by almost 40% to over 120 million Americans by 2025. And, roughly one out of every two people in the U.S. who are over 50 are members of AARP. That I’ll come back to in a few slides. 78 million boomers will bring new behavior patterns to the mature market requiring sort of a different way to think about marketing and acquisition strategy. And, the boomers, unlike the boomers of today and tomorrow are unlike, perhaps, the boomers of yesterday, are increasingly internet savvy and are demanding more control of their purchasing activity, including, importantly, in the personal lines insurance space.

So, these are sort of some of the market trends and observations that we think really inform what’s going on with respect to personal lines of insurance today and how we think about this marketplace that we’re competing in.

As far as how we’re doing in the personal lines space, we continue to experience profitable growth. And, it’s really by focusing on those three things — brand, product and broad market access. And, so, a little bit about each.

With respect to brand, we feel very good about the extent to which our brand is well known and well liked as in the marketplace. Our own internal survey data confirms this as well as independent data, both about the recognizability and the favorability of our brand. We think that’s an important aspect of our ability to compete and will continue to be an important aspect.

Product sophistication. We bring a broad array of products in the personal lines space. Really all needs can be met through our product. And, we continue to develop product at a very aggressive rate. So, we have in the end of ‘07 and continuing on into ‘08, been rolling out Dimensions with Auto Packages, a tiered product, which allows our customers to choose the product features that they — what they seek. We will also be rolling out new versions of that product in ‘08 that will have increased pricing sophistication, better tuned pricing cells and so forth. And then, on the AARP side, again, a new product, what we call the Next Gen product, which also will have the tiered package features for folks in our AARP channel.

In terms of the third leg of that three-legged stool, broad market access. Already, our AARP program is the fifth largest direct program in the country. We continue to work on segmentation of the AARP membership to further penetrate that age cohort and that membership. I’ll talk a little bit more about that in a few minutes.

On the agency side, we have added a tremendous number of agents since 2005. We are now up to 7,075 agents at yearend and plan to add another 1,000 agents in ‘08. And, overall, that gives us access to an awful lot more of the premium that’s available in that channel.

You can see on the left, that as a result of all this, our experience really has been successful. On a topline basis, we grew 1.8% ‘07 over ‘06, although the rounding here says just 3.9% and 3.9%, it’s really 1.8% increase. And, if you take those numbers X our Omni non-standard divestiture is up almost 5% ‘07 over ‘06. And, still as you see here, with combined ratio ex cats that is very, very favorable.

So, let me talk a little bit about our AARP program and then I’ll move over to the agency channel.

Our AARP program, I think by any account has been a tremendous success. It has significantly outpaced growth in the personal lines industry and done so very profitability. So, in the business model, we think, it’s proven. You can see on the left, the extent to which we have grown and we have outpaced the industry in that growth. And, the partnership that we have — the exclusive partnership that we have with AARP, which began in 1984, we have in 2007 extended that to 2020. We feel hugely good about that and the continuing very close partnership and very successful relationship we have with AARP.

In terms of how we have gone about the success there, we’ve obviously established direct marketing sales and service competencies to service the AARP membership and this program, which includes really, we think, very first rate call center capabilities and a tremendous expertise and experience with this age cohort and knowledge around issues that are specifically relevant to AARP members and others in that age segment, which has been a really key aspect, we think, of our success and our growth in this channel.

In 2008, we’re really looking to extend the success of this AARP program in a big way. And, up here, I have listed some of the things that we are doing to do just that. So, refining our sophisticated pricing and segmentation capabilities, that’s really about full-flowing out this next generation product, which will have the packages features that I mentioned. But, also, to include a work to tune our pricing model in this channel to better fine tune our ability to ability to price a range of risks amongst the 50 and over age cohort.

Continuing to invest in our call center capabilities. That’s a hugely important aspect of this part of our business.

Expanding our multimedia reach. Here, we have historically focused meaningfully on direct mail approaches to the AARP membership. But as their demographics shift and their characteristics shift, we have been turning increasingly to other forms of reaching them, including DRTV, different kinds of print and other kinds of marketing efforts.

We have been leveraging our segmentation so that we continue to find new pockets of AARP and 50 and over age cohort customers, which is really important as we continue to grow this business. We are continuing to refine and expand those that we reach within those age segments.

