Good day, and welcome Hanover Insurance Second Quarter Earnings Conference Call. My name is Nick, and I'll be your operator of today's call. At this 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 that this event is being recorded. Now I'd like to turn the call 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 Dick Lavey, President of Agency Markets; 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 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 2022, economic conditions and related impacts, including inflation and other risks and uncertainties 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, refer you to the forward-looking statements section in our press release, presentation deck and our filings with the SEC. Today's discussion will also reference certain non-GAAP financial measures, such as operating income and a 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'll begin by discussing our second quarter financial highlights in the context of the current business and economic environment. I'll then provide an update on each of our business segments and put our results in perspective for you. Jeff will review our financial results in more detail, provide an update to our 2022 guidance, and then we'll open the line to take your questions. We are pleased to report a strong second quarter highlighted by an 11.1% operating return on equity and 10.4% net written premium growth. Year-to-date, we have achieved an operating return on equity of 13.4%, while operating earnings per share increased 24% from the prior year. These results underscore the effectiveness of our business strategy and the strength of our agency partnerships. While our business is subject to a wide range of variable and challenging conditions, including the continuing macroeconomic pressures we experienced in our Personal Lines business this quarter, our well-balanced portfolio and disciplined underwriting minimizes the adverse impact of volatility in any one area of the business. With another strong quarter to our credit, we continue to drive our business forward, confident we have the financial wherewithal, business strategy, products and services, distribution capability and team necessary to achieve our long-term financial and strategic goals. I'm excited to share our results with you today, starting with a review of our core commercial business. This segment delivered top line growth of 7.7% in the quarter, with a combined ratio of 92.6%. We continued to drive healthy rate increases of 6.9% across our core commercial book, up 60 basis points from the first quarter and backed by solid retention. The increase in economic activity and increases in insured values continue to provide a meaningful lift…

Good morning, everyone. For the second quarter, after-tax operating income was $83.9 million or $2.32 per share. Our combined ratio was 96.2%, compared with 94.4% in the second quarter of 2021, primarily reflecting higher ex-CAT current accident year losses in Personal Lines, which I will address shortly. Second quarter current year catastrophe losses were $89.4 million or 6.9% of net earned premium higher than our second quarter CAT load due to a few Midwest storms, as well as several smaller events. Offsetting the elevated current year catastrophes was favorable prior year catastrophe development of 0.9 points, reflecting our prudent reserving. Prior year reserve development, excluding catastrophes, was favorable in the quarter by $9.2 million or 70 basis points of the combined ratio and stem from workers’ compensation, surety, management liability, personal auto and homeowners lines. Our expense ratio for the quarter decreased 40 basis points to 30.8%, compared to 31.2% in the second quarter of 2021. Year-to-date, the expense ratio was in line with our full-year target, and we remain on track to deliver a 20 basis point improvement in the full year expense ratio. I'll now discuss the recent performance of each of our segments in greater detail. Starting with core commercial. The combined ratio, excluding catastrophes, was 88.9% in line with the prior year quarter. The core commercial current accident year loss ratio, excluding catastrophes, improved 0.6 points to 57%, helped by the benefit of earned-in rate above loss trends. Improved underlying performance was driven by favorable loss experience in workers’ comp and, to a lesser extent, commercial multiple peril, partially offset by Commercial Auto. Overall, each major line of business performed quite well. Turning to Specialty. We achieved a combined ratio, excluding catastrophes of 87.2%, an improvement of 3.4 points from the prior year. Specialty current accident…

And I’ll now begin the question-and-answer session. [Operator Instructions] First question comes from Matt Carletti, JMP. Please go ahead.

Hey, thanks. Good morning.

Good morning.

Just a couple of questions on Personal Lines, I was hoping -- you talked a little bit. Some of your peers have -- with different footprints have expressing concerns about getting rate increases through regulators. And so I'm hoping you could talk a little bit about, kind of, what your experience has been in your larger states, which I'm thinking like Michigan, Massachusetts and so forth? It seems, Jeff, from your comments, particularly on kind of what you've done in July, it doesn't seem like there's any headwinds there, but I'd just like to hear a little color if you can provide it.

Yes. Thanks, Matt. This is Jack. I think early on, we did experience some -- a few states that were treading water, if you will, on rate increases or putting some additional process in place. I think what you'll see from our pricing trajectory is that, that has been overwhelmed by the obvious need in every state for some Personal Lines rate increases, both Auto and Home. So we're confident that those initial blocks, if you will, are already giving away. And as you said, we're not in places like California and others where there is really substantial blocks that are allowing companies to get the appropriate rate. So --

Yes, Matt, I would just add also, we have, as you probably would expect, very good, tight relationships with the Department of Insurance in Michigan and Massachusetts in particular, where we have a lot of scale. We have dedicated state management and actually real resources that focus on that. So yes, I don't anticipate any problems going forward, particularly on the home side, right? This is home, there's clear acceptance of the rate that's being pushed through. It's really an auto discussion.

