Good day, and welcome to The Hanover Insurance Group's Third Quarter Earnings Conference Call. My name is Gary, and I'll be your operator for today's call. At this time, all participants are in a 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 Jack Roche, our President and Chief Executive Officer; and Jeff Farber, our Chief Financial Officer. Available to answer your questions after our prepared remarks are Bryan Salvatore, our President of Specialty Lines; and Dick Lavey, President of Agency Markets. 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 posted on 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 as defined under the Private Securities Litigation Reform Act of 1995 regarding, among other things, our outlook and guidance for 2021, the ongoing impacts of the COVID-19 pandemic, economic conditions and related impacts and other risks and uncertainties that could affect company 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 today's call. It seems like only yesterday we spoke to you at our Investor Day. I would like to thank everyone for their participation and positive feedback. We enjoyed the opportunity to update you on our businesses and share our vision for the future. I'll begin today's earnings call by discussing our third quarter financial highlights in the context of the current business and economic environment. I'll then provide a strategic review of each of our business segments. Jeff will review our financial results and outlook in more detail, and then we will be happy to take your questions. Overall, we are pleased with our financial performance for the quarter, especially in light of the severe weather and inflationary pressures that are broadly affecting the industry. We posted net written premium growth of 8.4% and a combined ratio excluding catastrophes in line with our original expectations for this quarter. Our performance on both metrics underscores our ability to capitalize on market opportunities, while prudently managing the complexities of the current environment. . In particular, I want to call your attention to three highlights for the quarter. First, our continuing growth momentum. Second, our overall business diversification, which was emphasized with some unevenness in our segment results in the quarter. And third, the effectiveness of the steps we are taking to position our company to manage the effects of changing weather patterns. Our net written premium growth again exceeded our expectations with strong contributions across all segments. Year-to-date through September, our growth rate of 8.4% was equally robust, driven by successful execution of our differentiated business strategy and disciplined capital allocation. Our balanced approach to personal lines pricing has proven to be quite effective and critical as loss trends continue…

Thank you Jack and good morning everyone. In the third quarter we reported net income of $34 million or $0.94 per fully diluted share compared with net income of $118.9 million or $3.13 per fully diluted share in the same period last year. After-tax operating income was $30.8 million or $0.85 per diluted share compared with $93.5 million or $2.46 per diluted share in the prior year third quarter. Before I review our quarterly performance in more detail, I would like to note that similar to our second quarter 2021 analysis prior year quarterly comparisons reflect unprecedented distortions the pandemic created in our results and industry results last year. Given the unusual nature of the third quarter of 2020, we believe our more recent growth trajectory and loss experience, as well as our original expectations for 2021 are better parameters by which to assess our performance. We recorded an all-in combined ratio of 102.3% which included catastrophe losses from Hurricane Ida. Third quarter catastrophe losses of $153.5 million before taxes which represented 12.9% of net earned premiums were at the lower end of the guidance we provided in our prerelease on September 22. Ida added $75 million in losses to an already active cat season within our geographic footprint. This hurricane caused significant and widespread damage in Louisiana, New Jersey, New York and Pennsylvania. Together with our agent partners, we continue to help our customers and the affected communities recover from the storm. Our performance particularly in Southern states speaks to our prudent catastrophe management philosophy and the proactive steps, we have taken over the past decade to diversify our geographic footprint and reduce our exposure in cat-prone regions. And equally important it speaks to our use of sophisticated cat management and aggregation tools, data analytics and pricing to mitigate…

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Paul Newsome with Piper Sandler. Please go ahead.

Hi. Good morning. Thanks for the call. The sort of issue of the last quarter – this quarter last quarter has been inflation. One of your peers talked about a little bit higher expectation for inflation in commercial property and they also said that, some of that has to do with the differentiation that they're seeing between what we're generally seeing with commercial property and versus personalized property. The inflation has hit basically private passenger auto and home insurance, before it has hit commercial property, and Commercial Auto. My question is, have you seen that as well, and you have similar expectations for a modest increase in the expected inflation rate, because of that property-type loss.