And then, finally, and also very important, really focusing on our online capabilities and the ability for folks in the AARP channel to reach us and to sign on for new business through the internet. That’s been an important innovation in ‘07 and we think we will continue — we’ll begin to see real benefits of that in ‘08.

On the agency side, really for us, first and foremost, we are looking to expand our agency plans and to do so in a very efficient manner. We think that’s a key to our growth aspirations. The independent agents, notwithstanding the slide I showed you earlier on the direct channel, still controls over 25% of the total personal lines market. And, for us, over the last three years, since the beginning of 2005, we have now access to 35% of that channel as against a quarter back in 2005.

As you see from the bar charts on the left, we still have meaningful headroom amongst mid-size and small agencies in particular. And, it is there that we are focused with respect to our plans to add 1,000 agents in 2008.

Now, for us doing this in a cost-effective manner is obviously hugely important. And, so, what we’ve been doing is targeting those agents, both small and mid-size agents, in second-tier cities in rural areas. And, doing so in a way that combines really direct touch with our — by our field source, use of our call center capabilities and online capabilities to create the most efficient way of both bringing those agents onboard and deploying them in the first instance. And then, managing them.

And, we have been piloting efforts in a number of states on this model where we focal point and manage agents with this full suite of capabilities. We find it to be very effective in terms of production, but the agents also have been very positive in their response as well. The amount that we can touch them and interact with them has increased as we’ve had more and more tools in our kit to use in doing this. And, this is a key aspect of our strategy to expand our agency plant in this segment and, therefore, our access to the market.

So, what are we doing in 2008 in the agency channel. Again, the new agents that I mentioned. We’re really putting a tremendous amount of time on product development both to increase our speed-to-market and reduce costs. So, we’ve spent a fair amount of investment in creating a product capability that is, we think, state of the art and that, for that matter, probably both in the agency space and in the AARP channel and is the generator of these product innovations to which I referred earlier.

Spent a lot of time improving ease-of-doing business capabilities. Some of that is new agent pacing technology, which allows them to connect us in a better way. Some of it is a continued call center investments. And, we have, in late 2007 as well, created a policy change center, which allows CSRs in the agencies with a very few keystrokes to make policy changes on a very efficient, very speedy way without having to go through any hassle of call, which is what they had to do in the past.

And, so, the final point here is really looking at all of the learning we’ve done through our AARP program and trying to find ways to get the benefit of that in our agency channel. And, so, we are really trying to reach the baby boomer generation, not just through AARP, but also in the agency space.

So, the way we think about this is really initiatives that we are driving toward in five buckets many of which I’ve just mentioned, but just to go through these five and give you some examples.

On distribution. 1,000 new agents. A cost efficient way of appointing and managing our agency plant. The increased segmentation of the AARP membership, our key initiative on which we are very much engaged in ‘08 and through the rest of this year.

On product and pricing performance, again, the rollout of our new AARP product, the Next Generation product with packages similar to our Dimensions product in the agency channel. We’ve essentially completed our rollout of our Dimensions with packages product. It’s gone out in 38 states now. We have a few more to go. And, we will be starting this month releasing new versions of that product with, we think, more sophisticated pricing capabilities and better tuning.

Advancing Scalability. I think there, an awful lot of investment in our claims capability, which is scalable and which applies both to our AARP and our agency business. Our common product development and research capability that I mentioned before. And, we have been investing quite heavily in technology that will link all of our various call centers into essentially a virtual call center environment, which we think will be speedier, more efficient and also more scalable for our business.

Our marketing and demand creation on the bottom right. A huge focus on the greater than 50 year old population and reaching them in new ways, whether that’s direct response TV or the internet. And, overall, a commitment to increase our branding investment, both at the corporate level, where our corporate advertising has now begun to include our personal lines of businesses, in addition to other businesses across our platform, both on television and in print.

And then, finally, on the bottom left, online capability optimization. Really, online capability for agents, customers and claimants. I mentioned the policy cage center as a good example of that. And then, also, a universal customer front end for our AARP business so that now it is very easy for AARP members or folks through our age-eligible and want to become AARP members to buy insurance from us online rather than calling up a call center.

So, these are some of the many initiatives, which we believe in 2008 have positioned us for continued advantage, continued growth, but also continued profitability in both our AARP and our agency businesses.