Okay, great. Thank you. And then just a follow-up, if I can. Shifting to Specialty and Commercial. Jack, you've talked in the past about how your core commercial customers buy a whole lot of Specialty coverages. And in the past, has it been for Hanover? And so I'm hoping you can maybe update us on just kind of how that -- over the past several quarters, kind of, how that cross-sell initiative has gone? And have you had much success at kind of garnering some of those lines on this -- kind of into the package that Hanover provides?

Yes, Matt, I particularly appreciate that question because we are gaining momentum, both in terms of more and more Specialty business coming to us monoline, if you will, through some of the panels and platforms that some of the larger and consolidating agents are putting together, as well as more and more filling out the package, cross-sell type opportunities that Bryan has spoken to, not only in terms of how we approach the agents, but the operating models that we built to support that. So Bryan, why don't I let you elaborate on that?

Yes. Thanks, Matt. And so earlier, Jeff spoke about some of our new lines of business, our Specialty general liability, our finance institutions or retail units. All of those -- a big part of our plan was to drive cross-sell with our agent. And that's what's coming through, that's what's really supporting our growth. And in our broader business, we're seeing it as well. I think that cross-sell is having a material meaningful impact in our growth, and we're really feeling pretty good about the growth and the performance and so that is and has been additive.

Okay. Thanks very for the asnwers. Appreciate it.

Thanks, Matt.

Thank you. Next question will be from Meyer Shields from KBW. Please go aehad.

Thanks. Let me start with the modeling question, if I can. I'm sure this is contemplated in your guidance. But when we look specifically at homeowners, is the increasing reinsurance spend going to impact the accident year loss ratio in the back half of this year?

Yes. I'll let Jeff speak to the specifics of the reinsurance program, but I'll remind you that in our CAT program, if you will, based on the retention levels that we have, Personal Lines overall and homeowners in particular, really don't reach those thresholds very easily. So Jeff, do you want to address that more specifically?

Nothing to add. With our retention [Techncial Difficulty] to home losses would hit the tower.

I'm sorry, I didn't catch that.

There was -- something broke up. With our retention levels in the property per risk, it would be very unusual for a home loss to approach the tower. And so therefore, the allocation of reinsurance cost is not really relevant to the home business.

Okay. Perfect. That's very helpful. And second, this is more of an abstract theoretical question, but you're clearly seeing a benefit on the homeowners pricing from rising home values, and that goes through automatically. Is there any way of implementing something like that in Personal Auto? So when we go through these periods of inflation you’re subject to as much potential regulatory friction?

Yes, Meyer, this is Jack. Listen, overall, it is a challenge to do something similar in terms of insurance to value on auto. You can't just go into the system and change the cost new or get the value in there. But there are a number of levers that we pull, both on new business and renewal that our rate and non-rate leverage. So Dick, why don't you maybe elaborate on how we adjust pricing beyond the cost new adjusted?

Right. Yes, I mean there are other levers that we look at like the account discount, making sure that, that is applied or not applied. And we look at violations. We go back and scrub our book to make sure that we're appropriately capturing violations. So there is things that you can look at through the performance of the book, which you can then turn into rate. The only thing that's even close to what you're asking is like a symboling of a newer vehicle. So if you can capture that properly, the newer vehicles would capture a higher rate, but there's not the equivalent of kind of an ITV for coverage A.

Okay. That's helpful. And then one final question, if I can. I think, Jack, you talked about slowing Personal Auto PIF growth. Are you taking any actions? Or is this just an expectation as pricing increased rolling?

Yes, it's actually a great question, because no one knows how firm the market will get and how much your retention level will dip relative to the enhanced pricing that you're putting through or even as you adjust your new business pricing, it's all relative. Our expectation going into the second half of the year is that we'll continue to retain a good portion of our book of business as we push aggressively on price. The assumption we have made that we spoke to in our prepared remarks was adjusting the new business styles including the tiering so that some of that new business likely slows down. But again, it's all relative to the other markets that we compete against. And all indications are is that people are pushing pricing and changing their tiering within their multi-barrier product pretty aggressively. So time will tell. We're clearly not, as Jeff said in his remarks, we're favoring margin improvement over growth, we may get both.

Right, yes. The only thing I'd add is we are seeing kind of a new level of price elasticity where there's -- where our retentions are at some of the highest levels we've experienced. So as we push that growth -- I'm sorry, that rate, our customers are accepting it, and that's likely due to what other players are doing in the marketplace.

Okay so low -- I'm sorry, so lower elasticity?

Lower elasticity. That's right.

Correct.

Okay, fantastic. That’s good to hear.

Thank you. Our next question will be from Paul Newsome, Piper Sandler. Please go ahead.

I was wondering if you could talk a little bit again on the Personal Lines side about regional competition. We just heard Progressive talking this morning about trying to get out of Florida into the Northeast. And whether or not you're seeing any sort of differentiations in the competitive environment by kind of state-by-state basis, just based upon your regional footprint?

