Good day, and welcome to The Hanover Insurance Group's Second Quarter Earnings Conference Call. My name is Jason, and I'll be your operator for today's call. At this time, all participants are in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this 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 John Roche, our President and Chief Executive Officer; and our Chief Financial Officer, Jeff Farber. Available to answer your questions after our prepared remarks are Dick Lavey, President of Agency Markets; and Bryan Salvatore, our President of Specialty Lines. Before I turn the call over to John, let me note that our earnings press release, financial supplement and a complete slide presentation for today's call are available in the Investors 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 regarding among other things, our outlook for 2020 and the ongoing impact of the COVID-19 pandemic and the subsequent recession on company performance. There are certain factors that could 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, which includes supplemental risk factors related to the COVID-19 pandemic and general economic conditions. 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 John.

Thank you, Oksana. Good morning, everyone and thank you for joining our call. I will start by reviewing our second quarter financial results in the context of the current business and economic environment. I will then discuss our three strategic areas of special focus for the next 12 months to 18 months. These areas of focus will help us advance our long-term strategy in this rapidly transforming market and capitalize on some particularly attractive emerging opportunities. I will then turn it over to Jeff for a detailed review of our financial results and our outlook. Before we get into our agenda, however, I would like to acknowledge the extreme personal challenges that so many people across our country are facing as a result of the COVID-19 pandemic, economic headwinds and the recognition and impact of racial injustice. As an organization, we are committed to doing our part to help our country confront these issues through our business operations as an employer and as an active and responsible corporate citizen. We hope each of you, your families and friends are safe and healthy and we look forward to better days ahead for all. Now turning to our results. We are very pleased with our second quarter earnings performance despite the impact of the elevated catastrophe losses. We reported earnings per share of $1.63 and an operating return on equity of 9.5%. Our broad-based profitability and strong financial position are enabling us to effectively navigate the current market conditions, while remaining laser-focused on our long-term strategy. The investments we've made in innovation, analytics, underwriting, claims handling and our agency partnerships provide us with a strong foundation and represent a distinct competitive advantage as we work to meet the needs of our agent partners, customers and our shareholders now and in the future.…

Thank you, Jack. Good morning everyone. We're very pleased with our overall earnings performance in the second quarter particularly in light of the elevated catastrophe loss experienced across the industry. In the quarter, we reported net income of $115.2 million or $3.01 per fully diluted share compared to $74 million or $1.79 per fully diluted share in the second quarter of 2019. After-tax operating income was $62.7 million or $1.63 per fully diluted share compared to $77.7 million or $1.88 per fully diluted share in the prior year quarter. We reported an all-in combined ratio of 96.2%, compared to 96.1% in the prior year quarter. The ex cat combined ratio was 82.7% in the quarter which improved meaningfully from 90.7% in the prior year quarter and reflects the substantial decline in claims frequency. We experienced a temporary decline in claims frequency as a result of stay-at-home orders in all lines across our book of business. While we reflected such frequency in short-tail lines to a fair extent, we took a prudent and conservative approach to liability exposures given the uncertainty and our desire to be well prepared for potential issues. As Jack mentioned earlier being prudent with our reserves and current loss picks in the quarter will prepare us well for any deferred reporting of claims, excess legal costs, social inflation, recessionary impacts and other uncertainties. We reported net favorable ex-cat reserve development of $4.9 million. We continue to experience favorability in our workers' compensation line which was partially offset by adverse development in Commercial Auto from continued bodily injury severity trends. We've consistently achieved commercial auto rate increases of 10% or higher over the past several years which gives us even more confidence in the line of business and loss picks. But we recognize there is more work to…

We will now begin the question and answer session. [Operator Instructions] Our first question comes from Matt Carletti from JMP Securities. Please go ahead.

Hey Thanks and good morning.

Good morning. Hey John, I have a couple of questions for you, that relates to some of your opening comments. First is at one point in your comments you mentioned some increased competition. And I was hoping you could just clarify there, kind of where you're seeing that commercial versus personal and any detail you can give? And then secondly, I appreciate your comments on kind of how you're -- maybe repositioning isn't the right word. But just kind of tweaking some of the focus in the business in terms of how the world might look, coming out of this. I was hoping you might be able to give a little more detail there on, some of the areas that might be a little less emphasized. And some of the areas I think I heard you mentioned tech but maybe some others that might be more emphasized.

