Hanover Insurance Group Inc

Good day and welcome to the Hanover Insurance Group's third quarter earnings conference call. My name is David and I will be your operator for today's call. At this time, all participants are in the 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 1 on your touchtone phone. 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 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. I will begin today's call with my perspective on our third quarter results and a summary of the success we have achieved in our underlying margin recapture initiatives to date, a review of the actions we are taking to improve our catastrophe resiliency, including new initiatives we have underway. Jeff will review our financial and operating results in more detail, and then we will open the line for your questions. I'll begin by acknowledging the heavy impact of CATs on our third quarter results and the great sense of urgency with which we are executing on our CAT resiliency actions. I'll expand more on this topic shortly. Excluding catastrophes, we are very pleased with our third quarter performance. I'm happy to report that our third quarter ex-CAT results were slightly better than our expectations, in part due to the continued strong execution of our margin recapture plan which helped drive meaningful underlying improvement in all three of our business segments. Our progress in the quarter reflects the inherent strengths of our company, including our distinctive strategy and business model, broad and innovative capabilities, strong well-managed balance sheet, experienced and committed team, and deep mutually beneficial partnering relationships with many of the best agents in our business. The last of these, our deep agency relationships, is particularly important today as we and others are thoughtfully increasing prices, modifying terms and conditions, and tightening underwriting requirements. In keeping with our commitment to being a premier property casualty franchise in the independent agency channel, we are working closely with our agents and their teams to help them better respond to their customers and navigate today's challenges. At the same time, we are further leaning into one of the hardest markets we have seen in property, particularly in personal lines, as we deliver on our margin improvement initiatives. Those factors, along with many others, give us a very high level of confidence in our ability to drive disciplined execution further and enhance profitability over time. Our third quarter EXCAT results are a strong testament to the successful execution of our comprehensive margin recapture plan, as well as the important work we are doing to get back to our expected performance levels. We continue to be focused on three main levers. Price increases, property underwriting enhancements, and loss control and risk prevention measures. In personal lines, margin improvement is driven by robust and accelerating earned price increases. Earned pricing is outpacing loss trends, helping drive a one-point improvement in personal lines' current accident-year loss ratio in the third quarter compared to the second quarter this year, primarily driven by personal auto. Auto collision loss trends remain elevated, but we are seeing an easing of inflationary pressures, while prior rate increases are beginning to help drive improvement in our overall loss ratio. Homeowners' loss pressure is proving to be an ongoing challenge. Having said that, we are confident continued price increases on top of current increased earned rate and valuations will bend the curve starting next quarter. Additionally, we are taking a more aggressive approach to homeowners non-renewals based on specific underwriting criteria, including quality of roof score, prior loss experience, and age of construction. Third quarter personal lines total price change in auto and home were up 14% and 23% respectively. By the end of this year, we expect an average homeowners renewal price change upwards of 28%. Collectively, we expect personal lines to experience a dramatic profit recovery next year and a return to our target profitability on a written basis at the end of 2024, based on a range of reasonable assumptions for loss trends. We also continue to execute on our profit improvement plan in core commercial property lines in the quarter across all three focus areas, pricing, underwriting, and risk prevention. In terms of pricing, our core commercial property renewal price increased by 14.7% in the third quarter, up two points from 12.6% in the prior quarter. We've also made meaningful strides in addressing large loss volatility in middle market, completing non-renewals and policy limit adjustments that have lowered our total property risks by 17% in constant dollars compared to 12 months ago. We also engage in a range of risk prevention and mitigation initiatives designed to reduce both cat and non cat losses in core commercial. We are successfully expanding the number of accounts enrolled in our IOT sensor program. We have increased the number of protected accounts by approximately 40% over the last three months and 175% since the end of 2022. Additionally, Through the end of September, 30% of the 600 targeted middle market accounts have been addressed through underwriting actions or sensor deployment, and will continue to address additional accounts through the fourth quarter. These actions are now delivering results, reducing large loss volatility and improving our core commercial current year loss ratio by over five points compared