Yeah. Thanks Paul. This is Jack. We certainly are witnessing much of what others are seeing in terms of inflationary effects in the short term across Personal Lines and Commercial Lines. And we're monitoring and obviously trying to factor as quickly as we can, how much of that should translate into some improved rates. But I think what's serving us well is we have worked really hard on our claims analytics, to make sure that we're segmenting what we're seeing at an even finer level and make sure that we have an assessment of what we think might be transitory what might be more permanent, and how to allocate that across our portfolio. So Jeff, I don't know if you want to – I know, there's also some benefits that we derive from inflation in terms of our premium basis. But Jeff, maybe you can make some comments further.

Sure. Paul. With respect to building materials property, we're largely seeing and reacting with the same phenomena around the labor issues, the cost of lumber, all those sorts of things that we're seeing in both auto and home on the personal side. The one area that, Jack was referring to certainly in workers' comp and in liability, the premium increase with receipts and both payroll. So we're getting some exposure benefit there. But in our loss picks and in our reserving, we have assumed very similar increases in inflation. The only real difference is the used and new car phenomena that we're seeing in auto maybe is a little bit more extreme. But I think importantly, we're getting lots of rate on the commercial property side. So give or take 10 points of rate both, in Specialty a little bit higher, and in certain areas like home and in the middle market at or 10 or even – or just a little bit lower. But we're optimistic that we can keep up with it.

And somewhat relatedly, we also see wage inflation kind of broadly across the US certainly in the insurance world. Does that, if we have a sustained sort of wage inflation issue in the US does that change the math of your long-term 20 basis point improvement in expense goals materially?

Clearly, every good company is paying attention to their people and making an assessment of where their expertise lies, where they want to be offensive, if you will on retaining talent and frankly acquiring talent that's available. I think we're confident Paul that, while we'll make some adjustments to remain competitive and to retain good people, we have a lot of levers to continue to meet our expense objectives and they're essential. And probably one of the most powerful things that can help us is our growth that, we're seeing an opportunity to grow thoughtfully in this marketplace and that has a major effect on our expense leverage.

Great. Thank you for your insights. Appreciate it.

Thanks, Paul.

The next question is from Mike Zaremski with Wolfe Research. Please go ahead.

Great. Good morning. A lot of great color on Personal Lines. Maybe on just auto to make sure I'm thinking about this correctly. The pricing statistics cited, you say that it don't include I believe, there's an inflation guard and exposure increases. And so since we're kind of all, we all know, severities running a little hot or maybe more than a little high in auto. I just want to make sure, does the inflation guard and/or exposure increases, does that mitigate the delta kind of between price and rate in personal lines? Maybe you could include home in that as well.

Yes Mike, this is Jack. Yes the inflation guard that we're referencing is primarily in homeowners and obviously on the Commercial Lines side and property. The inflation of auto fizz dam is reflected more in how we adjust for those prices that are going through and primarily how we adjust for that in rate. So Dick, do you want to maybe take that?

The only other color I'd add is on the auto side. You have some exposure increase through model year in the autos as the years of the car become more modern that brings increased exposure. But really inflation cars really at homeowners reference.

And really maybe at the heart of what you're getting at Mike I think, is that we think we navigated the last few quarters better than most, in that we resisted the temptation to drop our rates to try to overreact to the loss frequency benefit that we were driving from the environment. And as you saw, we took a little bit of a retention dip but very quickly bounced back. And I think we're in a really terrific position, particularly since we are still having some loss frequency benefits to reset the dials. And really as we predicted, the environment is starting to firm up. Many people are starting to file for rates or make adjustments in their multi-barrier products that will allow them to start moving their pricing up. So at the end of the day, what's key is that we're doing the claims analytics and understanding our cost of goods sold and able to move our pricing to reflect that. And that's where, as we said in our prepared remarks, we have a lot of confidence in our team.

