Hanover Insurance Group Inc

Good day and welcome to the Hanover Insurance Group's second quarter earnings conference call. My name is Chris 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 during today's call, please signal for 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 that today's event is being recorded. I would now like to turn the conference over to Oksana Lukasheva. 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, our Chief Operating Officer and CEO-elect, and Bryan 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 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, Guidance, profitability, growth, strategy, capital management, the implementation and use of new technologies, the impact of recently revised policy terms and conditions, and targeted property actions. Additionally, they can relate to factors that could impact the company's performance and or cause actual results to differ materially from those anticipated, including changes in the demand for our products, economic and geopolitical conditions and related effects including economic and social inflation, tariffs as well as other risks and uncertainties such as severe weather and catastrophes. We caution you with respect to reliance on forward-looking statements and in this respect refer you to the forward-looking statement 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. Thank you, Oksana, and good morning, everyone.

We delivered an outstanding second quarter, with results that underscore the resilience of our business and the strength of our execution in a dynamic market environment. Our performance demonstrates that disciplined underwriting and targeted growth can coexist, and this combination is delivering significant returns. We continue to be thoughtful in how and where we grow, investing in opportunities where market conditions and expected returns are attractive Our strong results reflect the strategic actions we have taken over several years to strengthen and reshape our company. We have refined our portfolio around our underwriting and distribution strengths while investing in capabilities that enhance risk selection, improve efficiencies, and enable our teams to operate with greater speed and precision. Our actions are driving a stronger, more scalable business and positioning us to deliver consistent, profitable growth. The diversification of our portfolio helps us navigate changing market conditions and we expect to sustain strong earnings in our portfolio over time. In the quarter, we delivered record second quarter performance with operating return on equity of approximately 20%, and operating earnings of $5.31 per diluted share. At the same time, net written premium growth accelerated to 4.6%, led by core commercial and specialty, while personal lines continued to generate strong margins and leading indicators of business momentum. As we discussed last quarter, We expected top-line growth to strengthen, and our second quarter results reflect that trend. We entered the second half of the year with confidence in our ability to sustain this positive trajectory. I'll now discuss our segment performance in more detail. Our purse lines business is reaping the benefits of prudent underwriting and strong execution in the post-pandemic market environment. The underwriting margin gains we continue to realize reflects sustained pricing discipline, thoughtful terms and conditions management, and proactive exposure management actions across the portfolio. Although the industry is experiencing competitive market conditions, particularly in monoline personal auto, our relationship-driven approach and full account strategy continue to differentiate the Hanover and position us well in the marketplace with preferred customers. Importantly, our renewal pricing and personal lines remains above long-term lost cost trends, supporting healthy margins and reflecting the strong value proposition we deliver to agents and customers. While the quarterly increase in net written premiums was consistent with the first quarter, production activity has picked up in terms of new business submissions, quoting, and conversion. Retention improved from the first quarter and the overall quality of the book continued to strengthen as we gradually increase our mix towards higher valued customers. We continue to see a growing contribution from our higher value prestige offering, reflecting the deliberate shift we have been driving over the past several years. Prestige customers exhibit higher retention than the broader book, and as this business becomes a larger share of the portfolio, It is enhancing portfolio quality and making pricing more resilient. Year-to-date, we have added approximately 100 new distribution points with 75% of those appointments in our targeted diversification states, prioritizing distribution partners that mirror our top performing agencies. Overall, Purse Lines remains a differentiated account-based franchise that is generating attractive returns and positions us well to further grow our market share. Now turning to core commercial, this business is executing very well, delivering both healthy growth and solid profitability. Underlying margins improved from full year 2025 levels while pricing remains robust. These results reflect the strength of our underwriting strategy and deliberate portfolio management actions. Net written premiums increased by 7.2% in the second quarter, up from 4.3% in the first quarter, reflecting continued momentum in core commercial. Market pricing remains favorable, generally in the high single digits, although we are seeing conditions become a bit more competitive. This environment reinforces our focus on retention, disciplined underwriting, and targeted pricing strategies tailored to specific products, industries and geographies. In small commercial, premium growth of 6% represents another quarter of healthy expansion. Renewal activity and new business pricing remain favorable and retention is stable at approximately 86% with relatively low remarketing activity in this space. This is a result of the advanced underwriting tools and technology we have been building to improve responsiveness, make it easier for agents to do business with us, and drive better execution. We have expanded no-touch submission flow through our TAP sales offering, resulting in higher submission volumes and deeper agency connectivity. At the same time, our TAP sales workers' compensation product expansion remains on track for a full country rollout this year. We expect this initiative will broaden our market share and further support profitable growth. As these capabilities continue to scale, small commercial remains one of our most important long-term growth drivers, supporting strong profitability over time. Middle market delivered 9.4% top-line growth in the quarter. Excluding the benefit of several non-recurring or timing items, growth was approximately 7%, a strong result and a significant improvement from 1.5% growth in the first quarter. We continue to win attractive business through our strongest agent relationships that are committed to deepening our penetration and expanding our partnerships. At the same time, we remain disciplined in our underwriting. In the smaller account space where we are primarily focused, including the lower end of middle market, We are less exposed to the broader property market softening. Over the past several years, we have taken meaningful actions around property terms and conditions and we continue to maintain that approach, which helps protect profitability and differentiates our portfolio. Combined with our deep expertise and agent-focused approach, we believe Core Commercial is well positioned to compete, grow, and generate attractive, risk-adjusted returns as market conditions evolve. Turning to specialty, this segment remains a key driver of profitable growth. Specialty is a business where our underwriting matters most and where our team converts risk selection expertise into attractive growth and discipline returns while increasing scale over time. The breadth of our specialized capabilities enables us to pursue opportunities where technical expertise, underwriting discipline, and deep relationships create a meaningful competitive advantage. Production activity and growth were not uniform across the portfolio. and that is by design. We saw healthy growth across professional and executive lines where market conditions continue to improve. In management liability, strong new business production and continued gains in response speed and underwriting execution drove excellent top line results. Additionally, surety delivered strong growth fueled by robust new business, healthy demand and momentum in targeted bond offerings with our strongest distribution partners. As expected and consistent with last quarter, Hanover Specialty Industrial business production was more subdued, reflecting its greater exposure to the softening property market. This reflects our willingness to moderate production where pricing comes under pressure and reallocate capital to more attractive opportunities. Further highlighting the advantage of our highly diversified specialty portfolio.