to the third quarter last year. Turning to our specialty business, we are very pleased with the performance across our portfolio, delivering a combined ratio of 83% for the quarter ahead of our expectations. While market conditions in some of our segments are competitive, in particular for sectors like management liability, our ability to deliver consistent profitability is a validation of our diversified specialty portfolio and disciplined underwriting and rate strategy. Our specialty growth in the quarter was somewhat muted due to the temporary impact of non-renewals of a couple of underperforming programs. Despite ongoing excellent performance in specialty, we expect all segments to contribute to the enterprise margin recapture plan. And we are also being proactive on any lines and segments that are sensitive to social inflation. Excluding programs, specialty growth was 7.4% in the third quarter. Longer term, however, specialty continues to represent a robust growth opportunity for our company. This business provides important diversification for our overall portfolio and consequently reduces our property and CAD exposures, all while providing our agent partners with robust, comprehensive product offerings, highly valued capabilities, and additional growth prospects. We fully expect our specialty portfolio to return to upper single digit growth starting in the first quarter next year, as we benefit from increased market penetration in most segments and growth in newer product offerings, including specialty GL and E&S business. We also expect additional lift from our newest initiatives, including expansion in the wholesale channel, which is already delivering solid growth. Now, turning to our efforts to manage our catastrophe exposures more effectively in personal lines. We made important progress on the CAT exposure management actions we discussed on our second quarter call. These actions include increasing all peril deductibles to specific minimum levels determined by coverage A limits, implementing wind and hail deductibles in additional states, and transitioning to an actual cash value schedule for roofs in certain states and on specific risks for new business policies. As of September, the defaults for all peril and wind and hail deductibles in the comparative raters for new business have been updated, and our agents are supporting our efforts. These changes will be introduced in our TAP sales platform as a requirement on transactional new business as soon as next week. We also are advancing the technology and regulatory processes that enable us to expand these product changes to policy renewals starting in February with our key states starting with April effective dates. We expect we will roll most of our homeowners business into new terms by the end of 2024. In addition, we are planning to introduce actual cash value for roofs in the comparative raters starting in 2024 for new business in certain geographies and types of risks, thereby further reducing claims costs for older roofs. We expect these actions will enable us to better share loss costs with insureds, which should support loss prevention, decrease claim severity, and minimize our exposure to aggressive roofer actions. We expect to see significant improvements in our cat vulnerability and loss experience once these product changes are fully in place. At an individual risk level, we could realize upwards of 30% to 50% reduction in hail and roof claims payouts. For example, a wind and hail deductible on a million-dollar coverage A, depending on the roof age, will range between $10,000 and $20,000 against an average roof claim cost of $35,000 to $40,000. At the same time, we expect to see the benefit of reduced claims frequency as the higher deductibles will ensure that only legitimate claims are filed. In addition to product and pricing changes, we are also reviewing our geographic exposures and re-evaluating our property microconcentrations. While we continue to believe some of the recent CAT losses for personal lines in the Midwest were aberrant, we are taking steps to reduce our property exposure in certain areas across these states, including but not limited to Michigan. We have updated our models and are reassessing our property aggregations to ensure we are not overly exposed in specific geographic areas in light of the increased property valuations and changing weather patterns. Additionally, we are achieving substantial decreases in exposure beyond PIF reduction from the product changes and risk prevention actions we are implementing. Longer term, we will continue our diversification efforts to emphasize Persiline's growth in lower concentration states. We also expect small commercial and specialty exposure and policy counts to grow much faster than personal lines, and ultimately to reduce the relative share of personal lines business in our overall mix. As we look ahead, we believe we have what it takes to succeed in a rapidly changing and challenging marketplace. We are very encouraged by our strong XCAP performance and the progress we have made on our margin recovery plan during the year. We look ahead with resolve and a high degree of conviction that we are executing the right set of initiatives to move our company forward. We have a proven strategy, one refined to meet the moment, one that will benefit our agent partners and customers, and one that positions our company to deliver sustainable, profitable growth and long-term value creation for our shareholders and other stakeholders. With that, I will turn the call over to Jeff.