Hanover Insurance Group Inc

Good day and welcome to the Hanover Insurance Group's second quarter earnings conference call. My name is Betsy, 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 touchtone 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 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 salvator 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.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. These statements can relate to, among other things, our outlook, reserve position, economic conditions and related effects, including economic inflation, potential recessionary impacts, as well as other risks and uncertainties such as severe weather, catastrophes and social inflation that could affect the company's 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 to refer you to the forward-looking statement section in our press release the presentation deck and our filings with the scc today's discussion will also reference certain non-gap 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. Good morning, everyone, and thank you for joining our call. I'm pleased to report our second quarter results demonstrate the strength and diversification of our business, our financial discipline, and our ability to execute in a dynamic market environment. Despite significant catastrophe activity, we delivered strong earnings with a 9% operating return on equity in the quarter and a 12% operating ROE through the first half of this year. Our performance reflects strong execution on two critical priorities. First, XCAT margin enhancement. We significantly improved our underlying margins in personal lines and delivered consistent, strong profitability in core commercial and specialty in the quarter. This focus on profitability yielded outstanding results, as demonstrated by an XCAT combined ratio of 88.5% compared to 92.8% year-over-year. And second, the progress and execution of our catastrophe mitigation actions. Although severe convective storms in the Midwest and South Central U.S. made the second quarter more challenging than anticipated, we continue to have a high level of confidence that our proactive approach to managing catastrophe exposure will clearly bear fruit. In personal lines, our actions to address convective storm exposure are well underway. We remain optimistic about the rapidly growing impact of increased all-peril deductibles and the introduction of wind and hail deductibles on our CAT claims intake and ultimately loss severity. As a reminder, these terms and conditions changes only began impacting renewals in April of this year. We expect, as a higher proportion of the book of business is rolled under these terms, the impact will dramatically increase in each of the next few quarters. Additionally, we are anticipating that close to two-thirds of our homeowners' business in the Midwest will have wind and hail deductibles applied to the policy by the end of 2024. And the vast majority of the book will have the desired deductibles, both all peril and wind and hail, ahead of the spring storm season. The current effect of property and CAT actions in core commercial is more significant after several quarters of increasing deductibles in pricing, as well as risk-specific PML pricing and risk prevention initiatives. As a result, our modeled CAT loads are significantly reduced in middle market, especially in states exposed to convective storms. And 75% of the most vulnerable middle market accounts have been addressed through underwriting actions or sensor deployment. Our second quarter results also reflect our commitment to balanced and thoughtful growth. We grew written premiums by 5.1% in the second quarter, up 2.8 points from the first quarter of this year, and we expect growth to increase sequentially each quarter for the remainder of the year as we elevate our new business and renewal retention in areas where profitability is strongest and where we'll benefit from continued diversification. Now let's look at the second quarter performance of our business segments in more detail, starting with specialty. Specialty achieved top line growth of 8.2%, 3.4 points higher than in the first quarter of the year, helped by strong retention and accelerated double digit new business growth. Retention remains strong at 83%, with continued renewal pricing momentum of 11.7%, further reinforcing the specialty segment's integral role with our agents as a key element in our value proposition. The specialty market in our target markets remains strong. We achieved double-digit growth across multiple lines, including surety, marine, industrial property, healthcare, and management liability. Our excess and surplus lines business also grew double digits in the second quarter. The E&S market remains very attractive as freedom of rate and form allow us to capture opportunities at good margins while helping us further diversify our portfolio with respect to catastrophe risk. In marine, we are pursuing growth initiatives by expanding our portfolio geographically and by class of business to further limit us from concentration-related cat and market volatility. Across most of our specialty portfolio, we continue to expand distribution points, including substantially growing the wholesale channel to capture broader market opportunities. In addition to broadening our portfolio of specialty offerings, we are accelerating key technology investments as well to ensure we are optimally positioned to compete in the