Hanover Insurance Group Inc

Good day, and welcome to the Hanover Insurance Group's fourth quarter earnings conference call. My name is Anthony, and I'll be your operator for today's call. At this time, all participants are in listen-only mode. If you need assistance, please signal 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 that the event is being recorded. I'd 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 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 2023 economic conditions and related effects, including inflation, supply chain disruption, potential recessionary impacts, evolving insurance behavior emerging from the pandemic, and other risks and uncertainties, such as severe weather and catastrophes, 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 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 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 us. Today, I'll begin with an overview of our performance, discuss Winter Storm Elliott and ways to address future impacts of winter storms, update you on progress we've made in the fourth quarter to recapture our top-tier underwriting margins, And I will conclude my remarks with a review of our 2022 strategic accomplishments and the important strides we made this past year, strengthening our competitive position and executing our winning strategy. Next, Jeff will review our financial and operating results by segment as well as our balance sheet and provide an update on our outlook and longer-term financial expectations. We'll then open the line for your questions. For the full year, we delivered operating income per share of $5.53 and an operating return on equity of 6.7%, both reflections of the inflationary economic environment and the magnitude of the CAT activity in the fourth quarter. From a growth standpoint, we generated net written premium increase of 9.7% for the year with strong contributions across all segments. Our full year combined ratio excluding catastrophes was 92.1% toward the lower end of the guidance we provided on our third quarter earnings call in November. Given the frequency and severity of catastrophes in recent years, including unusual atmospheric events like Elliott, I'd like to take a minute to highlight the work we've done in the past and most recently in terms of the strategic management of our catastrophe risks. We've built a strong track record in addressing catastrophe risks, in particular hurricanes and convective storms, employing disciplined underwriting strategies augmented by data, analytic tools, and technology. As a result, our share of catastrophe losses over the last five years relative to the domestic P&C industry has declined significantly. Additionally, our catastrophe losses during the same period generally have been in line or smaller than our market share in the affected territories. But as evident from our fourth quarter results, extreme cold weather, like we saw with winter storm Elliott, can challenge the conventional wisdom of what level of losses a winter storm can bring. And our prior catastrophe management actions clearly weren't as effective in this type of storm. While our top priority in these circumstances is to address the needs of our customers and agents, it is also incumbent upon us to leverage all we learn from this event to advance our financial and operating performance. With changing weather patterns affecting more geographies, we've intensified our focus on pricing and volatility management over the last few years. We have further expanded our capabilities in the area of risk solutions and mitigation, collaborating with innovative technology partners. Today, we are gathering vital information from visual intelligence technology, water and temperature sensors, AI risk assessment data, and other advanced tools to make underlying decisions and prevent claims. A relatively small number of early adopters of water and temperature sensors and related property IoT solutions have already begun to benefit from their use. We believe Winter Storm Elliott will drive a needed market movement on adoption of these risk solutions more broadly, and we have the infrastructure ready to quickly scale our existing risk prevention platform as customers better understand their exposure. We are focusing our efforts to address weather loss volatility around the following levers. Actively repricing products consistent with change in weather risks. Addressing risks for which we cannot achieve adequate price. Significantly increasing water damage deductibles. And enhancing the implementation of water sensors using lower deductibles as incentive. We're confident our focus on risk selection, pricing, and use of innovative tools will enable us to even more effectively address these less frequent but more broad-based storms in the future. Now I will take a few minutes to update you on our progress regaining our top-tier margins in personal and core commercial property lines, despite the persistence of inflationary and supply chain pressures. As we discussed in our third quarter call, our margin recapture plan includes three main levers. Enhanced pricing, significant insurance to value adjustments, and targeted underwriting measures. And we have successfully executed on all three areas in the fourth quarter. First on pricing. As guided, we achieved personal lines pricing increase of 10% in the fourth quarter, up nearly three points sequentially, with meaningful gains in both auto and home pricing. Personal lines retention remained solidly above 86%, with only slight sequential moderation, which is a testament to our unique account proposition