Hello, and welcome to today’s Hartford Second Quarter 2019 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Ms. Susan Spivak.

Ma’am you may begin the conference..

Thank you. Good morning and thank you for joining us today for our call and webcast to discuss second quarter 2019 earnings. We reported our results yesterday afternoon and posted all the earnings-related materials, including the 10-Q on our website.

Please note that we reported results a bit later than usual due to the financial reporting integration related to the closing of the Navigators acquisition in May.Before we begin today’s presentation, I want to highlight a couple of upcoming days.

First, Beth Costello will be participating in a fireside chat on September 9, at the Barclays Conference in New York City. Second, the tentative date for our third quarter earnings release is November 4. For today’s call, our speakers are Chris Swift, Chairman and CEO of The Hartford; Doug Elliot, President; and Beth Costello, Chief Financial Officer.

Following their prepared remarks, we’ll have a Q&A period.Just a few final 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 the 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 commentary today includes non-GAAP financial measures.

Explanations and reconciliations of these measures to the 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..

One, the purchase of the previously announced adverse loss development cover; and second, increase in loss reserves from the completion of our review for the 2018 in prior accident years and the 2019 loss picks.

With the reserve review completed, we are fully focused on achieving the strategic and financial benefits of this acquisition.Only two-and-a-half months after closing, a significant amount of progress has been made on multiple initiatives, and I am pleased with the continued positive feedback from agents and brokers about the combined potential of our business.

We expect a smooth integration and remain confident of the future benefits we will realize from expanded product in underwriting capabilities.In addition, we expect to generate good returns on this investment reaching approximately $200 million in core earnings, excluding the amortization of intangibles within the next 4 years to 5 years.

We’re also encouraged by the recent firming in Commercial Lines pricing, particularly in Global Specialty, which is better than anticipated when we first announced the acquisition.Doug will discuss the market in more detail, but I would note that loss trends in certain lines needed increased pricings to achieve acceptable returns and in-part informed our judgments on the acquired reserves, and the 2019 accident year loss picks.

The team is focused on capturing the benefit of improving pricing, terms and conditions, particularly in international where results in recent years have been poor.In addition to the trends in Global Specialty, we are also seeing stronger pricing in growth opportunities in middle and large commercial.

I am pleased to see that previous investments in expanded industry verticals are generating strong new business growth.To conclude on the quarter and year-to-date, our performance is strong, commercial lines has momentum, and the navigator’s integration is going well.

The outlook for commercial lines in the second half of 2019, which includes navigators remains largely consistent with our view provided earlier this year.We expect an underlined combined ratio of 92 to 94.

This outlook is essentially flat with last year, including the impact of navigators, which has a slightly higher combined ratio than The Hartford Commercial Lines book.

In total, we are well positioned to achieve or exceed the business metric outlook we provided in February and to sustain a strong consolidated ROE.Before turning the call over to Doug, I wanted to note that we recently published our 2018 sustainability report, which provides the summary of our commitment to environmental stewardship, communities and giving, diversity and inclusion, and ethics and governance.

As a company in business for more than 200 years, we understand what it takes to be sustainable and how the company’s actions align with our mission to underwrite human achievement.We are proud of The Hartford’s track record and are committed to achieving the specific goals summarized in our report.

You could find that report along with other information on our sustainability programs on our website.Now, I’ll turn the call over to Doug..

Thank you, Chris and good morning everyone. This was a strong quarter for our business units and as Chris noted, strategically significant as we closed our acquisition of Navigators.

Our Hartford Property and Casualty business units performed very well with strong execution on the top and bottom line, and group benefits posted another quarter of outstanding earnings.Underlying performance in the former Navigators business units, which excludes prior period development and catastrophe losses was in-line with our expectations as we’ve positioned these lines for profitable growth and a rapidly improving specialty marketplace were underwriting is tightening and pricing is firming.In the second quarter, we booked prior accident year reserve adjustments for Navigators in several lines of business and also reset the 2019 accident year loss selections.

Beth will be discussing these actions in greater detail. Our integration is off to a strong start.

We’ve hit the ground running with teams working together in the market, and across all parts of our enterprise to align strategy, resources, and outcomes.Over the summer months, we’re conducting nearly 400 agent and broker meetings to rollout our combined product capabilities.

Talent and expertise were primary drivers of the deal and we’re very excited to have over 800 new teammates join our ranks.

The market leadership and underwriting skill these experienced professionals bring to the combined organization is already evident.Efforts began immediately to jointly market our expanded product portfolio as we’re now able to effectively deliver a broader range of coverage solutions to agents, brokers, and customers.

I’m very encouraged by several recent wins and the positive reaction of the agents and brokers to writing more lines of business per account with us.

Our teamwork is evident to the marketplace and I’m confident we will continue to find more opportunities for growth.I’ll provide more commentary on Navigators performance and current marketplace transit in a moment, but let me begin the review of our business results with Group Benefits, which delivered another outstanding quarter posting core earnings of 115 million with a margin of 7.5%.