Okay. Got it. And I guess a quick follow-up on auto. Some folks are also talking about bodily injury severity being actually a little bit better than it has been, but still I guess maybe on an absolute level higher than they want. Any color on bodily injury for Hanover? I see that you might have you had a good amount of actually reserve releases. So, there might be some pluses going on there too maybe on PIP or whatnot or new fee schedules.

Yes. Overall, we have been watching for it. Obviously, trying to look for whether there would be a minor version of what the industry is seeing in Commercial Auto. But frankly, we have not and we'll continue to monitor it. But we have not seen any real meaningful elevation there. And again, for us, it's all about making sure that we look at those trends and we adjust our pricing appropriately. Jeff, do you want to speak to the reserve side of that?

Yes. Our assumption when we've looked at our reserves in particular prior year development is that there is a delay in case matters and in medical procedures and submissions and costs. So, we have been providing for and assuming that these are going to come. So we're assuming social inflation is there. It hasn't gone away. The large cases are just delayed. And so the favorable development you're seeing is simply matters that the case or the claim just simply didn't happen. And in some cases, it's 2020. In many cases, it's older years. So it's not just a delay phenomenon. And in fact, Michigan PIP actually provided some benefit to us with prior years on the rates and the new requirements that have come in that have actually put statutory limits on certain providers of health and that's actually helped us. So we've seen some favorability there really since the July one law went into place.

Okay. Great. That's helpful. Maybe a follow-up on the commercial casualty side. I know there's a lot of good commentary. I think Jack I heard you used the words return of litigation trends. And then you guys also talked about maybe looking out for the unskilled workers comp phenomenon, as unemployment gets tighter. So just kind of curious are you guys seeing in your book kind of a resumption of kind of courts opening or kind of workers' comp claims coming kind of steadily back online, or is some of the cautiousness in the written marks and middle markets kind of the trends are still maybe better than you'd expect longer term but they're – but you're just they're coming back a little bit in terms of the frequency trend or severity?

Let me take a shot at the liability side first in that what we're doing is being very granular in our analysis around some of the smaller cases that appear to be settling out maybe even at a more rapid pace than historical levels. We are monitoring and seeing some of the more severe cases or certainly litigated cases building. And so we have very much accounted for that and made sure that we are not assuming that some of the more severe cases are going to settle out quickly or frankly at low levels. So I think we're being very prudent with our reserves and with our picks and we're watching those cases in particular. The courts are clearly opening up. There's still a backlog but I think really good companies can segment the losses and the types of losses and start to make some assumptions that are appropriate going forward. We'll see if that levels off over time. But right now we're assuming that there's some residual effect of that. Real quickly on the workers' comp side, I believe we are seeing some indication that the labor shortage combined with some economic activity is starting to bring workers' comp cases back to maybe more normal levels. But it's still at historically low levels given the last six years that we've all observed. Dick, do you want to maybe just make a couple of comments on that?

Yes. I would absolutely agree. We – as the economy has come back online we've seen increase in frequency and some severity in workers' comp. To your question of is there a correlation to unskilled worker phenomenon. It's really hard to exactly pinpoint that. We analyze every loss, particularly our large losses and attempt to determine cause. It's hard to decipher. Is it the individual? Is it just the excess sales that are going through some of the factories and manufacturers? So it's something we're watching very closely. We can't say today exactly that if there is a direct correlation but we're watching it.

And maybe just one quick follow-up on workers' comps as you guys have given great color in the past at the Investor Day. Are there any – as a result of pandemic any kind of changes structurally in terms of how workers' comp is going to be adjudicated in the future, or is now that could have been benefiting or could change the kind of the curve in terms of on the medical side or just LAE side?

I think it's premature to make that kind of assessment. I think the biggest issue will be how much people return to work and what the implications are for determining when somebody is in a compensable role within workers' comp. But I wouldn't say that we're seeing anything that's worthy of commentary at this time.

Thank you.

The next question is from Bob Farnam with Boenning and Scattergood. Please go ahead.

