Hanover Insurance Group Inc

Good day and welcome to the Hanover Insurance Group's second quarter earnings conference call. My name is Gary and I'll be your operator for today's call. At this time, all participants are in a 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 Lukashova. 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 Jeff Farber, our Chief Financial Officer. Available to answer your questions after our prepared remarks are Brian Salvatore, President of Specialty Lines, and Dick Levy, President of Agency Markets. 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 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 as defined under the Private Securities Litigation Reform Act of 1995 regarding Among other things, our outlook and guidance for 2021, the ongoing impacts of the COVID-19 pandemic, economic conditions, and other risks and uncertainties that could affect companies' performance and or cause actual results to differ materially from those anticipated. We caution you with respect to reliance on forward-looking statements. and in this respect refer you to the forward-looking statement section in our press release, the presentation deck, and our filings with the SEC. Today's discussion will also reference certain non-GAAP financial measures, such as operating income and accident share 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 us. I'll begin by discussing our second quarter financial highlights in the context of the current business and economic environment. I'll then provide a strategic review of each of the segments during the quarter. Jeff will review our financial results in more detail and provide some thoughts on the quarters ahead. And then Brian, Dick, Jeff, and I will be happy to take your questions. We are very pleased to report outstanding second quarter results, highlighted by strong growth with net written premium increases of 11.7%, or 8.6% on an adjusted basis, excluding the impact of 2020 premium returns driven by gains across all segments. Operating income of $104 million, or $2.85 per share. Operating return on equity of 14.7%, and a combined ratio of 94.4%. Our strong underwriting results are a reflection of our ability to capitalize on evolving market opportunities while navigating the complexities of this dynamic underwriting environment. From my perspective, there are two key takeaways for the second quarter results. First, our growth has accelerated and exceeded pre-COVID-19 levels in all segments. And second, we continue to achieve broad-based profitability with strong underlying underwriting results in each of our businesses. I would like to briefly discuss each of these points in turn. With respect to growth, we delivered a meaningful step up in premium increases in each of our business segments compared to the first quarter of this year. All of our major segments now are exceeding pre-COVID-19 growth levels as a result of our disciplined and consistent pricing strategy, strong retention, and robust new business production metrics. Strong relationships with our agent partners provide an opportunity for solid growth potential going forward as we capitalize on our most profitable market sectors and leverage our state-of-the-art technology platforms. Additionally, we continue to enhance the level of sophistication within our claims, data, and analytics, including our real-time driving pattern and inflation monitoring tools. I've never been more confident in our ability to grow profitably. In personal lines, we delivered growth of 11.6% in the quarter, or 5% excluding the effect of premium returns in the prior year period. Our continued strong growth momentum in this business is a reflection of sustained agent and customer interest in our attractive account offerings, targeted pricing actions, the strength of our market position, and our ability to successfully adapt and navigate a competitive marketplace. We grew our commercial lines businesses by 11.7%, driven by the strong performance of our specialty portfolio, as well as our small commercial business, which benefited from the economic recovery and is beginning to see the impact of the rollout of our new quote and issue platform, Tap Sales. Overall, we are well positioned to continue driving growth in all segments, and we now expect to deliver mid to high single digit growth for the remainder of the year. Regarding loss trends, we are still experiencing some remaining lower auto loss frequency in the quarter, reflecting the fact that a meaningful portion of our customer base likely has the opportunity to utilize more flexible working arrangements. Additionally, in many areas of the country, our data indicates reduced traffic and less congested rush hours as potentially lingering consequences of the pandemic. We expect frequency will reach its new normal over the course of 2021, which may provide some persistent lower accident frequency in certain geographies, given our mix and customer profile. We believe this benefit will be partially offset by near-term increased severity from materials inflation and more severe accidents, including elevated fatalities. We delivered strong commercial lines profitability in the quarter, although we experienced some elevated property losses, including in other commercial, which we do not believe are necessarily recurring or indicative of a trend. We've been watching the overall property large loss activity for several quarters, and we believe it is consistent with that of the market. Thus, we think that there is room for additional rate increases in the property lines moving ahead. And, as always, we remain very prudent on our law selections. We are mindful about the potential for increased social inflation, medical information and treatment delays, and other inflationary trends. We are watching the economic recovery and the acceleration of business activity closely, as well as the full reopening and catch-up of the court system in many jurisdictions. While the impact and duration of inflation on our book of business is yet to be determined, we believe our comparatively short reserve duration positions us well to manage through that potential exposure. With that as background, I would now like to share some recent highlights by business, beginning with personal lines. Our efforts to selectively apply rate adjustments where warranted have been very successful, as demonstrated by our sequential PIF growth of 1.8% in auto, and 1.7% in home during the quarter. New business growth came in ahead of expectations, and we are seeing significant sequential improvement in retention. Our preferred customer focus and our value-based approach represent significant competitive advantages, particularly as agents become even more strategic with their personal lines operating models and carrier placement decisions. Account business represents over 85% of our overall book, leading to a high level of retention and business stability. Our personalized retention improved by over two points in the second quarter compared to the first quarter, demonstrating the agility of our approach and the success of our business strategy, even in this very dynamic environment. In personal auto, we expect our claims auto frequency to gradually approach new normal levels as the year