Yes, Paul, this is Jack. Clearly, the answer is yes. I think traditionally, the national kind of stock companies, if you will, are -- have a more sophisticated pricing approach, but also better analytics and more motivation, if you will, to change pricing quicker. And as much as 60% to 65% of the business in the IA channel is written by regional carriers. So that is a phenomenon that we constantly deal with. That said -- and I know Dick can elaborate on this, is that this market is moving very, very fast. We are -- there is no one that is immune to the inflationary pressures that are coming upon them. And so even kind of mutuals or regionals that are less inclined to be early movers in pricing, they're going to become fast followers, and there's good indication of that right now. Dick, would you add to that?

Yes. Just a little color. Absolutely, you called it right. I mean, it depends on the states you operate in. In some of the states, like as an example, in Michigan, we're up against more of the regional players, the mutuals, where some of the national players are not as present. In other states, that's a different story. So it's -- there's no one kind of competitive environment that we can -- we have to adjust ourselves based on the state. I would also say that pricing sophistication and technology will become more and more important. And some of these regional players and mutual haven't kept pace with some of the pricing sophistication and engagement tools that they have. The aerial imagery that Jeff mentioned in his commentary, that's really important to understanding what your book looks like and how you're going to price it. So we think we have some advantages against those players.

I think net-net, what you should know is that we're going to have a real firm market, and we're well on our way in Personal Lines across the country. And I don't think you'll see any sustainable differentiation between regionals and nationals, given how strong the inflationary pressures have come on.

Great. My second question, I was hoping to get some of your thoughts on the impact of exposure increases. My personal view is that we're going to have a debate in the future about how much of an exposure increase access rate versus not rate. And maybe you could just kind of talk about your opinion about that if it differs by your major segment very much, if it has any impact in personal lines. So just curious about your general view on that as we try to think about the exposure improvements and the impact of profitability prospectively.

Yes, Paul, this is Jack again. I think the topic is important for us to continue to talk about as an industry. And the answer is yes, there is quite a variance from line and sector on how exposure translates into additional loss costs versus additional pricing over those loss costs or loss trends. We evaluate this continuously in a dynamic way. As you can imagine, in Personal Lines right now, with the inflationary pressures that have come upon, they come upon both homeowners and auto physical damage in very different ways. And we have the best analytics we've ever had to break down exactly what are the exposure increases, what are they coming from? How much is labor, how much of it's parts? How much of it's used car that are replacing cars versus in some of the liability lines, both Personal Lines and Commercial Lines where you have to evaluate how much of the additional exposure, whether it's payroll or sales and Commercial Lines translates into additional loss costs. So we evaluate that by line, by sector and develop an opinion across that. And we are applying as much insurance to value into the system as we possibly can, related to the property exposure increases and then evaluating kind of the broader analysis. So anything else that you would add?

No, I think you captured. I mean, homeowners is probably the best example of where we're systematically increasing our insurance -- our coverage A, which is a replacement cost as a reminder. And so that's across the entire book. And it does capture, of course, the inflationary elements of repair. But it only really comes into play in a total loss situation, right? So you're getting this across your entire book, but obviously, you're not having total losses, but only a small fraction of your book. So it plays through as a rate lever

Great. Thanks, folks. Appreciate the help as always.

Thank you, Paul.

[Operator Instructions] Next question comes from Grace Carter, Bank of America. Please go aehad.

Hi, everyone.

Good morning.

Just given the uptick in core commercial rates and very modest downtick in Specialty rates versus the first quarter, I was just wondering if you could give your take on the competitive environment and any differences between those two segments? And if you think that pricing remains rational across both of those segments?

Yes. This is Jack, Grace. Thanks for the question. And I would answer the latter part of your question first. I do think the market is behaving quite rational. I'll remind you that both in core commercial and in specialty we play in the small to mid account space. And that travels differently than some of the sectors that surround us, and particularly some of the larger accounts or more severity-oriented specialty business, whether that be the upper end of E&S or Med Mal or some of the high-end employment or management liability, professional liability lines. So because of that, you saw we didn't get the dramatic price increases over the last couple of years when people were having a real firm market in some of those sectors, we got more gradual increases. We think that's a big factor on why we're continuing to have sustainable price increases. And then most recently, we think people are starting to acknowledge that the property, not only inflation, but some of the volatility in the property lines requires more rate than within the system or within the sectors. Previously, a lot of that was driven by liability trends or anticipating liability trends. So a lot of moving parts here, but the short answer, I believe, is that we are anticipating a pretty firm market and our Specialty and core line teams are seeing that pretty consistently across the country.

Thanks. And I was wondering if you had noticed any atypical pressure on loss cost trends for umbrella coverages here lately?

I'll let Dick elaborate, but the short answer is no. We evaluate this regularly, and we have not seen a material uptick in our umbrella loss experience, but we have been aggressively changing some levers despite that.

Yes. We've been managing our limits on high hazard accounts. We've been pushing price aggressively, but our loss content in the commercial umbrella side is nothing to speak of.

Thank you.

Thank you. 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 this morning, and we're looking forward to talk to you next quarter.

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