and strong agency relationships. Additionally, we are operating in an unprecedented hard market in personal lines, and the regulatory environment is evolving to allow further rate increases in most states. Given the disciplined market conditions and elevated loss trends, we now expect personalized pricing to further strengthen and end 2023 in the mid-teens. We also made meaningful strides increasing core commercial pricing, with underlying property renewal price change up 11%, slightly above third quarter levels, and expect even higher increases for 2023. A disciplined strategy is essential in the current environment, and our superior agent partnerships and strong market position should enable us to hit our pricing targets while maintaining satisfactory retention levels. Second, we're using property-specific insurance to value adjustments to complement renewal increases for certain middle market property risks. The adjustments we made in the fourth quarter, in combination with the work we completed throughout the year, added approximately three points of middle market premiums in 2022. And third, we continued to make enhancements to our underwriting strategies. We are tightening criteria with our targeted underwriting risk appetite to restrict new business and renewals in challenging industry classes and updating underwriting guidelines, particularly related to secondary perils. For the year, we non-renewed approximately $25 million of middle market commercial property business that presented outsized volatility. We expect this to improve CMP property profitability by approximately 1.5 points in 2023, all things being equal. Overall, I am pleased with the strides we made in the quarter to address recent inflationary pressures in property. we are already beginning to see the impact of our action plan and expect to achieve solid profitability gains in 2023 as a result of these actions. Now let's take a broader look at the past year and discuss our strategic accomplishments in 2022. While the year was certainly not without challenges, we remain well on track on the execution of our strategic priorities. continued expansion of our specialty business, investment in innovative technology to enhance analytics and ease of use, deepen and broaden our agency partnerships, and further cultivate our strong culture to build on our talent momentum. Our specialty business continues to deliver in terms of financial contributions as well as becoming a critical element of our agency value proposition. Specialty lines delivered a combined ratio of 89.3% for the full year, an improvement of nearly four points from 2021. This business continues to serve as a major source of growth, increasing annual premiums by 11% in 2022 and enabling us to pursue an even better balance between property and casualty risks over time. Our highly diversified and specialized portfolio enables us to offer our retail agents one of the broadest ranges of products in the small to mid-sized market. We continue to expand our offerings in 2022, completing the nationwide rollout of our Specialty General Liability product and strengthening offerings for financial institutions, retail E&S, management liability, and other sectors. Additionally, we implemented automatic renewal capabilities in the underwriting system for professional and executive lines, reducing manual intervention and creating greater operational efficiencies for both us and our agents. We continue to be impressed with the diligent work of our specialty team and their ability to drive our strategic initiatives forward. And it certainly gives us confidence in our continued momentum and success in this business. On the technology front, our investments in digital capabilities, underwriting tools, and innovative platforms enabled us to react more quickly to the dynamic environment we faced in 2022. We made enhancements to our claims platform to improve user, customer, and agent experiences while reducing manual intervention and workarounds, driving increased productivity. In a similar vein, we launched Hanover Small Business Digital Exchange Gateway to streamline the small business placement process for agents. We also made important strides in 2022, advancing our independent agency relationships, helping many agents succeed in the midst of continuing consolidation trends and a challenging employment market, and better serve their customers. We gained share with many great existing agents, while at the same time making 290 new agency appointments, enhancing personal lines, small commercial, and specialty niche market access. Finally, we believe our organizational culture has been a distinct competitive advantage for us. And in 2022, we continued to build on this strength, making additional investments to further attract, retain, and cultivate talent. Despite the challenging employment market, we have real momentum with employee engagement and talent acquisition. From our efforts to advance our inclusion, diversity, and equity initiatives to multiple skills training opportunities and workshops, we expect our accomplishments from last year to feed our great culture and talent depth in the years ahead. We enter 2023 with the advantage of several quarters of strong rate increases and the benefit of sophisticated underwriting expertise. We will continue the necessary work of adjusting to our dynamic, rapidly changing environment, and I have every confidence we have the team and the expertise necessary to anticipate the impact of the changes ahead, delivering long-term value for all of our stakeholders. With that, I will turn the call over to Jeff.