Good day, and welcome to the Hanover Insurance Group’s First Quarter Earnings Conference Call. My name is Jason, and I will be your operator for today’s call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Oksana Lukasheva. Please go ahead.

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 Jeffrey 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 in the Investors section of our website at www.hanover.com. After presentation, we will answer questions in the Q&A session. Our prepared remarks in 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, catastrophe load economic conditions and related effects including inflation, supply chain disruption, potential recessionary impacts and evolving insurance behavior. These statements can also relate to other risks and uncertainties such as severe weather and catastrophes 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 accident year loss and combined ratio, 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 slidentation 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, and good morning, everyone. I will begin with an overview of our first quarter results, a discussion of the accelerated steps we are taking to address the risks posed by extreme weather events as well as an update on the progress we are making towards our margin recapture plan. I will conclude my remarks with an update on our agency relationships and key takeaways from our recent annual agency conference. Jeff will review our financial and operating results in more detail, and then we will open the line for your questions. Our first quarter results, excluding catastrophes, were strong, consistent with our expectations and supported by the progress we’ve made to advance the margin recapture plan we established last year. We are executing price increases slightly above expectations in Personal Lines, while also meaningfully advancing pricing and underwriting measures across the board in commercial property. Throughout the quarter, however, Hanover and the industry experienced heightened catastrophe activity, stemming from severe freeze events and several storms with widespread wind and tornado activity, which turned what was a very solid quarter for our company into 1 of essentially breakeven operating results. I first want to take a moment to recognize the efforts of our exceptional cat response team. Our cat team members are working tirelessly to settle claims as swiftly and effectively as possible for our valued customers. The team once again stepped up to do what they do best, providing responsive service to our customers in their time of need and helping them recover from these storms as quickly as possible. Given the continuing pressure related to changing weather patterns and elevated cat activity, I want to provide more insight into the actions we are taking to address its effects. On our fourth quarter call, we highlighted our…

Thank you, Jack. And good morning everyone. Our consolidated results for the first quarter reflected elevated catastrophe losses, which led us to exceed our cat assumption by approximately $112 million or about eight points. First quarter catastrophe losses stem from over 20 events, including severe freeze events in February and the beginning of March, as well as widespread wind and tornado activity, particularly in mid-to-late March. According to preliminary industry estimates, this first quarter was one of the highest for catastrophe losses over the last 10 years. Excluding catastrophes, we performed in line with our expectations, registering an ex-cat combined ratio of 91.7%. Our expense ratio for the first quarter of 2023 was 30.7%, compared with 31.1% in the prior year quarter, keeping us on track to achieve our expense ratio target of 30.8% for the full year 2023. Prior year reserve development was favorable in the quarter by $3 million primarily attributable to specialty as well as workers compensation in core commercial lines partially offset by unfavorable development in personal lines and commercial auto. Turning to a discussion of our underwriting results by segments starting with core commercial. Our combined ratio excluding catastrophes was 92.1% in the first quarter of 2023 above the prior year quarter, but in line with our expectations. Core commercial current accident year loss ratio excluding catastrophes was 58.5%, 1.1 points higher than the year earlier period driven by higher property loss severity in commercial auto. The underlying loss ratio in core commercial was in line with our expectations in the quarter. We were also pleased to see the frequency of large losses in our CMP business come down from elevated levels seen in the second half of 2022. Performance of other major lines within core commercial was also in line to slightly better than…

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

Hey, thanks. Good morning. Jack, you spent a good amount of time there talking about a lot of the things you’re doing to tackle the elevated weather and catastrophe losses. Elliott was kind of a very different issue than kind of what we saw this quarter. I was just wondering if you view kind of winter weather or spring weather is kind of being equal things you need to tackle? Or if you think one is maybe more persistent and more of an issue than the other? Is it less of an issue on year-end and more of just cat happen when they happen and not in a straight line?

