Hanover Insurance Group Inc

Good day, and welcome to the Hanover Insurance Group's fourth quarter earnings conference call. My name is Chuck, and I'll be your operator for today. 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. And 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 Ms. Oksania Lukashova. Please go ahead, ma'am.

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 2022, 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 statements 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 in 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 today's call with a discussion of our fourth quarter performance and full-year financial highlights in the context of the current business and economic environment. I'll then provide an overview of our strategic and business accomplishments for the year and our high-level expectations for 2022. Jeff will review our financial results in more detail and discuss our 2022 guidance, and then we'll be happy to take your questions. 2021 was an outstanding year for our company. I am extremely proud of the way our talented team navigated the challenges of an exceedingly complex market environment and executed on our key business imperatives, building even more on the strong strategic, operational, and financial momentum we have established over the past several years. Considering what was an extremely active catastrophe year for our industry and our company, We are very pleased with our financial performance, highlighted by operating income per share of $8.73 and an operating return on equity of 11.2%. We achieved a sub-90s XCAT combined ratio for the year and generated record net written premium of $5 billion, reflecting the success of our distinctive and winning strategy. For the fourth quarter, we delivered outstanding results, posting our best-ever quarterly operating earnings performance. In the face of higher inflation and evolving loss trends, we took advantage of the opportunities presented by our particularly dynamic markets. fully leveraging our strong agent partnerships, broad and innovative capabilities, and organizational agility, posting a 16.8% operating return on equity and a combined ratio of 92.9%. Our results continue to demonstrate our ability to drive broad-based profitable growth through strong market awareness, excellent portfolio management, and financial discipline. Looking first at growth, we gained considerable momentum over the course of the year, capping 2021 with a 9.2% net written premium increase in the fourth quarter and 8.6% for the full year. Each of the growth levers we discussed last September at our Investor Day, agency penetration, specialized products, and a focus on innovation contributed to our growth momentum. Additionally, each of our major segments exceeded our original growth expectations, demonstrating the strength of our market position, the appeal of our select agency strategy, and the effectiveness of our customer-centric strategy. We believe our high-quality product portfolio, in combination with our consistent and segmented pricing strategy, position us exceptionally well to continue to deliver sustainable, profitable growth going forward. From an underwriting perspective, 2021 included some of the most dynamic loss trends we've ever experienced in the P&C industry. From property volatility, inflation, and severe weather, to changes in auto loss trends and court delays. In the face of these and other challenges, we posted an 88.6% XCAT combined ratio for the year, one of the best on record, while also outperforming the guidance we had provided to the street. Our underwriting and pricing discipline, combined with our diversified portfolio, has enabled us to deliver broad-based profitability across our business. The investments we have made in data analytics and our cross-functional collaboration inspire additional confidence in our ability to anticipate loss trends and adjust our underwriting and pricing accordingly, providing significant agility while focusing on long-term value creation. Our strong results for the fourth quarter and for the full year reflect earning in of rate increases above loss trends in commercial lines and a thoughtful pricing strategy in personal lines. As we close out 2021, we are delivering higher margins compared to pre-COVID levels, which demonstrates our ability to successfully navigate market dynamics and to continue to increase the earnings power of our organizations. turning to our strategic accomplishments for 2021. We continued to strengthen our relationships with our agent partners, delivering even more value to them and helping them meet the constantly changing needs of our mutual customers. We continued as well to support our agents with an array of product innovations and technology investments designed to enhance the customer experience and give our agent partners the tools they need to achieve their business results. We also made further enhancements to our agency insight tool, providing our agents with unparalleled market insight and helping them drive their business strategies forward. As Dick Levy illustrated at our investor day, this tool also plays a critical role in the increasingly important agency appointment process. In 2021, we made more than 350 agency appointments across personal lines and small commercial, helping to further drive new business production and geographic diversification. On the technology and analytics side, our new claim system and small commercial tap sales platform are among the 2021 accomplishments that are poised to deliver meaningful benefits going forward. Turning to core commercial, Strong renewal retention, a healthy rebound in exposures, and robust rate increases help drive growth in this segment. We gained significant traction in small commercial with the launch of our tap sales quoting platform, which has helped fuel new business growth. Our small commercial business benefited during the year from an upward rate trajectory throughout the year, and we delivered growth of 8.3% for the year and 9.3% in the quarter. We also made great strides in middle market as we continued to grow our most profitable segments and manage underwriting profitability in more challenging areas. Targeted industry verticals such as technology, human services, and financial institutions are among the areas where we continue to drive strong, profitable growth. In 2022, We believe our granular pricing capabilities will allow us to continue to push robust rate to less profitable lines and cultivate the most profitable sectors of our core commercial business. We expect the firm market to continue into the year as drivers of rate increases persist, most notably the rising costs of materials and labor. Those catalysts, combined with our outstanding data and analytic capabilities, underwriting discipline, and unique strategy, should enable us to generate additional strong profitability and mid-single-digit growth in core commercial this year. Our specialty business delivered stellar results in 2021, exceeding $1.3 billion in direct premiums written for the first time and $1.1 billion on a net basis, growing 11% for the year. This performance underscores our strong product portfolio, distribution relationships, and market position. For the full year, we achieved very robust growth with our most profitable specialty lines. including professional executive lines, marine, and Hanover Specialty Industrial. At the same time, we continued to gain significant momentum in our newer specialty businesses, including the specialty coverages in the financial institution sector and