Hanover Insurance Group Inc

Good day and welcome to the Hanover Insurance Group's second quarter earnings conference call. My name is Jason and I'll be your operator for today's call. At this time, our 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 Barber. 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 complete slide presentation for today's call are available in the investor section of our website at www.hanover.com. After the presentation, we will answer questions in the Q&A session. Our prepared remarks and responses to your questions today, other than statements of historical fact, include forward-looking statements regarding, among other things, our outlook for 2020 and the ongoing impact of the COVID-19 pandemic and the subsequent recession on company performance. There are certain factors that could cause actual results to differ materially from those anticipated. We caution you with respect to reliance on forward-looking statements And in this respect, I refer you to the forward-looking statement section in our press release, the presentation deck, and our filings with the SEC, which include 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. I will start by reviewing our second quarter financial results in the context of the current business and economic environment. I will then discuss our three strategic areas of special focus for the next 12 to 18 months. These areas of focus will help us advance our long-term strategy in this rapidly transforming market and capitalize on some particularly attractive emerging opportunities. I will then turn it over to Jeff for a detailed review of our financial results and our outlook. Before we get into our agenda, however, I would like to acknowledge the extreme personal challenges that so many people across our country are facing as a result of the COVID-19 pandemic, economic headwinds, and the recognition and impact of racial injustice. As an organization, we are committed to doing our part to help our country confront these issues through our business operations as an employer and as an active and responsible corporate citizen. We hope each of you, your families, and friends are safe and healthy, and we look forward to better days ahead for all. Now turning to our results. We are very pleased with our second quarter earnings performance, despite the impact of the elevated catastrophe losses. We reported earnings per share of $1.63 and an operating return on equity of 9.5%. Our broad-based profitability and strong financial position are enabling us to effectively navigate the current market conditions while remaining laser-focused on our long-term strategy. The investments we've made in innovation, analytics, underwriting, claims handling, and our agency partnerships provide us with a strong foundation and represent a distinct competitive advantage as we work to meet the needs of our agent partners, and our shareholders, now and in the future. I'll discuss our strategic priorities in more detail shortly, but first I would like to take you through the highlights of our second quarter performance. As outlined in our July 14th pre-announcement, we incurred elevated catastrophe losses in the quarter. The damaging hail and wind storms that affected the Midwest and Southeast, as well as property damage from civil unrest, resulted in total losses of $148 million, or roughly 13.5% of second quarter net earned premium. Unfortunately, significant catastrophes happen from time to time. It's part of our business, and our losses appear to be consistent with our market share and the experience across the industry in the quarter. Higher than expected CAT losses were offset by an improvement in our current accident-year loss ratio, excluding catastrophes. which declined 7.4 points from the prior year to 51.8%. The lower loss ratio primarily reflected the temporary benefit from lower frequency of auto accidents and other claims throughout our business portfolio as many states only began to emerge from stay-at-home orders later in the quarter. We remain prudent in setting our reserves. As businesses begin to reopen, we are very mindful of the potential for delayed claims reporting increased legal costs, potential impacts from the recession, changes in severity, and other factors. As for COVID-19 related losses, our overall exposure remains manageable. Our ultimate loss reserves for COVID-19 related losses are now $19 million in total, which include approximately $6 million we added in the second quarter to account for workers' comp presumption orders of compensability. Actual overall COVID-19-related loss activity has been limited thus far, and these reserves are holding quite nicely. With that being said, the underlying long-term loss ratio expectations for our business remain stable, given our proven ability to implement rate increases that meet long-term loss trends. Second quarter premium production was impacted by the significant and sudden slowdown in economic activity. as well as the auto premium returns we issued to our customers in April and May. Adjusted for approximately $30 million in premium returns in personal auto and very small amounts in other businesses and some other discrete items in the quarter, our underlying premium decline was approximately 2%. New business decline in personal and commercial lines, which clearly hit the low point in May, We also saw meaningful endorsement activity from our core commercial customers, most notably in certain industry classes that were most impacted by the stay-at-home orders. Our