Hanover Insurance Group Inc

Good day, and welcome to the Hanover Insurance Group's third 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 phones. To withdraw your question, please press star, then 2. 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 posted on the Investors 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 related impacts, and other risks and uncertainties that could affect company 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-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 today's call. It seems like only yesterday we spoke to you at our Investor Day. I would like to thank everyone for their participation and positive feedback. We enjoyed the opportunity to update you on our businesses and share our vision for the future. I'll begin today's earnings call by discussing our third quarter financial highlights in the context of the current business and economic environment. I'll then provide a strategic review of each of our business segments. Jeff will review our financial results and outlook in more detail, and then we will be happy to take your questions. Overall, we are pleased with our financial performance for the quarter. especially in light of the severe weather and inflationary pressures that are broadly affecting the industry. We posted net written premium growth of 8.4% and a combined ratio excluding catastrophes in line with our original expectations for this quarter. Our performance on both metrics underscores our ability to capitalize on market opportunities while prudently managing the complexities of the current environment. In particular, I want to call your attention to three highlights for the quarter. First, our continuing growth momentum. Second, our overall business diversification, which was emphasized with some unevenness in our segment results in the corner. And third, the effectiveness of the steps we are taking to position our company to manage the effects of changing weather patterns. Our net written premium growth again exceeded our expectations with strong contributions across all segments. Year-to-date through September, our growth rate of 8.4% was equally robust, driven by successful execution of our differentiated business strategy and disciplined capital allocation. Our balanced approach to personal lines pricing has proven to be quite effective and critical as loss trends continue to evolve. At the same time, the overall commercial lines environment, including rate and exposure, remains strong, fueling our robust premium momentum. During our recent investor day, we highlighted the growth levers that have and will continue to enable us to build competitive advantage in this dynamic market. Specialized capabilities, a unique distribution approach, and an extraordinarily talented team are among the many reasons why we are becoming a premier P&C franchise for the nation's top independent agents. and we continue to lean into our mission every day. Our distinctive strategy and our high-quality book of business inspire confidence in our ability to achieve our guidance of high single-digit growth for the full year. Overall XCAT loss activity was in line with our expectations, with many moving parts, which Jeff will review in more detail shortly. From a macro perspective, there is no doubt that the environment is changing rapidly. The third quarter reflected that movement for us and the industry. Our personal auto and some other lines continue to benefit from lower loss frequency in the current uncertain environment. At the same time, inflation, labor shortages, rising cost of materials, and supply chain bottlenecks are adversely affecting certain lines, albeit to different degrees. As I noted during our investor day, in my more than three and a half decades in this business, industry trends have never been as dynamic as they are today. But as our results have demonstrated over time, our diversified book of business and broad-based profitability have enabled us to maintain a well-balanced portfolio and consistently deliver strong overall performance. This result speaks directly to the quality of our underwriting, integrated capabilities, and the analytical tools we leverage to effectively manage the fluctuations inherent in our industry. And we believe we will continue to win in this dynamic environment that presents both challenges and opportunities. The third quarter marked an especially active catastrophe season across the industry. At $153.5 million, our third quarter losses were in line with the preliminary estimate we shared with you in our September 22nd pre-release. Hurricane Ida represented approximately $75 million of the total, with the balance comprised of rain, flood, and tornado events. We are looking carefully at the increase in the frequency and severity of weather events, including non-modeled storms. The changing weather patterns are an issue we and others in the industry will likely contend with going forward. We have been monitoring and addressing this issue for several years using all the levers available to us, including exposure management, reinsurance, and improvements in data and analytics. Our continued focus on exposure management has proven effective across our portfolio. As you'll recall, we have withdrawn from the personal lines market entirely in Florida and have carefully managed our exposures in other Gulf states. We have benefited from this strategy in the wake of Hurricane Ida when we sustained lower cat losses proportional to the industry in general in the south. We also restricted our capital allocation in wildfire exposed regions in the west and coastal exposures in the east, and we continue to emphasize growth in casualty lines to ensure good balance and enable continued property capacity in our most profitable territories. Additionally, we buy a substantial amount of catastrophe and property per risk reinsurance with broad terms. Finally, we have augmented our CAT management and aggregation tools, including PML underwriting, dynamic CAT pricing, single-property CAT load, and microconcentration models. While these actions have served us well in the past and continue to do so, we believe pricing still requires additional focus. Given the volatility the industry is seeing on CAT and non-CAT basis, we expect commercial property rates to remain firm going forward and even move higher. We also expect industry participants to coalesce and partner more with the government to protect our customers through better infrastructure, stronger building codes, and expanded risk sharing pools, among other things. Overall, our past and current actions, combined with our commitment to sustainability, position us to effectively navigate the ongoing effects of changing weather. I will now turn to a review of our business, beginning with Persilines, which generated net written premium growth of 8% in the quarter. Policies in force continued on an upward trajectory, with all lines contributing to the growth. Broad interest in our offerings, combined with our measured and less reactive pricing strategy, continues to drive increased retention and spur new business growth. At 88.7%, our retention places us in the top quartile in the industry, supported by our account strategy and focus on being a market leader