The increase versus prior year was driven by favorable disability results, higher net investment income and lower amortization of intangibles.

This was partially offset by a slightly higher life loss ratio, increased investments in technology and customer experience, and higher commissions.The lower disability loss ratio reflects favorable incident trends across recent accident years. Shifting over to personal lines, we had a solid quarter with an underlying combined ratio of 91.

In first lines auto, the underlying combined ratio of 96.7 was two-tenths of a point higher than 2018 with favorable frequency trends and a severity in the low-to-mid single-digit range.Collision severity remains elevated, due to higher repair costs associated with newer vehicles and a larger mix of total losses.

Overall, loss cost trends are developing within our expectations. We remain focused on returning to growth in AARP Direct to auto, our lead product for marketing and new customer acquisition. New business in this line grew 44% for the quarter.Direct marketing response rates continue to be strong and our conversion ratio was up versus prior year.

Over the last few years, AARP auto retention has improved several percentage points. We remain focused on further increases to retention as a key factor in achieving total written premium growth.Turning over to Commercial Lines, the second quarter underlying combined ratio was 93.2, up 3.2 points versus 2018.

The increase was primarily due to elevated inland marine loss experience in Middle Market, higher expenses and the addition of navigator results for five weeks post-closing.For the quarter, renewal written pricing in standard commercial lines was 2.2%, up slightly from first quarter of the year.

Pricing excluding worker’s compensation was 5.5%, up several tenths of a point versus first quarter, driven primarily by increases in middle market.

Pricing in auto was nearly double digits, and we saw solid increases in property and general liability.Margins in worker’s compensation were strong across our business units and consistent with our expectations.

Results to date indicate they were managing market forces effectively and I remain pleased with our worker’s compensation pricing and underwriting strategy as we seek to balance margins and growth.Let me touch on a few additional details for our commercial businesses.

Small commercial had another excellent quarter with an underlying combined ratio of 87.8. Written premium grew 6%, with a 183 million of new business and excellent retention in the high-80s.

New business was led by the foremost renewal rights deal.In addition, we also experienced excellent growth from our core book, with new business up 10% versus prior year. New business flow from the foremost deal is essentially complete at this point.

This is a great opportunity for us to scale our market leading platform and to extend our partnership with many of our existing agents. We also developed a number of new agency relationships that have been growing steadily over the last year.

Our team executed flawlessly on this transaction and we’re well prepared for similar opportunities in the future.In Middle & Large Commercial, the underlying combined ratio was 100.9, increasing 3.8 points versus last year. We experienced another quarter with a number of large losses in the Hartford inland marine book, specifically builder’s risk.

Approximately 3 points of this increase is attributable to large water intrusion claims that occurred near project completion. Several of these losses resulted from less experienced workers on the job in this tight labor market.

We’ve taken actions to address this part of our business and expect performance to improve.The expense ratio was also slightly higher driven primarily commissions. Written premium in Middle & Large Commercial increased 15%. Retentions were solid and new business production was outstanding at $177 million for middle market, up 31% versus prior year.

New business growth continues to be fueled by our industry practice groups in areas such as construction, programs, and energy.

We’re also seeing strong growth in our other core industries, including manufacturing, technology, and professional services.Our strategy of underwriting specialization is helping to drive this growth and increase our focus on pricing and margin improvement. In Global Specialty, comprised of U.S.

international and reinsurance business units, the underlying combined ratio was 90.7. Given the navigator results are only included for five weeks of the second quarter, I’ll focus my commentary on current business performance and marketplace trends.Overall the specialty markets are in positive transition.

Industry financial results support the need for pricing and underwriting actions as prior years have been developing unfavorably in several lines. Our Global Specialty team has experienced progressively firming market conditions each month during the quarter.

Real pricing for Navigators business block was in the high-single digits for the quarter, up more than 5 points from the first quarter and also from prior year.Lines of business with particularly strong pricing include marine cargo, excess casualty, D&O and property.

This is an important time for our teams to be focused on business fundamentals and now that the deal is closed, our number one priority is improving margin performance.Let me now turn to the individual business units of Global Specialty.

In the U.S., we recorded prior year development largely in the ocean marine, primary casualty and D&O books, with only a modest adjustment to the current year loss ratios and casualty.

Underlying performance year-to-date has been solid with strong returns in management and professional liability lines and bond.Given the market momentum I just described, our trends is for – our outlook is for favorable renewed pricing trends, exceeding expected loss trends.

The international business, primarily comprised of Lloyds syndicate and London market portfolio has been under financial stress due to its historical growth focus.We’ve increased our prior and current action year loss ratio picks in financial and casualty lines and are fundamentally repositioning portions of this book through underwriting and nonrenewable actions.