momentum improved meaningfully as we exited the quarter, with net written premiums flat in June and up slightly in July, propelled by rising rate levels, declines in endorsements and an increase in new business. We expect our Q2 net written premiums to represent the low watermark of the year. We are pleased with the metrics underlying our premium production in the second quarter, including our execution on the balance between rate and retention. Personalized rate increases remain relatively stable at nearly 5%, despite increasingly competitive market conditions. Renewal retention increased as expected, a function of less account remarketing during the initial weeks of the pandemic, as well as higher customer persistency. Poor commercial rates ticked up by about 50 basis points to 5.1% with increased retention. Our specialty rates also improved as we are starting to see the spillover effect of a substantial market firming in the large account specialty classes. We are very pleased with our granular segmented pricing strategy, which delivers lower rate increases in our most profitable lines and business segments and higher rate increases in loss-prone sectors and accounts, increasing the underlying profitability of our book of business. Consistent with our capital allocation framework, we repurchase shares in June and July as market conditions stabilize. Our strategic approach to capital allocation is driven by an unyielding commitment to both maintaining a strong financial position and delivering value for our shareholders. In that regard, I'm pleased to report that AMVEST recently affirmed our financial strength rating of A and our long-term issuer credit ratings of A+. All in, we feel good about where we ended the second quarter from a financial and operational perspective. I am particularly pleased with the agility and focus our team has displayed during this dynamic period. Moving on now to our strategic priorities. In this remarkably fluid environment, when profit pools, customer preferences, and operating landscape are rapidly shifting, it is critically important for us to look forward to anticipate these changes and have a clear set of priorities to guide our efforts over the next 12 to 18 months. These priorities align with our goal of being the premier franchise for our agent partners, an innovation-driven company with specialized products and capabilities that is capable of exceeding industry premium growth rates and delivering top quartile returns. Our nearer-term priorities will allow us to advance our fundamental strategic imperatives while also capitalizing on the challenges and opportunities of the current environment. First, we are laser-focused on risk and portfolio management. This enables us to optimize our underwriting performance to navigate short-term market dynamics effectively and at the same time benefit from the profitable growth opportunities that present themselves in this environment. In commercial lines, we are shifting our mix away from business classes that may have more lasting impacts from the pandemic as we remain cognizant of some lingering economic effects. On the other hand, we are implementing growth plans in our most profitable segments. Thank you for joining us today. For example, our tech and life sciences business combined grew 20% in the quarter. Our personal lines team is also applying an opportunistic growth strategy to drive the top line. For example, our Hanover Prestige product, which was fully deployed last year, represents a growing portion of our personal lines portfolio. This product offers our customers multiple coverage enhancements and a concierge-like claims experience. positioning our company as the carrier of choice for preferred accounts, a resilient customer segment that generates strong growth and profitability opportunities. We successfully doubled this business in the second quarter despite the pandemic and general decline in shopping. Second, we are committed to helping our agents navigate this challenging environment and optimize the value of their books of business. Our agent partners are an integral link in our value chain and strategy. and we are well positioned to help them thrive. One unintended benefit of the pandemic is the way our partnerships are becoming even more critical to our agents. Our selective distribution strategy provides franchise value, first rate product and service capabilities and local responsiveness. These factors have become critically important to agency success and sometimes even survival. When agents are challenged with customer service levels, Connectivity and Workflow Issues. In a difficult market environment where organic growth may be scarce, our ability to help our agents reach new customers, retain existing ones and create operational efficiencies is an important competitive differentiator. We have invested in and continue to introduce relevant industry-focused content and virtual underwriting expertise that can be easily accessed and distributed by our agent partners as they shift to a more virtual and digital sales approach. Coupled with our recent investments in Salesforce Marketing Cloud and our market leading customer service center, the expertise and tools we have developed allow us to become even more actively engaged in the agency marketing, sales and renewal process. Additionally, we have an exceptional level of transparency with our agents, allowing us to share unique knowledge and unparalleled insights and build detailed and thoughtful roadmaps to drive our mutual success.