Yeah. Hi, there. Good morning. A question for Jack, perhaps Dick on the book rollers. How successful have they been? I'm just trying to figure out as a proportion of the new business is it material? And why have you been successful getting book rollovers? Are you offering agents incentives, or is it just more of the traction of a broad-based product? Just -- maybe just more details on the rollovers.

Yeah. Let me -- this is Jack. Bob thanks for the question. I would really clarify that we're really not into book rollovers. What we are into is working with agents that believe that consolidating the markets that they do business with for the full benefit of better servicing their clients and also creating some efficiencies because the business is so fragmented. And so because of our tools, because of our broad appetite, because of our operating models, we're just really effective at helping people when they decide to do that and sometimes even influencing them to do that. So to me that's a clarification worth noting because I think this is all in the best interest of our customers. But the short answer is that we are -- really in Small Commercial Personal Lines and even on the smaller end of Specialty, we have a meaningful amount of our new business that comes from not only direct market consolidation, but also pipelining that comes from the work we do with our Agency Insight tool. I don't know Dick, if you want to make a comment in there?

Yeah. I would just offer that this part of our strategy continues to be a really important growth lever for us. The Agency Insight work we do is really -- it leads to a strategic dialogue, as Jack was just pointing out with our partner agents about markets and market consolidations and efficiency and it brings forward the insights that lead to a conclusion of hey, this customer is better suited in a Hanover product or Hanover solution. So it really is part of a strategic road map we have to build out our partnerships. It is in the range of 12% to 15% of new business for us and that has been consistent. In fact, in past years, we've had record signings from our agents. And I would just offer we're really unique in the industry to have dedicated resources that do this analysis, do all the work and kind of shoulder the hard lifting on behalf of the agent.

And we'll keep moving. But I think that 12% to 15% is really in that direct market consolidation. I think it's ranged from 15% to 20%, frankly when you include the pipeline that we're doing that we don't necessarily call that a consolidation, but it's a direct result of those strategic dialogues.

Okay. Thanks for the clarification. The second question for me is given the potential for increased cat activity, increased non-cat losses, increased inflation. You increased your ROE target to 14% at the last investor meeting up from 13%. So I'm curious if that -- is that realistic in this type of environment?

Well, I think it requires us to lean into the rate environment, particularly on the property side and we are doing just that. You're right in suggesting that if the weather is going to continue to be challenging and some of the property volatility that we've experienced requires us to kind of reprice that line of business really across the across the portfolio. I will say and I think we pointed this out in our prepared remarks that property volatility non-cat though moves around and it's not pervasive, right? You saw -- we -- our specialty property and even our Small Commercial this quarter behaved quite nicely from a non-cat perspective and it was really middle market that drove some outsized losses in the third quarter. And if you look back at our calls over the last few years, some of the volatility that we've spoken to came from our Marine business and our HSI business and I think a couple of quarters ago some Small Commercial. So it's really -- if we look at property holistically on a non-GAAP basis, it's still a good business for us. It just requires us to keep pushing on the rate.

But all of the improvement in the getting to 14-plus percent is really around expenses and claims activities. Our view is that, the loss ratio will be relatively flat. There may be some movements to run pieces of the portfolio, but it will be relatively flat. So, our view is that, we can get price which is consistent with loss trend over time. And to the extent that there are heavier property losses or greater cat activity or weather is stronger, then we will be pricing for that accordingly.

Got it. Thanks for the color guys.

Thank you, Bob.

The next question is from Grace Carter with Bank of America. Please go ahead.

Hi everyone. I was thinking that with kind of the preferred bundled business that you all work within Personal Lines. A lot of that business tends to be pretty sticky across the industry, but it sounds like there's potential for kind of industry-wide homeowners and auto pricing to be rising at the same time, maybe that's not really what those customers are used to seeing. So, since you all have tried to maintain pretty consistent pricing relative to some other players over the past year, I guess I'm wondering how you're thinking about any opportunities going forward that might result from shopping activity over the next few months as the industry tries to correct pricing?