The rapidly firming market will provide a tailwind as we execute our business plans for needed margin improvement.In Global Reinsurance, our business is mainly comprised of accident health, property, global credit, Latin American surety, and other casualty lines.

During 2019, underwriting results have been challenged in the accident and health resulting in prior year reserve development and an increase to the current year loss ratio.

This is largely a medical stoploss business, and we're aggressively tightening our underwriting and increasing pricing, while non-renewing accounts that do not meet our financial thresholds.As we look ahead with Global Specialty, I’m more convinced than ever that our expanded talent and product capabilities are powerful addition to our Commercial Lines platform.

Vince Tizzio, our Global Specialty leader along with a very experienced team comprised of both Navigators and Hartford teammates are driving business plans with great acumen and energy.As we work together every day, and now with the full engagement of our agents and brokers, I see our strategy unfolding in the market, positioning us for further success as a Commercial Lines leader.Based on our year-to-date results, our outlook for Commercial Lines in the second half of 2019 is for a combined ratio between 95 and 97 with an underlying combined ratio between 92 and 94.

Total commercial lines earned premium for the six months is expected to be approximately 4.4 billion.In closing, this quarter represents an exciting milestone in our journey. Our integration with Navigators is in full swing.

We’re operating as a combined organization bringing broad capabilities and deep underwriting expertise to the market and we continue to see new opportunities to leverage these skills in all parts of our commercial lines business.

This important step forward along with the strength of our group benefits and Personal Line businesses positions the Hartford for continued success. We look forward to updating you on our progress in the quarters ahead.Let me now turn the call over to Beth..

Thank you, Doug. Today, I'm going to cover second quarter results for the investment portfolio, Hartford Funds and Corporate, including capital management activities, as well as the impact of the Navigators acquisition.

The investment portfolio continues to perform very well with no impairments, strong LP returns, and generally stable investment yields. Net investments income was 488 million for the quarter, up 60 million or 14% from the prior year quarter.

Excluding Navigators, net investment income was 476 million or 11% higher than the prior year quarter.Limited partnership returns were strong in all asset classes with an annualized return of 14% for both the quarter and year-to-date. This compares to an annualized yield of 9.5% in the second quarter 2018.

The annualized portfolio yield was 4.2% before tax and 3.4% after-tax, slightly above second quarter 2018.

Excluding LP, the second quarter 2019 annualized portfolio yield was 3.1% after-tax, flat with second quarter 2018.Lower market interest rates and tighter credit spreads increased net unrealized gains on fixed maturities after tax to a total of 1.4 billion at June 30 from about 700 million at March 31 and almost no net unrealized gain at year-end 2018.

As a reminder, unrealized gains on equity securities are classified and realized capital gains in the income statement and are not included in AOCI.

Total realized and unrealized gains on equity securities were 30 million before tax in the quarter and 162 million before tax year-to-date.Turning to Hartford Funds, core earnings of 38 million were flat with last year and up 10 million sequentially.

Daily average AUM rose 5% from first quarter 2019, reflecting strong market performance, partially offset by modest net outflows and was up about 1% over second quarter 2018. Investment performance remains very strong.As of June 30, 2019, about 70% of Hartford Funds outperformed peers on a one, three, and five-year basis.

Corporate core losses of 35 million were 54% lower than second quarter 2018, principally due to higher investment income and lower interest expense, due to net debt reduction over the last year.

As a reminder, the three main drivers of corporate results are investment income on cash and short-term investments, interest expense and preferred dividends, and net income from our investment in Talcott.Taking into consideration the reduction in average cash and short-term investments, due to the 2.1 billion purchase price for Navigators, as well as interest expense and timing of preferred dividends, I would expect the quarterly run rate in corporate to be a loss of 55 million to 65 million after-tax before consideration of net income from the Talcott investment.

The impact of our proportionate share of Talcott's net income is harder to predict and was 22 million after-tax in the first-quarter and 2 million after-tax this quarter.During the quarter, we began share repurchases under the $1 billion authorization.

Since its inception and through the end of July, we have repurchased about 800,000 shares for $43 million.

As previously discussed, we expect to use this program with discretion, based on current and projected holding company cash position and liquidity needs, and expect to utilize the majority of the program in 2020.In total, second quarter core earnings of 485 million and core earnings per diluted share of $1.33 were both up 18% over second quarter 2018.

Excluding AOCI, book value per diluted share was $41.55, up 5% year-to-date and 9% since June 30, 2018. Core earnings ROE over the last 12 months, which includes fourth quarter 2018’s wildfire catastrophe losses was 11.7%.

Our year-to-date annualized core earnings ROE is 13.4%.The closing of The Navigators acquisition on May 23 impacted our results in several areas. I will briefly review these and additional details are included on Pages 6 and 7 of the slides.

Core earnings had a modest net contribution from Navigators as their closing occurred more than halfway through the quarter. Net income included several acquisition-related charges.First, in the quarter, we recorded transaction and integration-related costs of 31 million before tax of which 21 million was related to Navigators.