evolving digital environment and help agents create efficiencies, particularly with their smaller specialty policies. These investments should result in significantly improved, quote, turnaround times and allow us to capture more of the robust new business opportunities in the market. More broadly, our technology investments have positively impacted all of our businesses. We deploy digital APIs to work with our distribution. We use advanced analytics for pricing sophistication and risk selection. And we have targeted generative AI use cases to achieve operational efficiencies. Turning to core commercial, this segment also delivered strong performance this quarter, achieving solid net written premium growth of 5.5%, driven primarily by an 8.5% increase in small commercial. We remain very optimistic about opportunities in small commercial, with accelerated new business growth to be driven by several key initiatives. These include the continued build-out of our TAP sales platform with the rollout of our workers' compensation product in the first half of next year, the expansion of virtual sales capabilities across all states, and deeper market share penetration with our best agents. Additionally, we are very pleased with the pricing, class, geographic mix, and quality of new business and renewals as the TAP sales platform includes enhanced capabilities for pricing sophistication and product expansion. While focusing on small commercial growth, we are simultaneously implementing profitability and property improvement initiatives in middle market, including the catastrophe management work I referenced earlier. Although middle market growth remained low at 1%, it showed sequential improvement and we have executed very well on the key margin and cap management initiatives. As we near the end of our portfolio optimization, we expect to elevate our growth in middle market beginning in the fourth quarter. Looking ahead, the commercial lines market is expected to remain firm and disciplined for the remainder of this year. and into 2025, supported by challenging liability trends. While we continue to closely monitor liability trends and proactively work to manage through the environment, we remain highly confident in the strength of our reserves and disciplined in our loss ratio picks. Over the past several years, we have dedicated significant effort to analyzing the expected trajectory of liability severity and its potential impact on our operations. This proactive approach led us to adopt a more defensive posture, both in terms of strengthening our balance sheet and refining our underwriting practices. And from where we stand today, we believe our current liability profile is very well positioned to navigate social inflation challenges. Our strategy includes maintaining lower limits, reducing risk in large metro areas and difficult geographies, reducing premises liability exposure, and refraining from writing standalone excess umbrella policies. Additionally, we have implemented rate increases above our prudent loss trend assumptions, maintain a low reinsurance attachment point, and have a lower reserve duration, which is inherent in a small account size book of business. These tactical decisions have collectively enhanced our resilience in the face of evolving market conditions. As we look ahead, we remain committed to navigating the evolving liability environment with vigilance and agility. Turning to Personal Lines, we delivered tremendous year-over-year improvement of 7.6 points in our ex-CAT current accident year loss ratio, reflecting the outstanding execution of our margin recapture initiatives. Personal Lines net written premiums grew 3.3% in the quarter, in line with expectations. Although we continue to project segment growth in the low single digits in 2024, we expect to see the pace accelerate slightly in the second half of this year. Higher all-parallel deductibles and new wind and hail deductibles are being applied to new business and renewals in all targeted states judiciously and on schedule. We continue to operate in a hard market across our geographies, especially in homeowners, and believe this will continue at least for the foreseeable future, as many of our peers continue to file for higher rate increases, as well as terms and conditions changes. We are seeing a number of carriers starting to follow our actions, particularly in the Midwest, and we have continued support from our agent partners. The elevated catastrophe experience across the industry reinforces the importance of our terms and conditions changes, as well as the more aggressive approach based on specific underwriting metrics, such as quality of Roos score. In conclusion, our strong second quarter and year-to-date performance serves as compelling evidence that we are on the path to meaningfully improved financial outcomes. While the industry landscape remains dynamic, with increasing liability trends and more frequent severe weather events, we are confident in our ability to navigate these complexities. Our distinctive strategy is a key advantage, positioning us to capitalize on emerging opportunities in the current market. Our flexibility and agility allow us to pivot quickly in response to changing conditions and to maintain our competitive edge. With this formidable foundation in place, combined with our inherent strengths and talented team, we are exceptionally well positioned for future success. With that, I'll turn the call over to Jeff.