Yes. Thanks, Matt. There’s no doubt, as we said in our prepared remarks that the type of winter storms that we encountered, starting with Elliott, but also to a lesser degree in the first quarter are different in that they’re not as responsive to the property aggregation work we’ve done and the elimination of some mitral concentrations. And so in that regard, that rises to the top of our list of areas that we really want to improve upon fast. Stating the obvious, all of that was accentuated by and exacerbated by the inflation and supply chain issues that continue. So it’s a bit of a perfect storm in terms of the cost that we have to incur. So as we said, we’re going hard at this. We had momentum, frankly, in some of the areas of risk mitigation versus just loss reimbursement. I think in a lot of ways, Elliott and the subsequent storms give us an opportunity to advance those more quickly. And also, if you look back at Elliott, roughly 250 commercial customers made up an outsized proportion of our losses, which allows us, I think, to be even more surgical about how we go after that versus the broader catastrophe kind of terrain. So we’ll continue to work very, very hard on the broader catastrophe management and including pricing and terms and conditions, but we are definitely putting winter storms at the top of our list to go at very surgically.

Great. And then you mentioned kind of on that risk mitigation point and you talked about working with your agents to get your insured on board. What does that look like? Is it a -- if you install this, there’s policy discounts? Is it you need to install this or you’ll be non-renewed? Or is it Hanover will pay for it or provide some funding for the customer to install it and carry on? Kind of how does that -- how do you incentivize your customers to install these things?

Yes. Our plan of attack is going to include all of that. It really does start with what did we learn about the type of customers, why weren’t they able to respond to a pretty well advertised freeze that came across the country and hit almost every state in the union. So we’ve been pretty firm about which customers do we think really did not -- were not responsive enough from a risk management standpoint. There are certain sectors, whether it be educational institutions and schools or certain types of real estate accounts that frankly are more susceptible to that type of event. So we are kind of tiering it as where do we believe that maybe we should kind of take some chips off the table relative to some of our portfolio concentration, where can we lean in hard and put some incentives in place that say, if you put these controls in place, we will give you some pricing consideration, which these days means less of an increase, not a decrease. And then we’ll contemplate what kind of deductible is appropriate for the water damage based on the responsiveness at the customer level. And I think last but not least, as we look at this going forward, we are trying very hard to get as much price as we possibly can, particularly where the elevated limits really aren’t being fully contemplated with the new severity. Even after the inflation eventually starts to subside some, we are really focusing on making sure we have the proper insurance to value and pricing for the kind of where the severity is presenting itself.

That’s great. And then one, just if I could kind of shifting topics to think about Personal Auto and a little bit just a very high-level question. Just as we look at -- obviously, there’s a lot of inputs into the cost pressures there that we’ve talked about on past calls. I’m just wondering as you look at kind of extended repair times and other things. How much of an impact is kind of the growing presence of electric vehicles having? I would think your book might have an okay proportion of mass affluent and then being more expensive vehicles. Does that kind of shift over time as the industry, the fleet on the road goes that direction. Is that contributing to this? Or is it just a really, really small issue?

Matt, this is Jeff. So that latter point, it really is not a material issue to us at that point. There’s certainly elevated costs for some of those types of vehicles. It’s just really not that big a part of our portfolio, frankly. And so I wouldn’t say that’s the center of our bull’s eye. I’ll let Dick comment on the PL trends real briefly. But what I would say in the macro is the industry, as you see, is trying to get their arms around, the impact of inflation and supply chain and, frankly, labor shortages that are dragging out some of these claims and making inflation a little bit more stubborn than maybe it otherwise would be. I think we and most of the industry has just had enough time now to get their arms around all the moving parts that contribute to getting your loss trend analysis, right? So Dick, maybe you could just add to your point.

Yes. Before I do that on the electric vehicle point indeed, it’s not yet showing true, but it is one we’re watching closely, because we do know that those repairs, the cost of the battery, the materials actually have their an elevated cost. So that’s one that into the future, we’ll watch and we’ll make its way into the pricing. A loss trend in general, the themes are still similar, the ACV or the cash value of used cars, new cars, you’re seeing some of the wholesale metrics and KPIs coming down, but that’s not yet making its way into the retail side. So they’re still elevated but coming down. The real cost pressure is coming on the repairable side. So as Jack mentioned, parts -- the labor component is quite sticky. And even as parts and supply chain come down, the labor component probably persist. So we are segmenting our losses very closely to understand how they differentiate and that helps us understand how those losses will develop into the future. But many of the themes stay the same. So therefore, the pricing, as you see, we’re getting in the book, we will be over loss trend in the second half of the year and which gives us confidence that we’re going to be able to get on top of it.