We expect to incur additional charges through 2021 for a total of 90 million to 100 million before tax of which 15 million relates to integration activity. Second, upon closing, we entered into the previously announced adverse development cover and reported a charge of 72 million after-tax.

Finally, we made two adjustments to Navigators reserves after closing.We increased the pre-acquisition 2019 accident year reserve by 29 million before tax. We also increased our estimate of prior year loss reserve by 159 million of which 91 million was ceded to the ADC, resulting in a net charge net charge of 68 million before tax.

After these actions, there remains 209 million of coverage under the ADC for development for 2018 and prior accident year reserves.Overall, the reserve actions we have taken incorporate our methodologies and judgement.

Going forward, Navigators reserves will be part of our normal quarterly reserve review process.To summarize, second quarter results were very strong. We are hard at work on the integration of Navigators and focused on maximizing the potential of all of our businesses with our combined teams and enhanced product and underwriting capabilities.

With strong capital generation and financial flexibility, we are pleased to be able to both invest in our businesses and return capital to shareholders. We look forward to updating you on our progress.I'll now turn the call over to Susan, so we can begin the Q&A session..

Thank you, Beth. We have about 30 minutes for questions. Carmen, could you please repeat the instructions for asking a question..

And you first question comes from the line of Brian Meredith with UBS..

Hello, can you hear me?.

Yes. We can hear you..

Okay, great. So, first question for you all.

Chris, just curious, could you kind of walk through from The Navigators perspective, now that you’ve got it integrated – or integrated – on your books, how does your kind of accretion forecast look – low end, high end, kind of what are your expectations for it?.

Sure. Thanks for joining us Brian. As we said, both Doug and I invest in our prepared comments. I mean, we’re confident about both the financial and strategic aspects here. I think on the longer-term basis, we’ll still see the ability to generate 200 million of core earnings ex-amortization of intangibles over the next 4 to 5 years.

I think there is support levers that remain the same that we’ve talked about.

What’s going to contribute to that? One would be expenses, two would be NII, three would be – and you heard from Doug that actions that were beginning to take on the in-force management to improve the margins on the existing book, and then fourth, a contributor but not a large one, you know the cross-sell revenue.So, I would say those are the components.

The waiting might be a little different Brian then we first thought 6 months to 9 months ago, particularly with lower interest rates, but I would say that we didn’t expect this level of pricing firming as rapidly as it has been.

So, we’ve taken the adjustments, so we think we needed to particularly on the 19, accident year loss picks, which is generally in-line with our pricing models and our deal models, maybe slightly little higher, but equally I think there is more rate environment, more rate to capture.So, we see all those pieces fitting together to generate that $200 million of core earnings and you remain really, really confident and pleased with how the teams have been interacting and behaving particularly in the marketplace..

Excellent.

And then another question, just curious, could you talk a little bit about your thoughts and exposure to the reviver statutes and kind of what we're seeing with what’s going on all these states?.

Sure. I guess there is one other point I would just mention as it relates to the integration activities. I mean, we did guide on our prior call to 110 million to 145 million of core earnings in 2020 Brian.

I would say that’s still a valid range, but I would anchor a little bit more on the lower-end, particularly given the interest rate environments, we thought we were going to get a little quicker left with interest rates, even after marking the balance sheet to market.So, we still see [110-ish million] in 2020 as far as an accretion potential.

As it relates to reviver statutes and activities, I would say, first, we’ve got a long history of managing and dealing with I’ll call it complex claims in area, particularly bodily injury, mass tort – and Jan Kinney, who heads our team and his lawyers and claims professionals, I think do an outstanding job.

Whether it’s on a primary basis or excess basis, remember we have a lot of excess claims experienced, particularly coming through our first interstate state operations in Boston.So, I would then say on a social side, I understand the desire to make people, allow people to talk about their injuries and present claims, but on the other, and it’s a slippery slope to sort of open up years of case law and litigation and how contracts are resolved, but I know that’s occurring, but I would also say that for us you would primarily focus in on three major areas.

The liability associated with injuries, particularly in commercial auto, obviously the sexual abuse and reviver claims, and then head injury.I'm not going into specifics on any particular aspect other than we’re well aware, we’ve been on top of these trends for a long, long time and as I’ve always said Brian, we’re in the business of paying claims, and we want to pay claims that are legitimate and where people are injured, but equally in some of these areas we're going to be sensitive and that’s a plight word of saying, if there was a contributory actions or inactions that have consequences on our terms and conditions and our policies, we’ll be equally vigilant in asserting our rights because the rest of our policyholders would expect that.And that’s where the social inflation comes into effect that everyone is talking about.

It affects everyone and we’ll be thoughtful, we want to be fair, but also make sure that people are living up to the terms and conditions in our contract. So, that’s what I would say at this point-in-time..

Okay.

It makes it, but if you re-evaluated your reserve positions given what’s been going on?.