progresses. Though the pricing environment remains competitive, we are seeing clear indications that the rate deceleration has bottomed out and the industry is looking to increase rates. This is to be expected given the nature of the personal lines pricing cycle, as historically personal auto rates adjust to loss trends rather quickly. We believe we are more favorably positioned for the future given our prudent pricing strategy throughout the pandemic. As a result, we have much less of a need to significantly increase rates and create customer disruption in the near future. We continue to gain momentum with Hanover Prestige, our full account offering for customers with higher value homes and autos and more complex insurance needs. These customers represent a growing segment of the Persilines market, which further positions us as a strategic partner with agents. The contribution of this offering to our overall growth is increasing every quarter, with the second quarter benefiting new business growth by three points. Turning to commercial lines, we executed extremely well on our strategic priorities, posting growth of 12% in specialty and 11% in core commercial, driven by a pickup in new business, rate increases, and exposure growth. Strong top-line growth in our core commercial business is expected to continue through the year, driven by the reopening of the economy, continued rate increases, and a successful launch of TAP sales, our small commercial quoting platform, which is proving to be a great addition to our already strong small commercial offering. In the second quarter, we launched this new platform in an additional nine states, bringing the total to 20 states. And we complete the implementation countrywide for our first product, Business Owner's Advantage, by year end. As a reminder, this multi-year significant investment delivers a comprehensive set of capabilities to the marketplace. It includes a new user front end for our agents, new products and endorsements, new states, new sophisticated pricing algorithms, a new policy administration system, and new self-service capabilities. In those states where tap sales was deployed in the first quarter of this year, submissions significantly increased and our hit ratio also improved. The response to this offering has been incredibly positive with agents praising the product's ease of use and simplified quoting process, calling it best in market. The efficiency gains are substantial, enabling the quoting and an issuance of a single location risk in 50% of the time it required before. The investments we have made to modernize our infrastructure and enhance our capabilities across our business are being realized at a time when agents are consolidating and buying more agencies that have substantial small commercial books of business. This is forcing them to become more strategic about the carriers with whom they do business. Our account focus, easy to use tools, and product breadth are driving increased efficiencies for our agents and increasing our value proposition to them. We are confident that our robust offering will provide further growth and agency penetration opportunities for us in the quarters ahead. In specialty, we also delivered significant growth. During the quarter, we achieved double-digit growth in our marine, E&S, and management liability lines, which are among our most profitable businesses. We continue to leverage our expanded products and capabilities in the financial institutions and retail E&S spaces as well. And we also advanced our total handover strategy, deepening the use of our specialty capabilities across our commercial lines customer base. As agents continue to offer specialized products to more customers, we are confident that our specialty business will continue to generate critical growth for us going forward. We are pleased with the commercial rate environment and the exposure dynamics in our markets. We achieved rate increases of 6.5% in core commercial and sustained strong retention at 84.9%. we continued to implement double digit rate increases in commercial auto and upper single digits in property with granular pricing segmentation and a strong differentiation in price and retention by risk type. Exposure growth exceeded historical levels in the quarter, which bodes well for our growth prospects going forward. We achieved rate increases of 8.5% in specialty, up from 7.5% in the first quarter. In general, specialty rates can fluctuate from quarter to quarter as a result of large account renewals and other unique items. But overall, pricing in our specialty markets has been very strong, with price increases continuing to outpace loss trends. There continue to be meaningful drivers that support the strength of the rate environment in commercial lines, including the potential of an increase in social inflation, property loss pressures from materials costs, increased reinsurance costs, and low interest rates. We believe our focus on smaller accounts and differentiated offerings will help to shield us from meaningful pricing deceleration, which can occur in larger-sized brokered accounts. In summary, the exceptional growth we delivered during the quarter reflects the significant positive momentum we have established across our business and sets the stage for continued profitable growth. We are performing exceedingly well in an uncertain environment, leveraging our unique distribution capability, distinctive agency and customer-centric strategies, disciplined approach to underwriting and pricing, and broad and specialized product offerings. As we begin the second half of the year, we are encouraged by our performance year to date and confident in our ability to advance our strategy and capitalize on opportunities for profitable growth going forward. Before I turn the call over to Jeff, I'd like to update you on our efforts to reimagine the future of our business and our workplace. As I have said many times, we are extraordinarily proud of the work our team has done over the course of this public health crisis, delivering on our promises, maintaining and even enhancing the levels of service we provide to those who depend on us. As we continue to drive our business forward, positioning our company to deliver sustained, profitable growth, we are being very thoughtful and opportunistic, determined to emerge from this ordeal as a better insurance company, employer, and corporate citizen. We are closely monitoring the rapidly changing employment trends and practices, as well as employee preferences, intent on strengthening a culture that for us has been an important competitive advantage, enabling us to attract and retain outstanding talent. We have begun to invite employees back to work on a largely voluntary basis and expect to fully reopen our offices sometime during the fall, assuming the public health environment is conducive to do so. We are planning to embrace a progressive hybrid model, one that will enable us to provide agents and customers the products and services they expect and deserve, and to provide our employees a flexible, engaging work environment where they can build rewarding careers. These are truly exciting times for those that are up for the challenge. With that, I will turn the call over to Jeff.