Yeah. Thanks, Matt. There's no doubt, that this is maybe the most dynamic environment that, any of us have had the opportunity to work in. And so with that, we are trying to make sure that we continue to move forward on, the portfolio management actions that we had planned for the year. But also acknowledge that, there are some temporary dynamics and market environment issues that need to be contemplated, so that we don't have a static playbook. So I think to your first point, this is a competitive business. There's no doubt in Personal Lines, there's been some competitors that have decided to go after some new business a little bit more aggressively. And we will continue to do that in the right states, in the right areas. But as you saw in our renewal book, we're maintaining a pretty high level of discipline on, our rate need and are balancing that with proper retentions. And we're actually quite proud of that result. But as Dick can elaborate on, we're determined to make sure that we continue to build that book of business. And we think there's an opportunity for us to navigate an overall competitive environment and continue to grow. On the Commercial Line side, I would tell you that, we're there's the slowdown in the economy. And the readjustment that many of our agents have had to adjust to like we have caused the temporary slowdown, in new business activity. In particular, high-quality new business, I think in May was hard to come by unless you had something in your pipeline. There was some additional, I think competitive pressure put on the business because accounted managers and CSRs felt obligated to fill their time. And if their new business wasn't that active they were going to see where remarketing efforts would be fruitful. So -- but we see that already starting to taper off. And now I think the competition comes down to, what sectors and lines of business and to some degree what geographies you're playing in. And so we as you know, play in for the most part preferred sectors in the Commercial Line space. So they're going to remain competitive. We don't play in the public D&O business. We don't play in the mid-mal business. We're not in the high-end of E&S. So while those areas are experiencing some more firm pricing, there's likely good reason why they are. And so we're net-net happy that we're in the sectors that we are. And that we have the line of mix that we have. And we're fine playing in a in a continuing competitive environment that we think we've been successful in navigating.

Great. That's very helpful. And then maybe just one last one probably for Jeff, related to the guidance particularly the accident year combined ratio guidance with the back half 91.5-ish, it looks to me like whether I compare to the original guidance for the year just kind of how that plays out that you're not assuming much of the frequency benefit you saw in Q2 much if any continues on in the back half of the year. Is that -- am I reading that correctly? And if so, is that more just conservatism on your part? Or have you seen something already in July that would indicate to you that we're getting back to normal maybe more quickly than we would have thought?

Look Matt from a mathematical perspective that's correct right, obviously, at a mid-91s that's basically saying the second half of the year will look like what we guided to upfront. The reality is throughout July, we have seen a continuation of frequency declines. And we really don't know how long that will continue. We've seen a slow inching back to some more normal levels but it's still there. It's really hard to know. Remember we do have weather to think about. Obviously Q4 weather could be a higher in terms of what's happened the last couple of years, although the cat load is low. So you put it all together and we're -- we haven't reacted to in the guidance and expectation that we'll have continued low frequency, although that is entirely possible for some period of time.

Okay. Nothings there imperative. Thank you. Thanks for the color, and best of luck going forward.

Thank you, Matt.

The next question comes from Paul Newsome from Piper Sandler. Please go ahead.

Can you hear me now? Sorry about that.

Yeah.

Just hoping you could talk a little bit about the -- your thoughts on the underlying inflation trend. Obviously, we're all trying to pull out the COVID related stuff to get to what's going on underneath. Travelers talked about sort of a 50 basis point increase in their long-term trend for inflation. And maybe you could just talk about how the pieces add up for you guys.

Well, this is Jack. I'll just make a couple of comments and then I think as Jeff wants to comment as we go through our -- being very disciplined in understanding the difference between short-term and lost -- longer term trends. And overall I would suggest to you that we think, we are being very prudent with our picks that we are -- we have worked hard to continue to improve on our portfolio and we are taking some underwriting actions. And I think it's impacting our growth to some degree. But we're committed more than anything to make sure that we come out of 2020 in a healthy position and able to capitalize as the economy comes back and as business opportunities emerge in 2021. That's my number one goal for our organization is that as 2020 subsides and people really have a firmer understanding of what the cost of goods sold are, we believe we're going to be well-positioned, well-reserved and have the appropriate current accident year picks to be able to jump on the opportunities as they emerge in 2021. So net-net, you haven't seen us feel the need to increase our picks as you're suggesting others may have. But Jeff I don't know if you want to build on that commentary.

So we focus on long-term loss trend as Jack mentioned. We're getting very good rate at the moment and we feel that that rate is generally above long-term loss trend, but we're cautious about it. And that's in core commercial. And in specialty, we're actually getting better rate than the 5.1% rate that we've talked about and there's probably even a greater delta relative to loss trends. So we're cautious. We worry about social inflation. We continue to focus on the long-term trend even though there might be some abating for a very short period of time. And we feel good about our ability to maintain or even slightly increase our margin.

A little bit narrow, but there have been some conversations about workers' comp finally bottoming out. And do you have any thoughts on whether that might actually happen? Or are we back to the regular trend if we pull out all the noise that we saw this quarter?