As I tried to say, I mean, we’ve been managing these types of activities for a long, long time. I would say that we have case reserves and IBNR established for known losses and obviously incurred, but not reported losses. We’re going to have to really see sort of the volume of the new activities that really comment.

So, as we sit here today, we feel really good about the balance sheet, but not knowing what’s going to come out as in the future from new claims, new activities, new theories, you can never be absolute, but just know we do have provisions that we feel comfortable at right now..

Great. Thank you..

Your next question comes from the line of Elyse Greenspan with Wells Fargo. Elyse, your line is open..

Hi, good morning.

Can you hear me?.

Yes, we can hear you..

Hi, thanks.

My first question on the disclosure within commercial lines on the standard commercial earned premium rate, so that was 2.2% in the quarter, it trended down sequentially and then when you look back last year, I know you guys are getting more written price right now, but I'm just trying to think about the earned premium that you're seeing and expectations for a rate that you are earning to the balance of this year, and also into 2020, as I think about the underlying margin profile for small commercial and mid-to-large account segments, and just thinking of the rate versus trend and kind of the underlying margin expansion you might see or contraction there?.

Elyse good morning. It’s Doug. I would suggest that the earned trend is going to follow some of this momentum on the revenue side. So, obviously it’s a calculation and as we see slightly upward signals in those pricing indicators, the earned premium will follow at that, number one.

Number two, we gave you a comp, ex-comp split, right?So, you know that we’ve got a little bit of negative pressure on pricing, particularly in small commercial that will pay out and the mechanics of that are lost trend at the moment might be slightly ahead of, where the small commercial pricing is, but in middle we’ve done a nice job of achieving flat to just slightly down pricing in comp and so very pleased with what we're seeing in metal.In the non-comp lines, you know, we’re feeling better than we were 90 days ago about signals in the marketplace, and our ability to get a little bit of rate.

I know that the changes are not up materially, but they matter to us in several key lines. They’re moving in the right direction. So, we’re on the rate push hard, we’re working harder account by account and I’m encouraged by what I see as we close up the second quarter..

Okay. Thank you.

And my second question, on the Navigators book, so you guys took a true-up on prior year and then also on the current year, so on the current year adjusted, I’m assuming the adjustments were really saturated kind of in the same lines where you took the prior year development and then, can you also just give us a sense of where the underlying margin you’re starting with for that business given that you now trued it up versus your expectations when you announced the deal?.

Sure. I’ll start with that and Doug please feel free to add in. So, the lines that we adjusted for the current year, you know, some were consistent, again in the U.S.

wholesale casualty area and a little bit in the D&O and E&O of book and as Doug mentioned, kind of in the international casualty area, and when we looked at the – our projections back at the time of the acquisition, we had anticipated needing to increase those accident year picks a bit.

I would say, the final adjustments that we made were probably a point or point-and-half higher than that, but relatively speaking, we’re in-line with what we were thinking.So, a lot of the things that Doug talked about as it relates to the book and actions that we’re taking and pricing will obviously help improve those margins going forward.

And our views on their underlying margins were included in the overall guidance that we gave for the second half of 2019, and again their book we would expect to run at our higher combined ratio then our historical Hartford book..

The only thing I would ask Beth is that, some of that Navigator combined ratio dynamic is playing into the fact that our new outlook is just slightly up a point or so on the underlying. So, the mixing end of that Navigators book and actually your encounter – your 2019 is causing a little bit of that bump..

Okay. Thank you very much..

Your next question comes from the line of Josh Shanker with Deutsche Bank..

Yes, thank you very much for taking my question.

Obviously, there’s a reserve strengthening on the, I guess, I don't know, is it the 1Q Navigators or is the first five months just as a better understanding?.

So, Josh are you talking about the current accident year?.

Yes. 2019..

Yes. So, it would be for the first five months..

First five months. Okay..

Yes. Through the date of acquisition..

This then implies an increase to The Navigators combined ratio about 500 basis points in addition to what’s going on in the rate market right now.

When you think about modelling or the next year, how much attritional policy and premium decline do you expect as you put through the necessary rates to get to a Hartford level of conservatism in the book?.

Josh, this is Doug. I would say, it’s a little premature for us to take you all the way down through that path. We are building those plans.

We had original plans, obviously, we’ve been updating over the course of the last two quarters, but there are so many moving pieces and as you know, as Chris commented on, several of their core lines are going through an aggressive degree of firming at the moment.

So, we are making decisions and plans around what we see in the current marketplace, around retentions, required retentions, pricing and also new business levels that we think are appropriate for not only the combined ratio as it sits here today, but also what we think the opportunity is in that book moving ahead.

So, we’ll provide more of that as we go forward in the next several quarters..

Okay. And I guess it’s another easy one.

Was there any prior year reserve development on The Navigators loss reserves not applicable to the NICO cover, and how should we consider the risks associated with that non-NICO covered part of the portfolio?.