retail E&S. To further round out our portfolio, in 2021, we launched a new specialty general liability product for our agents. This exciting new product introduction fills the casualty space between core commercial and E&S and advances our total Hanover initiative, making our specialty offerings accessible to more core commercial customers. With 11% net written premium growth for the year, we are on track to deliver on the specialty target of 10% long-term CAGR that we share with you at Investor Day. And even with the increase in weather-related property losses across the industry during 2021, our specialty book delivered a 92.9% combined ratio all-in and 87.9% excluding catastrophes, beating our XCAT expectations for the year. Our specialty business is optimally positioned to deliver significant and meaningful value to retail agents for small to midsize customers with a very diverse and unique offering. With eight different businesses, including 18 product areas, we have a breadth of product capabilities that agents need and that typically are available through large nationals or specialty carriers, oftentimes through the wholesale channel. Simultaneously, we provide the high level of visibility and service agents often expect from top regional carriers, enabled by local market presence and coordination with core commercial lines. Our strategic focus is on continuing to advance the use of technology and specialty to meet the needs of our agents for greater efficiency in coverage placement and servicing of customers, as well as improving our own efficiency. We'll also continue to build on our existing core commercial relationships, while thoughtfully executing our targeted wholesale strategy to complement our retail distribution, as not all large and mid-sized agents place some of this business directly. We expect to continue to leverage our strong specialty platform through our best agents to deliver excellent growth and strong profitability in 2022 and beyond. We are confident this business will be a significant contributor to our overall growth in the years ahead. With that in mind, I am pleased to share with you this morning that beginning in the first quarter of 2022, we will break out our specialty business as a separate financial segment, giving you much greater detail into the growth and profitability drivers of what has become our fastest growing business. Jeff will discuss our process and thinking shortly. Moving on to personal lines accomplishments. Our team delivered strong earnings and top line growth in an especially complex market during 2021. Given the changing loss trends and competitive environment over the last two years, we invested a significant amount of time, energy, and resources to achieve the right balance of rate adequacy and consistency, enabling strong retention and profitability. We are uniquely positioned in personal lines. Our geographic mix and focus on customers with complex insurance needs continue to deliver a remaining frequency benefit that helped offset the increases in property severity. Additionally, our consistent and thoughtful approach to pricing continued to represent an important competitive edge, contributing to our high single-digit growth, strong retention, and excellent profitability in our personal auto book in 2021, including the fourth quarter considering our typical seasonality. Recall that our fourth quarter generally reflects more elevated winter losses due to our northern personal lines footprint. We also continue to gain further traction with our Hanover Platinum and Prestige total account offerings in personal lines. Platinum accounts for 62% of our personal lines book, while Prestige now represents about $150 million, or 7.5% of the book. With very strong reception in the market, we believe Prestige premiums will double in the next three years. As we contemplate 2022, we expect to steadily increase home insurance pricing, including exposure increases, to address the continuation of rising material severity and labor costs. In auto, we will seek rate to keep up with the increased property severity, but we feel good about our auto profitability as it stands today. At the same time, we believe we will generate additional growth and new business as a result of much more aggressive and potentially disruptive rate increases being implemented by the industry to restore profitability. We believe our thoughtful approach to pricing and the anticipated longer-term persistence of some frequency benefit strengthen our competitive standing in the industry. Our growth might slow a bit as we increase prices in both home and auto throughout the year, but we are well positioned to deliver mid-single-digit growth at target returns and purse lines in 2022. I want to acknowledge the commitment and contributions our employees made during 2021 to drive our continued success. We are extremely proud of and appreciate our talented and committed team. The Hanover success in 2021 is a result of our team's hard work and dedication to meeting the needs of our agents and customers. The level of talent we have assembled is on par with the best in our business and constitutes our single greatest competitive advantage. While much has been written about what economists refer to as the great resignation, I'm extremely proud that we came through 2021 with robust employee retention rates, and we have a full talent pipeline and continue to attract the talent we need at all levels of the organization. Additionally, our employee engagement remains high as well. As part of our ongoing company listening strategy, we recently engaged an outside firm to conduct an employee survey and assess an employee engagement across the organization. While we are still working through the full analysis, we are very pleased with the initial feedback from that survey. Our ability to attract and retain top talent and keep our workforce engaged speaks to the strength of our culture. At the Hanover, our employees' actions and behaviors are guided by our care values, collaboration, accountability, respect, and empowerment. Underlying these values is the belief that a highly engaged, inclusive, and empowered workforce positions us to compete effectively in a dynamic market and to drive top quartile growth and returns. In 2021, we worked on a number of initiatives to advance that principle. These initiatives include expanding the number of business resource groups supporting women and underrepresented populations within the company, expanding recruitment efforts to help us attract employees from more diverse talent pools, and creating more opportunities for women and other underrepresented populations in leadership roles. While there certainly is more work to be done to advance inclusion and diversity goals across our organization, I am inspired by our accomplishments to date and eager for us to build on those efforts this year. Our overall strategic imperatives for 2022 center on maintaining our profitable growth momentum, investing in products, services, data, and innovation to embrace the change around us, and continuing to attract and retain the industry's best talent. In conclusion, we begin 2022 with great optimism. We look to the future from a position of strength, confident in our ability to deliver sustainable profitability and growth momentum. We look forward to taking our company to the next level and making our vision a reality as the premier property and casualty company in the independent agency channel. one that delivers value for its shareholders and other stakeholders. With that, let me turn the call over to Jeff.