Right, thank you both for the answers. Very much appreciated.

Thank you.

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

Good morning. Maybe some additional thoughts on what all of these efforts you’re doing to reduce cats will have on the top line? Are we seeing that there’ll be a meaningful shift in certain lines of business from just a policy perspective? Or is this -- I mean maybe some sizing of how much the non-renewals might be?

I think because Paul, we have been really continuing to cull out certain subsectors of our business, particularly in middle market, that I’m not anticipating a major drop-off in the growth trajectory. As you can see, particularly in middle market, our growth is substantially about pricing and not really about growing new exposures, whereas in small commercial and specialty we’re trying to grow the book of business beyond just what the pricing in the marketplace is. So we’re -- I think this is a significant actions that we’re taking, but the marketplace, as you can expect, is getting firmer by the moment. And that’s allowing us to get done what we need to get done without removing a ton of business out of the system. I’m hopeful that in some of these subsectors will get more adoption and more compliance with what we’re doing. But frankly, if we don’t, then we will be more than happy to lose a point or 2 of growth to get the improvement that we’re looking for.

I guess somewhat similarly on the personal line side, how much are we talking about geographic mix shift versus other efforts fairly concentrated in a couple of states? Is that really about getting out of those concentrations? Or is there -- is it much more simplifying?

Well, I don’t think you’re oversimplifying it, but I think that, as you know, we’re in 20 states today, and we’re pretty substantially driven by Michigan and Massachusetts, despite all the diversification we’ve done in those other states. We outperform in those states. We’re closer to target returns in those states. When we look at the catastrophe experience, we have not been outsized in those states vis-a-vis our writings or at least in our estimate of lost share to market share. So I think in the present tense, Paul, you won’t see us do anything dramatic from a geographic shift. And our diversification as a business allows us to think more broadly than just our personal lines footprint, right? Heavy emphasis on growing specialty and specialty casualty and small commercial. So I think that buffers the fact that we can continue to diversify the firm without doing something dramatic with our personal lines footprint in the short term.

Great. Thank you. Always appreciate to help very much.

Thank you.

Our next question comes from Mike Zaremski from BMO. Please go ahead.

Hey good morning. Lot of great color. A lot of the discussion has been on the inflation side -- I still think on the property side of the portfolio. And by the stock reaction, I think investors are getting comfortable that pricing in the right direction and you’re taking a lot of corrective actions that will have pace. But I’m just curious, any insights on the liability side of the equation, maybe on commercial lines, is loss cost trend there inching up to? Or are things fairly stable or maybe even better than expected? It looks like reserve releases were -- have been a little bit light in the commercial segment, but maybe that’s just because of the property side, too. Thanks.

Hey Mike, this is Jack again. I think that’s a really appropriate question at this stage of where we are in the business because there’s obviously a lot of appropriate focus right now on property, cat and non-cat based on the volatility that we’ve experienced. And so that is really always at the top of our list in terms of priorities. But as we think about our growth into the future, we’re also being very mindful of what is happening kind of behind the scenes in liability trends. And it varies across the portfolio, and I won’t go too far with this. But there are some areas in specialty, for example, where you know that as things mature management liability in some of those areas. The results have been a little better than we expected, and we’ve been able to recognize that. There are other areas and probably commercial auto and to a lesser degree personal lines or liability where you’re starting to see some inching up of those liability trends pretty consistent with what our expectations were, but there’s evidence that as the courts kind of fully reopen as the cases make their way through the system there is clear evidence to us and I think the industry that litigation trends and social inflation will emerge to be something that the industry has to reckon with. So what I’m really proud of is our team is all over these trends, and while you can’t be perfect. They’re much more focused on anticipating where things are going based on some metrics that we’ve established in each of these areas that are about where the litigation is manifesting itself and how that’s turning into kind of severity trends versus just reflecting on past trends. To some degree, are hard to analyze coming out of the pandemic and the most recent environment. So overall, liability trends are creeping up, I think, for the industry, and it’s something that certainly we’re watching very closely.