So, just to round out, to go back to the context. For us, overall at The Hartford, we’re really looking to capitalize on three big, strategic opportunities.

The first, which is really at the top of what we’ve been talking about here, the personal lines business — to be the unparalleled provider of business insurance and financial products across the business insurance space. And then, finally, retirement investment products would be the third leg of the enterprises, three-legged stool in terms of our focus on strategic opportunities.

So, with that, I will take some questions.

UNIDENTIFIED SPEAKER: Neal, if I could kick it off. On the AARP program, can you talk about how the penetration rate has changed over time? If I do the quick math, it looks like it’s slightly more than 10% currently. And then, also, if you could touch on, if you’ve — if Hartford’s been so successful with that affinity program, why is there seem to have been challenges historically with generating other affinity programs with that level of success?

NEAL WOLIN: So, on the first one, it’s about 12% penetration right now and it has been growing. I think that the work that we’re doing on segmentation is further deepening our understanding of the various pockets of AARP membership, including focus on sort of folks who are newly members of AARP or newly eligible to be members of AARP, is a real source of growth of that penetration going forward and an awful lot of what we’re focusing on. So, I would expect that we will continue to grow there.

On the question of other affinity relationships, we are certainly looking at other possibilities. We began a program with Kroger Grocery Stores, for example, in ‘07 and are open to others. This has been a very special program for us and one that we’d love to replicate. But, I don’t think there are many like it out there in the marketplace. I think, it’s pretty a unique program. And, so, we’ve really felt very pleased by its success.

UNIDENTIFIED SPEAKER: Why don’t we open it up.

UNIDENTIFIED PARTICIPANT: Yes. Question regarding (technical difficulty).

UNIDENTIFIED SPEAKER: Neal, would you mind repeating the question, just for the webcast.

NEAL WOLIN: So, the question is, on the new agents that we’re adding, I guess, one of our small regional competitors, maybe 100 miles north, something like that, made the point that it’s not just how many agent adds, but how profitable are the new agents that you add. And, how can we can understand or be sure that the agents that we’re adding are profitable.

So, we’ve been spending an awful lot of time internally, obviously, focusing on just that. I mean, if it’s not cost efficient at the end of the day, the business that we generate from these new relationships isn’t profitable in of itself and overall cost effective, it doesn’t make a whole lot of sense. I would say that there is a certain amount of time it takes for new agents to reach a level of profitability so the key is to making sure that the onboarding and the management of them is efficient as possible to decrease that time. I would cite this statistic, if you look at the — so, we’ve been really adding agents meaningfully from ‘05. So, ‘05, ‘06, ‘07.

If you look at the new premium, the new business that we’ve written, for example in ‘07, more than a third of it has come from agents that we have added since the beginning of ‘05. And that’s been a circumstance in which we know ‘07 adds, which are more than 1,000, aren’t contributing all that meaningfully to that number, because they’re just brand new and there’s a certain ramp-up time. So, for us, obviously, being very focused on the data related to exactly how those new agents are performing and cutting that data in all kinds of ways — by size, by geography, understanding what the cost of the onboarding process are and the ongoing management of them, looking at the profitability characteristics of the business that we write through those new agents — all of those are key aspects of how we measure and understand our success here.

UNIDENTIFIED PARTICIPANT: Your predecessor, David Zwiener, was very public about saying that needs more scale in agency (technical difficulty) in premiums, and mentioned acquisitions as something that might be needed there. (Technical difficulty.) Do you share his vision and comment on (technical difficulty). And, where do you think acquisitions fit into it (technical difficulty)?

NEAL WOLIN: I think it is scaled business. There’s no question. When I think about the scale point, I don’t think of just the agency channel, although obviously having more business, the agency channel will advance the scale point. But, for us, we have almost $4 billion in personal lines premium and we get scale advantage in the agency channel in meaningful ways from our AARP business, claims, product development and so forth. There’s a lot of we — what goes on in AARP that creates some amount of scale lifts for us in our agency business. Having said that, we are certainly insistent in growing as we have been growing our agency business and are open to acquisitions when ones come along that make sense. So, that’s certainly something that we would not rule out.

UNIDENTIFIED PARTICIPANT: Yes. Combined ratio, first one, still quite good (technical difficulty) good stuff. Compare a combined ratio, if you’d say, invest a lot, (technical difficulty), Progressive talks about their 96, could you at least refer me to a number that you’d care to talk about?

