Hanover Insurance Group Inc

Good day and welcome to the Hanover Insurance Group's first quarter 2020 earnings conference call. My name is Cole and I will be your operator for today's call. At this time, all participants are in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Oksana Lukasheva. Please go ahead.

Thank you, Operator. Good morning, and thank you for joining us for our quarterly conference call. We will begin today's call with prepared remarks from Jack Roach, our President and Chief Executive Officer, and our Chief Financial Officer, Jeff Farber. Available to answer your questions after our prepared remarks, are Dick Lavey, President of Agency Markets, and Bryan Salvatore, President of Specialty Lines. Before I turn the call over to Jack, let me note that our earnings press release, financial supplement, and a complete slide presentation for today's call are available on the Investor section of our website at www.hanover.com. After the presentation, we will answer questions in the Q&A session. Thank you very much. and in this respect refer you to the forward-looking statement section of our press release, the presentation deck and our filings with the SEC which includes supplemental risk factors related to the COVID-19 pandemic and general economic conditions. Today's discussion will also reference certain non-GAAP financial measures such as operating income and accident year loss and combined ratios excluding catastrophes among others. A reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis can be found in the press release, the slide presentation, or the financial supplement, which are posted on our website, as I mentioned earlier. With those comments, I will turn the call over to Jack.