Okay. That’s helpful. And my final question on the reinsurance side, and I’m cognizant renewal is coming up, so maybe you don’t want to tell us your exact thoughts. But maybe you’re willing to shed more light than others, given, I believe, Hanover’s reinsurance program has been more profitable for reinsurers and kind of the average -- your average -- do you expect the reinsurance renewal to have a potential impact on the income statement as we model things out? Anything we should be thinking about? Or is it kind of a relative non-event?

So as you mentioned, Mike, 7.1% is our property renewal, both the per risk and the cat program. And we were fortunate in 2 respects or maybe 3. Number one, we did a lot more purchasing of cat -- both with the cat bond and higher portions up the top. At the 7.1% renewal last year, we buy on a 3-year basis, and we haven’t used that treaty since 2005. So the reinsurers have done well on that. We also were fortunate because we could have visibility to the one-one renewal. So when we established our plan and our guidance, we built in very extensive increases in the cat program and the property program. So we’re very optimistic that we can renew at the same attachment point, and we’ve built into our guidance a hefty increase in that program, which we believe to be achievable.

Thank you.

My pleasure.

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

Hi, everyone.

Good morning.

You have mentioned over the past couple of quarters already some re-underwriting actions in certain middle market accounts like you just mentioned. I was curious to which the same account sort have driven the pressure and attritional losses have also driven pressure in catastrophe losses, like if there should already be any sort of benefit coming through the portfolio on the catastrophe loss side just given the underwriting actions you’ve already started to take over the past several months?

Yes, Grace, this is Jack. I’ll make a couple of comments, and I’m sure Dick will want to chime in here. But there’s always an intersection when you’re managing down your limits on the larger side of your business, to catastrophes, right? I mean catastrophes show up in a variety of different places. And the more limit you have, the more likely you are to catch some large losses when those events happen. So I can’t say that precisely, we can go back and say these are the accounts we got rid of, and we would have had a loss there or that they’re going to -- by non-renewing them, we’re going to automatically make ourselves less susceptible. But from a modeling perspective, there’s clear overlap in the AALs that we see running through the models based on the actions that we’ve been taking in middle market.

Yes, exactly. Grace, I would just say in certain geographies, that is your statement is this more true? So some pockets of the Midwest and some of the Northeast territories where we took some action to re-underwrite some property centric, real estate centric classes food manufacturers, some schools those are some of the same classes that potentially have been hit on the cat side. So it varies by geography this way, I would add some color to.

Okay, thank you. And in specialty lines, it seems like the gap between pricing and premiums written growth grew a little bit this quarter. I know you all mentioned some risk segmenting and underwriting actions in the prepared remarks. I was just curious if you could give us a little bit more color on those and where growth might go for the rest of the year?

Yes, I’m sure Brian will want to chime in here. But overall, as we said, in our prepared remarks, we really are quite happy with the way specialty is developing, not only in terms of the results in our ability to continue to grow and diversify the firm, but the impact that it’s having on our agents and value proposition that we present. But inherent in all of that, as you’re seeing, I think, with some of our competitors, you have to have a good healthy offense and defense in your game plan. That’s -- specialty can bring additional volatility. And so we’re on top of both where we’re offensive and where we’re more defensive based on where the market is guiding us. So Bryan, maybe you can chime in there.

Yes. I mean first also to echo that, we are pleased with how Specialty overall is performing both from a profitability and a growth perspective. And I would add that I’m pleased with the first quarter new business results too, good growth there, that was well in line or better than our expectations. When I think about where we are driving that growth, we really are staying focused on the areas that are not only very profitable for us, but where the pricing is holding up in the way that we feel good about it, right? So a number of our areas in terms of that is property oriented, but not all, the pricing remains strong, and so we’re growing disproportionately there. Where we see a little bit of rate erosion, we’re going to be prudent, right? You probably know that if you look at the some of the professional and executive lines and what’s called -- a publicly traded D&O type business, when rates have fallen over a couple of quarters precipitously. And we’re watchful of that. And we saw some of that work its way into -- private and small to middle market. When we see that, we’re going to take a pause and look at it and try to hold our pricing closer to trend. And so if that causes us to lose a little ground there, we’re okay with that. Overall, the book grew. I like the fact that it grew in the areas that we think are the best places to be growing right now.

