Hanover Insurance Group Inc

Good day, and welcome to the Hanover Insurance Group third quarter earnings conference call. My name is Keith, and I'll 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 your host today, Oksana Lukashova. Ms. Lukashova, please begin.

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 Dick Levy, president of agency markets, and Brian 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 in the investor section of our website at www.henover.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. These statements can relate to, among other things, our outlook and guidance for 2022, economic conditions and related impacts, including inflation, supply chain disruption, evolving insurance behavior emerging from the pandemic, 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 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, and good morning, everyone. I'll begin by providing some context on our third quarter performance, share my perspective on the current industry environment, and outline our approach to address the prevailing economic and market pressures. Next, Jeff will review our financial and operating results by segment, outline our action plan in detail, and provide an update to our financial expectations. And then we will open up the line and take your questions. Before I comment on the results, on behalf of the entire Hanover team, I'd like to acknowledge all those who have been impacted by Hurricane Ian. Members of our claims organization are hard at work doing what they do best to help our customers recover as quickly as possible. As always, I'm very proud of the important work we do every day to help our customers in their time of need. As evidenced by recent earning reports, our industry is operating in a very dynamic macroeconomic environment. Continuing inflation and supply chain disruptions, turbulent financial markets, and losses from Hurricane Ian created a confluence of headwinds for the P&C industry in the third quarter. As our track record demonstrates, we are executing very well on our catastrophe exposure management and continuing to diversify our portfolio over time. While our risk management discipline and strategic approach to the market enabled us to moderate the impact of recent macro challenges on our results, the accelerated pace of inflation and persistent supply chain issues surpassed our expectations. As a result, we are making meaningful adjustments to our short-term pricing and underwriting approaches. and are taking specific actions to mitigate the effects of inflation more aggressively, all to bring our company back to target profitability and deliver on our financial objectives. We have a very strong, highly regarded franchise and an excellent portfolio of businesses. Our company is built to generate superior performance over the long term. We've established a strong track record of profitability and assembled the skills, talent, and capabilities to address these short-term loss trends head-on. And we're confident the market is responding appropriately to these environmental issues. And we remain on track to achieve our long-term financial targets. We will continue to execute on our proven growth strategy, focused on a differentiated agency and customer approach, while also putting a laser focus on margin improvement in certain businesses to address the recent changes in the overall environment. In the quarter, the effects of inflation were most pronounced in our personal auto, homeowners, and CMP property lines. Additionally, we experienced an increase in large losses in CMP, with inflation and supply chain issues magnifying the effect on lost costs. Jeff will elaborate on the impact on each business in more detail. But to be clear, despite these temporary challenges, we remain very comfortable with the quality of our book of business, our risk selection, and our underwriting discipline. From that perspective, we are pleased with our overall performance year-to-date. our resulting ROE of 10.5%, the execution of our strategic priorities, and our top-line results in the third quarter. We generated net written premium growth of 9.5% in the quarter, with healthy production indicators across each of our segments. Our core commercial business grew 5.9%, led by renewal price increases of 11.2%, driven by double-digit increases in both our small and middle market businesses. Rate increases accelerated 40 basis points sequentially to 7.3%, and strong retention indicates we have additional opportunities to take even more rate in the future. Our specialty team continued to build on its momentum, achieving growth of 12.6%, underscoring the strength of our agent partnership model and our ability to access high-margin specialty business. The investments we have made in our specialty capabilities have proven to be high-yielding. enhancing our relevancy and enabling us to pursue an even better balance between property and casualty risks over time. In the third quarter, we achieved robust rate increases of 8% across our specialty book, with price increases including exposure of 12.4%. This highly diversified and specialized portfolio enables us to offer our retail agents one of the broadest range of products in the small to mid-sized market. In that vein, we continue to expand our offerings, and we remain on track to complete the nationwide rollout of our specialty general liability product before year-end. Additionally, we were extremely pleased to see strong renewal retention and robust growth contributions from Surety, Specialty P&C, and Marine. Moving to personal lines, this business grew net written premiums by 11.3%. with an average renewal pricing increase of 7.3%, sequential PIF growth of 1.5%, and continued strong retention. Of course, we expect our purse lines policy growth and retention to moderate as we implement additional rate and other pricing actions in the coming quarters. Looking ahead, we are working diligently on a series of actions designed to enable us to return to prior target margins in affected personal and core commercial property lines. As I indicated earlier, we have a high-quality book of business, but we need to make appropriate adjustments to address the current, rapidly changing external environment. Many of these actions are already being executed. They are focused on three key areas. pricing, insurance-to-value adjustments, and targeted underwriting measures. First, our most effective response to higher inflation is to increase rates, and we are aggressively stepping up these initiatives in property lines. Prospective rate increases must exceed loss trends for us to achieve our targeted combined ratios. We are moving quickly and have already stepped up our filings and made further automatic inflation adjustments for property exposures across all states. We expect these actions to result in Personal Lion's renewal price change of approximately 10% in the fourth quarter and to further accelerate to the low teens in 2023. A disciplined strategy is essential in the current environment, and our superior agent partnerships and market position will enable us to hit our pricing targets. Second, we are further implementing robust insurance-to-value adjustments in sectors and geographies that are most dramatically affected by the elevated costs. These actions target insured-valued adjustments beyond those embedded in the automatic statewide inflation guard factors and are tailored to specific risks that are experiencing accelerated property valuations, including elevated business interruption exposures. Third, we are implementing targeted underwriting actions to better position our quality book of business in light of the recent changes in the socioeconomic environment. These changes include enhancing underwriting guidelines, exclusions, and targeted agency management. We are also extensively using innovative tools and technology to increase our underwriting precision and reduce exposure to certain undesirable risks. Those that will not meet our profitability expectations even with additional rate. We are intently focused on the personal lines and commercial property pricing environment as we execute on our plans to recapture industry leading top tier margins. We do not see any signs of softening in the market conditions that would impact our portfolio. Inflation and supply chain issues are pervasive and impacting all primary insurers. Reinsurers are signaling shrinkage of property capacity, particularly after Hurricane Ian, which also bodes well for continued firming and discipline in the primary market. In personal lines, we are experiencing one of the hardest markets in history, and we are well positioned to improve margins at an accelerated pace. In virtually any macroeconomic environment, and particularly now, the market favors well-built companies with enduring business discipline. Through solid growth, a sound reserving philosophy, and thoughtful financial stewardship, our company has consistently proven that discipline and will continue to apply our superior skills and discipline approach while we further work through inflation and other evolving pressures. As we contemplate our past performance and our future opportunities, I have every confidence our experienced and talented team our highly responsive and collaborative culture, and our unique business strategy will enable us to drive superior performance well into the future. With that, I will turn the call over to Jeff.