NEAL WOLIN: Did you, I mean, for us, we want to be very focused on target of returns, which 13% to 15%. And, so, we monitor this with great care and we’re not prepared to relax that discipline. And, so, without giving a specific number, something in the mid, upper 90s. Some — not different from a lot of what our competitors talk about would be numbers that are about the ballpark for us that we like to look at. And, that’s how we think about it. But that sort of discipline around 13% to 15% return is really what drives how we think about the business, what territories we want to compete in, how we want to grow and all those sorts of things.

UNIDENTIFIED PARTICIPANT: When we think about the AARP business, what would be the total (technical difficulty) after (technical difficulty)? Would that be 50 to 65 category or just (technical difficulty), because they have funds or are they merely here by age? When you really look at it, what are the real goals (technical difficulty)?

NEAL WOLIN: When we first segment the AARP business, it’s not so much by age, it’s by psychographics. So, in different kinds of folks, who have different living patterns or buying patterns, and so forth. Our view is that this business is very, very profitable. We would love a ton more or it and we continue to drive some more of it. So, we don’t have a specific number of how much of the AARP membership we want to penetrate. In fact, we add AARP members with a fair degree of frequency, people who are eligible for AARP and as we sell insurance them, we sign them for AARP membership all at the same time.

I think that one of the things that we have really been focusing on, I said earlier, are younger AARP members or younger AARP member eligibles, who have somewhat different buying habits, who have somewhat different lifestyle kinds of attributes to the in vector psychographics. And, so, in the cohort of folks, who are moving into the 50 and over crowd at very big numbers, very quickly, I’d say that’s a spot where we’re very focused in terms of growing that channel and our business with AARP. I think, as you get into the older, more stable age cohorts, those are places where we’re more highly penetrated. Still room to grow, but a 50 — people in the 50 to 60 range, who are independent, internet savvy, those are really our sweet spot, we think, going forward.

UNIDENTIFIED PARTICIPANT: (Inaudible question — microphone inaccessible)

NEAL WOLIN: I’m sorry, I can’t hear you.

UNIDENTIFIED PARTICIPANT: Operating methods. (Technical difficulty) Where do you need to be to get to (technical difficulty) range of homeowners is significantly lower, at the same time, you (technical difficulty).

NEAL WOLIN: On an accept basis, yes, it does. So, for sure. I think, our current leverage is about where we want to be.

Between 1.5 and 2. I’m not sure, exactly.

UNIDENTIFIED PARTICIPANT: I wanted to ask a question about (technical difficulty).

NEAL WOLIN: I’d say that this is something that we’re focusing on now — cost segments at the Company, personal lines to be sure. So, increasingly trying to figure out ways to cross sell in the personal lines space. But even more so, I’d say, in the small business space, where there’s probably even a greater overlap. So, if you look at the overlap on personal lines to the investment products businesses, they’re playing at very high-end in general relative to our average policyholder in the P&C personal line space. So, there’s some crossover, but it’s not huge.

It’s much bigger in small commercial and even in the low end of the middle market space, where, whether its all the coverages we offer, the boss, auto, workers comp on our side, 401K, group benefits, group life, group disability, key person life insurance, cost of suite products that really is a substantial overlap and it’s something that we’re focusing on very intensively in terms of penetrating P&C distribution with respect to our group benefits products and services and also increasingly 401K. I think that’s a real area of opportunity that we’ve begun to be very serious about.

UNIDENTIFIED SPEAKER: Neal, would you be able to talk about the Massachusetts auto market, whether that’s an opportunity for The Hartford?

NEAL WOLIN: We were sort of looking at it. We’ve noticed a lot of competitors have gotten their foot in the water, maybe more. And, I don’t rule out that we would go there, but we don’t have any immediate plans to do so.

UNIDENTIFIED SPEAKER: What would need to change to make it more —

NEAL WOLIN: I think we just want to see a little bit more about how the market develops, what the experience is of some of our competitors do — are now about to go in there and begin business. And, we’ve had a complicated history in Massachusetts and, I think, we want to have some verified before we launch into that market.

UNIDENTIFIED SPEAKER: Any final questions? Great. Please join me in thanking Neal Wolin from The Hartford.

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