Yeah, Paul, this is Jack. I think at the highest level I would suggest to you that we agree with that synopsis that we have watched pricing come down in the worker’s comp line for several years. To many of our surprise -- surprises those rate decreases have been justified in that there has been some meaningful loss content has moved its way out of the workers' comp system. But I think what you're seeing now is that particularly many of our larger competitors who have relied on that worker's compensation line to kind of bolster their profitability are starting to anticipate those margins being compressed and eventually the state rates will start to contemplate more normal loss trends coming into reduced earned premiums, which will be exacerbated frankly by the pandemic. So it's our belief that the state rates will eventually start to stabilize and head in the other direction. But probably more immediately some of our competitors will be forced to start to back off some of the discretionary credits that they've applied in order to protect their margins and to prepare for increased frequency and severity into the future. It is inevitable. We are -- we have seen unprecedented low and declining loss trends in that line. So I'll conclude with one other thing on that point is that as we said in our prepared remarks, we have really one of the lowest market shares in workers' compensation in the top 25 carriers. And while we've been growing that line in the small commercial and in some of the preferred areas like technology and life sciences, we have been preparing ourselves for the other side of this market. We believe that when those changes happen, we will be able to step to the play and be able to be a more vibrant workers' comp player profitably. So we look forward to that opportunity down the road when we think those dynamics start to hit the marketplace. Q – Paul Newsome: Thank you. Your thoughts are much appreciated. A – John Roche: Thanks, Paul.

The next question comes from Sean Reitenbach from KBW. Please go ahead. Q – Sean Reitenbach: Hi. I was hoping you could more elaborate on the personal auto competition you mentioned earlier how exposed do you feel to some of these larger competitors who've talked about decreasing rates? And is it going to be a more state-by-state approach based on how frequency trends develop with the ongoing pandemic? A – John Roche: Yes, Sean this is Jack. I'm just going to say a couple of overarching comments and then I think Dick has got some views to share with you on that topic. Overall, obviously Personal Lines makes up half the P&C sector. Personal Auto being two-thirds of that it's a meaningful line of business that we all are paying attention to. But it's not one big business. It's -- and we have moved ourselves into being a preferred account writer in the IA channel. And some of the competition you'll hear about some of it's inside the IA channel but much of it's not. So I'm going to turn it over to Dick to kind of maybe unpack that a little bit and tell you why we believe net-net we're in a reasonably good place. A – Dick Lavey: Yes right. Right, Sean. You hit on it in your opening sort of question and comment it matters in the segments you play and in the states that you play. We as you would expect track all aspects of the business both within our channel and outside of our channel. We're really diligent about watching market share trends and activities sort of between the channel IA, direct, captive and our analysis shows us that the IA channel has been very resilient over the years in holding share. And a lot…

Okay. Thank you very much.

[Operator Instructions] The next question comes from Mike Zaremski from Credit Suisse. Please go ahead.

Hi, good morning. I know Paul and others asked this question but maybe I'll try to ask in a different way maybe get some more insight potentially. So, in terms of the guidance about the loss ratio trend being stable you said you kind of have good line of sight into that because you expect commercial rate levels to continue their upward trajectory. So, it sounds like then you're prudently assuming that loss trend more likely than not does continue to move north as well. And I guess the question we get the most from investors is just what's driving loss trend higher. And how can investors kind of get comfortable that the industry is able to get ahead of it? And so any kind of color or insights? Is it just broadly social inflation more on the general liability side and commercial auto side that you guys are expecting to continue its upward trajectory? Is it you're just seeing industry reserve levels fall due to that? Any color to help us kind of feel more insights into what's driving your expectation for loss trend outside of COVID which right now clearly there's some frequency decline. What's driving your expectation for loss trend that continue going north?

Yes Mike. No, it's a very good question and this is Jack. I'll just tell you -- I think I'll separate my thoughts on the industry versus our company because to be clear we are not experiencing an upward trend our loss trends, right? That's not what we're seeing. It's really not even what we're contemplating. What we are seeing though in the overall industry if you look at some of the -- particularly the higher end of the liability sectors is that we're quite certain they're seeing some elevations, right? And that's why I think the difference is for us is that we generally play in the low-to-moderate hazard business with relatively low limits profile. So, if social inflation and some of the other factors that are impacting liability trends are in fact going up on a relative basis they should affect us less often. You're also looking at geographic views and it's clear that folks that have major concentrations in the major metropolitan areas are experiencing a different level of loss trend creep than those that aren't putting aside kind of the judicial hell holes that live outside of the major metropolitan area. So, at the end of the day, I think what we would say to you is that we're trying to look forward into the future and suggest that when you look past some of the short-term trends it is at least possible that some of what we saw in terms of social inflation in terms of increased litigation could get exacerbated, right? We're pretty sure that when this recession kind of sees its way through, there'll be a lot of economic pain of which people both families and businesses are going to try to reconcile and that generally doesn't lead to kind of stable litigation rates or demand. So, I think it's more of us being prudent, being thoughtful about where the trends could go. But in the short-term making sure that we get as much rate as we can in the marketplace with the sectors and the geographies that we play in and that's been reasonably stable for us.

Got it. Very helpful and that's my only question. Thank you.

Thank you, Mike.

This concludes our question-and-answer session. I'd like to turn the conference back over to Oksana Lukasheva for any closing remarks.

Thank you everybody for your participation today and we are looking forward to talking to you next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.