Good question. So, as it relates to the actions that we took in the second quarter for prior years, all of it was applicable to the cover. I’ll remind you that it was probably about $100 million of reserves that we excluded from the cover versus primarily covering things like unallocated loss adjustment expenses.

We are obviously taking the exposure on reinsurance collectability and then a handful of specific claims that were not covered. So, as it related to the actions we took, we saw no need to make any increases to those of reserves that were not covered by the reinsurance agreement..

Josh, it’s Chris. Welcome. Thanks for joining the call after your Rolling Stones concert last night. Second, I would just add a little color again.

The allocated – on allocated loss adjustment expense in the reinsurance, it’s similar to other transactions we’ve done with Nico and the handful of claims that I’ve described, I would say relates to pollution exposures that we judged favorably.

So, I don't think there is going to be any big surprises that are going to materially change any view on reserve positions and/or the reinsurance transaction in total..

Okay, thank you. I appreciate the answers, I’ll re-queue, maybe will get lucky. Thank you..

Your next question comes from the line of Mike Zaremski from Credit Suisse..

Hi, good morning, thanks for taking my question. First question, thanks for the color on the expense ratio increase, curious about, I believe you said some of it is due to upwards pressure and brokerage commissions.

I think you also mentioned that on last quarter’s call, maybe you can help us understand as like how big of a component that is and what’s kind of driving that? Is that being driven by some of the private equity backed brokers or is it all of them kind of doing the same thing?.

Mike, this is Doug. It’s more run rate commission. And so, when I think about quarter-to-quarter point, one point, two points have changed in the expense area, but half of that is coming from commission, much of that is coming from small commercial where we either have special deals happening. We’ve got terrific profitability indicators.

So, our contingencies around loss are up a little bit year-to-year and I would just characterize what we see in small as normal, competitive commission adjustments.What we see in the middle, more related to reinsurance, I don’t even think of that in the case of normal brokerage, it’s just we have some seated commissions and reinsurance a little bit different than they were last year.

So, that’s why I described the commission piece as really normal operating circumstances..

Okay, that’s helpful.

And lastly, switching to group benefits, clearly excellent results continue, doesn’t look like you guys changed your guidance there, maybe you can kind of update us on the competitive environments in group?.

Mike, let me just speak to guidance and Doug can give you some of his color on the competitive environment. The six to seven guidance on margin, we still believe is a long-term guidance that is reflective of long-term condition.

Obviously, in the near term here, we’ve been outperforming, which we would honestly expect to continue at least through the second half of 2019.

So, we’re not changing, not updating, but we’re acknowledged that we’re performing better primarily from incidences, but I would remind you that it is still a competitive environment Doug and the top ten group benefit players control large portion of the market, but competition is still fierce as ever and we’re remaining disciplined.

I don’t know, if you would add any color Doug?.

No, I agree with that. I think we’re competing well in this space. The numbers are pretty good shape across the industry. Our numbers are obviously outstanding. Second quarter is not as larger quarter as the first quarter, but our sales were up a bit in the first quarter.

We feel good about that, continue to grow our Specialty products, our voluntary products, so you see that in our supplement. Just we’re encouraged. And Chris, our disability trends are in good shape, so a strong quarter for our group business..

Thank you..

And our next question comes from the line of Paul Newsome with Sandler O'Neill..

Good morning. Just one question.

You did mention many changes to reinsurance related to The Navigators acquisition, I was wondering if that might change significantly over time given the Navigators was a pretty heavy user of reinsurance over time?.

Paul in the short-term, I would suggest that reinsurance programs are largely going to stay in place. Our teams are working diligently on a combined basis evaluating what programs need to come together over time, what programs will be left stand on it, etc.

So, as I think about the rest of 2019 and the early part 2020, largely think of their programs intact and then we’ll adjust over time and share some of that information as it comes..

As you now re-examined the book, are there any pieces of Navigators that you want to shrink or readdress significantly?.

Paul, again we just closed, what, 75 days ago, really excited, we’ve been focused on, obviously our go to market activities in the U.S. and in London taking the corrective actions that Doug has talked about.

We like all the pieces that we see, but we just are going to, let’s continue to learn, that’s why we're keeping the reinsurance programs the same and to learn from The Navigator’s team and adjust accordingly, and I would say the same thing with any major pieces of the business. It all fits together.

It works, we like it, but we’ve only owned it for 75 days..

Thanks. And best of luck for the rest of the year..

Thank you. And your next question comes from the line of Yaron Kinar with Goldman Sachs..

Thank you very much. Good morning everybody.

My first question, I guess this is a multi-part question now, with regards to the large property losses that you're seeing in commercial, so one, are those related to the large losses you saw in the first quarter that were part of the same trend? Two, could you maybe elaborate a little bit on the actions you’ve taken? And three when do you expect these actions to actually result in lower margins?.