for customers with sophisticated insurance needs. New agency partner appointments are on track and continue to supply a robust flow of new business as they work to achieve relevance with us. In addition, we are also seeing a new business lift from continuing market and book consolidations among our strongest and most established agents. I also would mention that we are continuing to see terrific momentum with Hanover Prestige, our popular full account offering. This solution has found a sweet spot between commodity players and high net worth carriers for customers in the $750,000 to $3 million homeowners coverage range with broader and more complex insurance needs, providing us a substantial competitive advantage and future growth opportunities. Overall, we are successfully navigating the dynamic purse lines market environment while striking the right balance between growth and profitability. Our personalized results are tracking in line with our expectations for the quarter. That said, we are actively watching frequency and severity trends, particularly given the industry-wide increase in severity in 2021. The loss frequency benefit in the third quarter was greater than we had originally anticipated at the start of the year and is helping to counteract the increase in auto severity. The pricing environment remains competitive, although we are observing signs of auto rates increasing across the industry with a significant uptick in competitor rate filings. We are carefully reviewing our pricing selections along with the competitive environment and have made necessary adjustments. Turning to commercial lines, Strong growth of 8.7% in the quarter was driven by positive exposure activity, rate increases, strong renewals in core commercial lines, and continued momentum in specialty. Exposures continued to meaningfully contribute to our premium increases as businesses grew in a more favorable economic environment. We are maintaining our strong agency position and continuing to capitalize on book consolidation opportunities. The pricing environment continues to be robust in our markets within both core commercial and specialty. We achieved core commercial rate increases of 6.9% in the third quarter, consistent with the second quarter dynamics. Specialty rate remains strong with robust pricing trends in most lines, particularly in property including HSI and marine. We expect the firm market to continue as the drivers of rate increases are not showing any signs of slowing down. With such dynamic loss trends and a more uncertain risk environment than ever, marked by elevated weather, supply chain disruptions, materials inflation, and a return of litigation trends and increased severity, we will be seeking additional rate in many lines of business. The rollout of our TAP sales platform for small commercial is progressing very well. We added 10 more states over the last three months, bringing the total number to 30, now covering the vast majority of our existing small commercial footprint. As the deployment of this platform continues, it is supporting our transactional new business flow, as well as providing additional growth and agency penetration opportunities. In middle market, we continue to focus on pricing segmentation and mix management, emphasizing growth in our target states, product lines, and industry classes. Over time, we see significant opportunity to further penetrate this segment and enhance our agency partnerships. However, we remain somewhat cautious in the near term, particularly until loss trends become a bit more predictable. Specialty continues to be a strong source of revenue expansion, with underlying growth holding at near double digits for our most profitable businesses and continuing robust rate of 8% in the quarter. We continue to make strides in E&S and professional and executive lines as we advance our digital capabilities and market our broad capabilities more holistically. Book consolidations with many of our best agents continue to build and supplement our new business flow. We are also excited to further drive our total Hanover strategy by expanding our distinctive specialty offerings across more and more of our core commercial customers. Earlier this month, several members of our leadership team joined other industry leaders at the Council of Insurance Agents and Brokers Leadership Forum, a gathering of many of the largest and most successful agents in our business. We conducted over 40 executive meetings, both in person and virtually, talking with many of the top 100 agents around the country. These conversations allowed us to review our current and planned capabilities and discuss how we can help them more effectively serve their customers and expand their businesses. We came away from these meetings extremely encouraged about our prospects and with several key takeaways. First, agency M&A is continuing at a rapid pace with new consolidators emerging and presenting new opportunities for small and mid-sized agents to join forces. Second, agency M&A trends combined with labor shortages are driving more agents to further explore various tech solutions and engage with carriers that have invested in state-of-the-art platforms and capabilities, seeking to drive operating efficiencies and enhance EBITDA margins. Our commitment to innovate alongside and for the benefit of our agents and their customers is making our value proposition even more attractive, as evidenced by the success of our agency insights engagement and market consolidation efforts. Third, differentiated personal lines and small commercial offerings continue to be in high demand among the best agents in the country, as they acquire midsize and smaller agents who have considerable amounts of this business. Agents are getting very serious about consolidating their flow business with the right carriers to drive additional operational efficiencies and better serve their customers. The combination of our agency insight work and our tap sales offering presents an unmatched competitive advantage. Fourth, many agents continue to develop areas of specialization, particularly among vertical industry segments, and are deliberately pursuing growth in these areas, very often including healthcare, manufacturing, human services, tech and life sciences, among others, areas where we are especially strong. Our industry specialization and our admitted and non-admitted product capabilities garnered substantial interest during these strategic conversations. Ultimately, we came away from the conference with even greater conviction that our strategy is further resonating and we are well positioned going forward to drive strong, sustained, and profitable growth and to deliver outstanding value for our shareholders and other stakeholders. We are delighted by the continued growth momentum and strong underlying results we have generated year to date. Our differentiated agency and customer-centric strategy, combined with our specialized capabilities, are key to our continued success. Supported by our strong team and unique culture, I have immense confidence in our ability to monitor and adapt to changing market dynamics and capitalize on emerging opportunities for profitable growth. With that, I will turn the call over to Jeff.