Yes. Great question, Grace. I think there's a lot going on in that white space between kind of the traditional middle market business and the high net worth. And we are very bullish on our Prestige product and our ability to price that business appropriately and deal with some of the volatility -- pricing volatility that's coming particularly from the high net worth carriers, who have to have an infrastructure and a cost structure to service the larger high net worth customers. And it becomes challenging for them on the lower end of that, which obviously is where we -- where we're playing. So Dick, I don't know if you want to speak to that?

Yes, absolutely. We are very bullish about our Prestige prospects. The growth rate has been significant. And not only what Jack just referenced with the opportunity coming from the high net worth players, equally we see some terrific opportunity for the independent agent channel to grab these accounts from the captive channel, where there's a significant amount of this business embedded in frankly inferior products and coverages. So, we work really hard and closely with our agents through our Agency Insight work to identify great bundled customers in that segment. So, it's a good source of new business for us.

Thanks. And just quickly another question on Personal Auto. I mean, we've talked a lot about your book of business having a frequency benefit relative to the industry, just given a higher percentage of office workers. But I was wondering, if we think about from the severity perspective, I mean maybe the book of business is more likely to have newer cars with higher technology. I guess just, how to think about the net impact of maybe a bit more of a severity impact in the current inflationary environment versus the ongoing frequency benefit and just kind of how you'll see that playing out over the next few quarters?

Again, I'm sure Dick can add some color. But I think as you go through that calculus Grace, you also have to kind of remind yourself that we have kind of a stronger casualty aspect of our business because, our customers basically buy higher limits. So, there is some truth to what you're saying is, the higher-value customer has better autos. And that translates into frankly more premium for us also. But I think some of what offsets what you're talking about is the fact that right now, we're not seeing any real challenges on the liability side and that's a bigger part of our book of business than say below limits auto folks who are really primarily in the physical damage business.

That’s helpful. Thank you.

Thanks, Grace.

The next question is from Meyer Shields with KBW. Please go ahead.

Thanks. Just two very quick questions if I can. First, this is across different lines of business. Are you seeing any signs of medical inflation getting worse [Technical Difficulty]

[Technical Difficulty] holistically across the -- you're talking about liability and workers' comp? Q –Meyer Shields: Yes. I'm thinking auto liability workers comp mostly.

Not any more than what we've contemplated, frankly. We've -- I think it's been a pretty steady level that we've watched and priced for, but we haven't seen an uptick beyond what -- where our loss trends contemplate. Q –Meyer Shields: Okay. No that's good to hear. Second, this is probably a Specialty question, but I just want to get a sense as to how benefits kind of ballpark the potential upside in premium assuming that some sort of infrastructure bill actually passes?

I'm glad you asked about Specialty. Because frankly, I'm anxious to reiterate, what we said in our prepared remarks that we are really bullish on the Specialty environment and the execution of our Specialty businesses right now. Specific to the Marine business and some of the businesses that might respond to infrastructure opportunities. Clearly, we're looking forward to that in both surety and marine. But Bryan, maybe you can speak more holistically to really the momentum that we have on all levels in Specialty.

Sure, Jack. And I think, I'd probably start by saying, I'm really pleased with like you said, the performance of the businesses and the results for the Q3 period and really year-to-date, right? The growth that you guys mentioned, really cuts across all of Specialty. Certainly, in some of our most profitable lines that growth was even stronger double-digit growth. So our most important area is growing at the double-digit level but growth across the businesses. And then when I layer that with getting of 8%, rate quarter-over-quarter consistently, continuing into the third quarter and then the retentions that we've been achieving well in excess of plan, as well as better than last quarter better than the prior year period. So a lot of our pieces are in a very, very good position. And so with that kind of momentum that we have, I feel really good about our continued trajectory from a growth and profitability standpoint. Q –Meyer Shields: Great. Thank you very much.

Thanks, Meyer.

This concludes our question-and-answer session. I would 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 talk to you next quarter.

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