Thank you, Yaron. This is Doug. So, a few comments about our rain book. We did see some adverse experience in the first quarter, which I did comment on first quarter call, a bit more in the second quarter.

Again, second quarter leaned a little bit heavier into builders’ risk, you know it’s a policy we offer associated with construction sites were essentially we replace the damaged property on the site. I think there’s quite a bit of volatility in the second quarter. We have pulled the covers back across all those losses.

I mentioned water intrusion in my commentary, seen a number of pipes couplings, connections, damaged material values in some of our construction sites.So, we’re on it. We changed the leadership in the underwriting profile that business about 15 months ago. That process is well underway. These projects run several years.

We know exactly where inventory is today. Yes, I don't think this is over at the end of June, but I do think this is well managed, well contained, both claim engineering, and also our underwriting teams are working together.And this little volatility and a pretty small line first in the middle.

We’ll have little volatility, but it isn’t something right now that’s keeping me up. I think, the line is not just putting pressure here at the Hartford. I think there are others in the business that are feeling that pressure, but as I think about the rest of 2019 and 2020, we’ll get this issue behind us.

I don't think it’s a huge deal and we’ll share a little bit about that journey as we go forward..

Okay. Thank you. That’s helpful. And then my second question relates to the personal auto book. I think you’re seeing that you’re seeing severity in the low to mid-single digits, which just seems a little lower than what we’ve been hearing or seeing among other carriers.

Can we maybe talk about what would drive severity to be a bit lower at The Hartford book? Is it a different mix of cars, is it different policy type, different negotiated arrangements with auto shops or what’s driving that?.

I think it’s really hard for me to compare ourselves to others. There’s so many different nuances of various books. When I talked about severity, I am combining all elements of severity, right.

Our collision is up a little bit, our liability, severity is in very good shape, and obviously our frequency numbers are in a very strong shape for the first six months of the year.

So, I don't know how to contrast our book with others, you know it is heavily ERP dominated that plus 50 crowd, that matters relative to drive miles, driven, parts of the year et cetera, but I don't think there’s something that sticks out to me right now that’s saying, our severity is causing something that others might not be seeing..

Doug, you were cut out. I think, I only heard the last sentence of your response..

I don't think there is one reason.

Can you hear me Yaron?.

Yes..

I don't think there is any one reason that suggest our book will perform differently than others. We manage aggressively, all of the comp liability and physical damage collision matters for our customers and I think we do a very adequate job. We work with terrific partner on the outside and have dedicated confident team inside.

So, I think, we're thoughtful about our work claim process, and I don't have a reason to suggest our numbers or understand why they’re different than others..

Okay. Thank you..

Thank you. And your next question comes from the line of Randy Binnner with B. Riley FBR..

Hi, good morning, thanks. I actually had – I think a couple related to commercial auto.

The first is a question on the in-land marine losses that are disclosed as being elevated, could you describe what those are and I’m just curious if they are related to wheels-based loss or something else?.

The builders risk essentially would be equipment materials on the job side. So, I don't think auto there. I think water intrusion causing damage to all kinds of equipment in sheetrock on the walls et cetera. There were earlier in the year a couple of marine losses in transit.

When you think in-transit marine that would have involved vehicles, so yes, it was a little commercial auto pressure there, but primarily second quarter, I’m talking about intrusion of water in a four-wall structure..

Okay, got you.

And then, just on the commercial auto, overall, it has not been a topic that’s come up on this call, but it is still a major issue for the group, and so, I’m curious kind of where you think pricing versus loss cost is there and kind of where The Hartford sits in the process of the industry getting on top of those liabilities?.

I guess, I’d start by suggesting the make-up of our book is largely small commercial where the middle market fleet as well, and now Navigators brings especially auto component to us. In terms of our core book, we’ve been managing aggressively auto for six, seven years now.

Our exposures are down materially over the last five years, you know plus 30% [indiscernible] change in auto.

Still not satisfied with our great adequacies today, our combined ratios are still not acceptable across both small and middle, and so there’s still more work to be done.Given where we see pricing today, yes, I think that pricing from our view and our middle and small books is on top of the loss trend, which means we’re now delivering better margins, but we're very careful – with a very careful eye watching 2016, 2017, 2018, some of those years that are closing up and this line has our full attention and will over the next several quarters for sure..

Is it a growth opportunity then, if you have your pricing right relative to loss trend are you seeing a lot more opportunity to rate business?.

Well there is a lot of business in the marketplace. It is on the top of our growth priority. We’re certainly not a major mono line provider and I'm talking about historical Hartford at the moment. We certainly look at it when we're rounding of accounts and we want to protect our accounts.

So, no it’s not on the top of our queue list to be facing mono line auto.With our specialty auto deviation now with Navigators, I think a good opportunity they’ve got terrific instincts, they’ve got great data and they’ll be thoughtful about their opportunities, but I would ask you to think about the different pieces of our book, and all told, we’re not an enormous auto player relative to the industry in general..