Thank you, Oksana. Good morning, everyone, and thank you for joining our call. Before we begin, I'd just like to say on behalf of the Hanover team, that we hope each of you, your families and friends are safe and healthy and managing through this public health crisis as well as possible. Our company delivered very strong results in the quarter while continuing to navigate the unprecedented, challenging and very dynamic environment defined by the COVID-19 pandemic. We are well positioned to navigate this crisis and have the resiliency and resolve to continue to deliver on our commitments to all of our stakeholders. I will begin with some comments about our business in the context of COVID-19 and the current environment, and then I will provide a high level overview of our first quarter 2020 performance. Jeff will take you through our operating results by segment, an in-depth review of our investment portfolio and provide thoughts on our 2020 financial outlook. We will then open the line for your questions. Over the past two months, COVID-19 has created unprecedented changes in the way we live and work. Today, most people in the U.S. and more than 2 billion worldwide are under some form of stay-in-place order. For the families of over 200,000 whose lives have been taken by this disease, this is an especially tragic time. Thanks to the selfless dedication of our health professionals and first responders, With the unique collaboration of scientists and the overwhelming response from the private sector, I'm confident our country will meet this challenge head on, just as we have so many other times throughout our history. For the Hanover's part, if anything has emerged from the coronavirus crisis, it's that our company is resilient, nimble, and compassionate in the face of this pandemic, and that we are committed to working together to deliver for our shareholders. Our business is running at full speed, our service levels remain strong, and we continue to deliver on our proud tradition of being there for our customers and agents when they need us most. With the health and safety of our employees being our earliest priority, we had to adjust to a virtual work environment in short order, and we were ready. Over 95% of our workforce has seamlessly transitioned to a remote work environment while continuing to deliver high-quality service to our customers. The substantial investments we have made in technology and workflow over the last several years, our business continuity planning and a cultural shift to agile and flexible work practices have prepared us well. I'm incredibly proud of our outstanding team of 4,300 employees across the country who have shown commitment, creativity, and resolve. Thank you for stepping up. I am also proud of our robust response to support our policyholders, agents, and local communities. Our extensive customer financial relief program includes a 15% personal auto premium return for April and May, as well as flexibility on bill payment options to those in need. It also contemplates expanded personal auto in homeowners' terms to cover delivery of essential goods, Living and rental car expenses resulting from repair delays and other adverse circumstances. We have also implemented steps to provide operational and technological support to our partner agents. Finally, we have committed $500,000 to local community funds and nonprofit organizations to provide pandemic-related assistance and donated critical medical supplies to local health professionals. From a financial perspective, our company remains very strong. We have a solid balance sheet, ample liquidity, and a high-quality investment portfolio. Our insurance portfolio is built on thoughtful and conservative underwriting practices and mixed management, and it continues to generate broad-based profitability. We believe these elements will allow us to successfully manage through the impacts of COVID-19. We have executed a comprehensive financial scenario modeling process with multiple economic scenarios incorporating detailed underwriting risk exposure reviews. Our modeling indicates that even in the most stressed scenarios, our overall operating performance should remain relatively stable in 2020, with some potential puts and takes by business and by quarter as the year progresses. In personal auto, We expect that various stay-in-place orders to result in a short-term frequency benefit. This reduction in auto frequency will be offset to some degree by premium return, higher cost of materials, and other exposure impacts, depending on the length of the economic downturn. We do not expect a material impact on our homeowners' business. While spending a lot of time at home will likely enable policyholders to mitigate potential losses, This benefit could be offset by an increase in cost of materials due to supply chain disruptions and moral hazard claims. In our core commercial lines, the economic pause might mean lower claims activity in the short term. But if the slowdown continues, we are mindful of the potential for an increase in vacancy-related risks such as fires and possibly elevated social inflation down the road. By and large, the effect on our specialty business should be similar to our core commercial business, given the retail agency small account focus of our specialty portfolio. We consider direct D&O and management liability claim potential to be limited, based on the small private company focus in this book. We have no exposure to first responders and limited exposure to medical professionals' workers' compensation. Now I would like to share some thoughts regarding business interruption. The overwhelming majority of our commercial multi-parallel policies are ISO based and have an explicit virus exclusion. We have 538 policies split between our CMP line and core commercial and healthcare businesses within specialty where we believe coverage could be triggered under specific circumstances. Consistent with our underwriting intent, these policies provide coverage with only $25,000 sublimits. Many of these insureds have not closed their facilities. We have reviewed these exposures and any others, and based on our current actuarial and underwriting assessment, have earmarked approximately $13 million of reserves to address direct COVID-19 related exposures, with the BI exposures making up the vast majority of the expected liability. Overall, based on our mix of business, we expect the net impact of the coronavirus to our 2020 underwriting results to be very manageable. 40% of our business is personal lines. In commercial lines, we predominantly use ISO-based forms. We have a low percentage of our premium in workers' compensation at roughly 7%, and zero exposure to event cancellation, travel insurance, trade credit, or similar coverages. The impact of COVID-19 on net written premiums is much harder to predict, both for our company and the industry overall, considering the many uncertainties related to the longer-term scope and impact of the pandemic and how the macroeconomic environment unfolds. Short-term, growth will likely slow or even show some temporary premium declines due to premium return in personal lines, cancellations, In terms of insurance pricing environment, we expect that the industry rate trajectory will likely continue as the need for rate in certain lines exists. As previous downturns have demonstrated, rate is typically more dependent on the insurance cycle than the economic cycle. We were on a steady trajectory of consistent rate increases in core commercial through March, and we believe it will continue, fueled by continued increases in loss inflation. We also believe that lower new money yields will serve as an additional catalyst for enhanced pricing. A number of investors have asked us about the potential for regulatory or legislative changes that may adversely affect the industry and how we see that playing out. Unfortunately, we don't have a crystal ball, so I can only speak from the perspective of history and the fundamental role of contract law in the economy. It's not unusual during a crisis to see a flurry of regulatory and legislative proposals aimed at the insurance industry and its operations. We expect and will comply fully with temporary regulatory actions such as moratoriums on cancellations, which are routine in crisis situations. That said, we expect the courts to continue to uphold the sanctity of contracts as guaranteed by the Constitution, in particular where virus is explicitly excluded as a peril. We are encouraged by the statements by the NAIC and many state insurance commissioners, as well as the efforts of the American Property Casualty Insurance Association to protect the strength and stability of the insurance sector. And we're in close contact with regulators and legislators nationwide to ensure the industry continues to work efficiently for our customers and agency partners. Now, turning to our first quarter performance. We generated net written premium growth of 3.5% in line with our expectations. Growth was driven by core commercial with a meaningful pickup in small commercial new business and specialty excluding our program business. Core commercial rate excluding exposure continued on its upward trajectory at 4.6% in the first quarter. Additionally, we saw continued sequential rate increases in our specialty businesses as well. First lines growth was tempered by the impact of consistent 5% rate increases on our retention, which was largely anticipated. We didn't experience a contraction in growth in the first quarter due to COVID-19 as most of our business renews 45 to 60 days in advance. Our current accident year loss experience in the quarter was defined by several factors, which on balance resulted in a minor increase in losses relative to our expectations. First, we had one large fire loss in our middle market business, which triggered an annual aggregate deductible under our property per risk reinsurance program. Second, we experienced favorable winter weather this quarter, as well as a decline in personal auto frequency starting in mid-March, Commercial auto frequency hardly changed in the quarter, which we believe is due to some businesses switching to enhanced delivery services. Third, we increased reserves to reflect potential COVID-related claims, which Jeff will touch on. In terms of prior year reserve development, we are very comfortable with where we stand from a balance sheet perspective, with slight favorability overall driven by workers' compensations. Current and prior year reserve movements in the quarter are consistent with our philosophy of reacting to issues promptly to avoid bigger issues down the road. Looking at our capital allocation strategy, in February we completed the $150 million accelerated share repurchase program we announced last year. In addition, we subsequently repurchased approximately 350,000 shares of our common stock in the open market. We stopped repurchasing Hanover stock in mid-March. We will continue to follow prudent and disciplined capital allocation strategies as we move forward. In summary, our first quarter results were in line with our overall expectations. Based on our strong financial position, sound underwriting practices, product expertise, and our broad, well-diversified portfolio, we are confident we can continue to successfully navigate the current environment. We remain committed to maintaining the health and safety of our employees, being responsive to the needs of our customers and agents, and acting in the best long-term interest of our shareholders. With that, I will turn the call over to Jeff.