Thank you.

Thanks Grace.

Our next question comes from Bob Farnam from Janney. Please go ahead.

Yes. Hi, good morning. I have kind of a nuance question in the margin of the capture plan and personal lines. So both Jack and Dick, you mentioned the kind of the rates for both auto and homeowners are going up maybe a few points more quickly than you expected for the back half of the year and it sounds like they’re ahead of loss cost trends. So the question is, -- do you see the margin improvement coming more quickly because of the change -- the higher rates or is it just a matter of -- it takes time to earn in, but maybe by the end of 2024, the margin improvement overall will be more than you expected because of the rate changes. Just kind of curious what your thoughts were on that.

Bob, this is Jack. I think at the highest level, so much of that depends on where the inflation and supply chain issues take us, right. They are more stubborn than I think anybody expected. Eventually, I think we all know that that should come down and that should start to be part of the margin improvement. But we frankly, can’t depend on it. If we’ve learned anything over the last three or four quarters is that we have to price as if these are the costs that we have to incur. And so in that scenario I think that the increased pricing that we’re experiencing at least covers any gaps that might have been created by the inflation being more stubborn. Our hope is that by the back half of the year, we’re getting more priced than we originally planned for. And the trends themselves start to calm and come back the other way. So I think to be any more precise than that is probably to sound like we have a better crystal ball than we do.

Right, right. Okay. All right. Good enough. Thanks.

Thank you, Bob.

The next question comes from Meyer Shields from KBW. Hi Meyer, is your line muted?

We can’t hear you.

Am I coming through?

Yes. Here we go.

Are you able to hear me now?

Yes.

Sorry. So a quick question for Jeff to start with. So the second quarter cat load or anticipation is still down year-over-year. I’m just hoping you could break that down between sort of the external loss trends of weather and inflation and the internal exposure and rate components.

You’re referring to the second quarter 6% load?

Yes. Versus last year, 6.9%.

Yes. So we use our models. We’ve got best-in-class models. And it happens to be down in the second quarter -- quarters. Overall, the cat load is up from 5% to 5.1%. I’d have to go back and see what was driving it down for last year’s second quarter, this year’s second, quarter. But it’s just the particular perils that are modeled and it’s not indicative of rate versus loss trend per se.

Okay. Understood. And then a question for Jack. I’m not in any way questioning the margin focus. But in the medium term, is Hanover interested in building a specialty property underwriting capability so that it can address what seems to be a growing need among the agents?

Meyer, to be honest with you, I think we have other opportunities to grow our firm and to do that in a way that further diversifies us. We have probably in the top 25 companies as a heavier property mix than most. And so I think optimizing our current portfolio relative to the property market and taking full advantage of the reset that is going on is a prudent strategy. And we get motivated to look at growth opportunities that, frankly, help our kind of overall mix and make it less property-centric over time. So we’re probably not one of those markets. Now remember, in our specialty business, we have a very significant and very profitable marine business, which is almost exclusively property oriented. We have our Hanover -- business that is all property and very sophisticated kind of lower end of the -- market. But I don’t see us really leaning into like the layered property market or -- and we do, Bryan, have a portion of our E&S business is in the pretty sector also. To that degree, we are participating in some of that firming market.

And those areas for us have performed quite well over the last year or so. And those areas do continue to grow for us. So -- while we’re trying to be very balanced where the growth comes from and have that both mix evolve, the areas that are profitable for us, like the ones that Jack mentioned, are continuing to grow for us.

Okay. No, that’s perfect. I just wanted to understand how you’re thinking about it. Thank you so much.

Thank you.

Thank you, 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 very much, everybody for a very good discussion today. Looking forward to talking to you next quarter. Good bye.

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