I think that’s the big distinction Doug, right. We're not big fleet players. I mean, we tend to ensure trucks, vehicles on the small-to-medium size business. We’re not national programs. It’s not, just given the environment, Randy it’s not a growth area as Doug said..

Okay. Thanks..

Your next question comes from the line of Ryan Tunis with Autonomous Research..

Hi, thanks, good morning.

This might have already been pretty clearly confirmed, but just I guess for my own head, so the new 92 to 94 guide wouldn't be any different if it weren’t just the addition of The Navigators mix, and you feel just as good about Navigators as you get at the time of the deal, is that right?.

That’s right. With the exception, we have built in a little bit of this pressure on builder risk, both what we experienced first half has set our view. So, we’ve treated our loss ratios in the marine area in the second half of the year. Largely, all the other lines remain on track..

Yes. And I will just add to that Ryan, just to be clear. So, absent navigators, we probably would be a point down relative to what our original thought was for, first for second half of the year..

Understood..

So, obviously, Navigators coming in at a higher loss ratio, combined ratio is kind of in the mix, but we put it altogether. We feel very good about being able to be in that range..

Got you..

Ryan, I would remind you, you know the compare on that, you have to almost go back to 2018 and think about what happened in Q’s 3 and 4. We were doing some adjusting to the workers comp line still in Q3 of last year. I think that’s something that just has to factor in here..

Got you.

And I think I wanted to go back to Elyse’s question, Beth did a good job talking about the accident year actions, and how would those compare to the original expectations at the time of the deal, but I’m still having a little bit of a hard time with, I think there’s like a $150 million of growth charges that Hartford took and there have also been some charges that Navigators had taken in the quarter since the deal.

The acquisition was announced.

So, yes, I mean on the reserving side, we just said all the activity that we have seen has also been around the level that you would have expected the time you announced the deal or could you just highlight some areas where things ended up being a little bit more elevated?.

Yes, so, if you go all the way back to the time, we announced the deal, I would say that the – our views relative to reserve increases have increased from there. We obviously took that into consideration when we started to look at purchasing an adverse development cover.

I would say that the actions that we took are relatively consistent with what we would have thought at the time that we entered int to the ADC, so we sort of incorporated those views when we look to purchase protection.And as I said in my remarks feel very good about the fact that there remained $209 million under that cover, and I would say the areas that we’re seeing the increases are relatively consistent, and just, again some of the size of those increases has changed, and we incorporated all of that as we thought about our 2019 accident picks, both what we felt needed to be adjusted from what Navigators had recorded pre-acquisition, as well as incorporating those views into our updated guidance for the second half of this year..

Thank you..

Operator, we’ll take one more question please..

Yes ma’am. Your final question will come from the line of Mike Phillips with Morgan Stanley..

Hi, great. Thanks for [indiscernible]. Appreciate it.

I guess, Doug made some comments on the reserve issues in some of the smaller lines for Personal liability and the [indiscernible] liability, I guess, I was looking to see maybe a little more detail in kind of what exactly you are seeing there, you know how confident you are, that you got things fixed and maybe some pressures going forward in those specific lines in Professional liability?.

Mike, I would say that, if you go back and think about some of the pressure spots and Navigators towards the end of last year and early this year, obviously there has been some pressure in the international book.

Some of that marine book internationally and also the D&O book, and they were addressing some of their own and essentially as we looked at the tail factors and we looked at those cases, we just decided that we needed to makes some adjustments.So, that’s how I think about several of those lines.

In the U.S., our view of tail and torque came together with their actuaries and we spent a lot of time debating and looking at things. So, I don’t look at what we did over the last quarter.

These changes as anything very, very different than our discussions last summer, but they were updated back based on facts and debates as we came together and close to second quarter..

Okay, thanks. I guess one more on Personal [indiscernible] turned back to that.

You commented that the premium drop in Personal Lines was kind of part of it was your non-renewal business and I guess maybe when do you expect kind of an inflection on that piece of the personal lines?.

Well, our goal is to be turning into growth as we close out 2019 and move into 2020. We’re encouraged because as you can see, our new business numbers look much more positive than they were this point last year. Again, we’re working on retention. The rate change, you know the book has had a pretty solid profit perspective.

So, I think the rate change probably won’t move a lot over the next 6 to 9 months. But we think the new business will grow and if we get a lift in retentions, we’ll see those positive numbers move approaching end of year 2019..

Okay, great. Thanks..

And that does conclude our question and answer portion of today’s call. I will now turn the call back over to Susan Spivak for any closing remarks..

Thank you, operator. In conclusion, we just appreciate all of you joining us this morning and we apologize for the technical difficulties and the sound interference during Beth’s note. Please note that there will be a transcript available and we’re happy to talk after this call to clarify anything that wasn’t clear during our prepared remarks.

Thank you, and look forward to next quarter..

Thank you again for joining today’s conference. You may now disconnect..