Good day, and welcome to The Hanover Insurance Group's First Quarter Earnings Conference Call. My name is Chuck, and I'll 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.

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 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 as defined under the Private Securities Litigation Reform Act of 1995. These statements can relate to, among other things, our outlook and guidance for 2024 economic conditions and related effects, including economic and social inflation, potential recessionary impacts as well as 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 with 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 ratio, excluding catastrophes, among others. A reconciliation of these non-GAAP financial measures to the closest GAAP measure on 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…

Thank you, Jack, and good morning, everyone. I'll begin with an overview of our first quarter results, discuss our segment financial highlights and investment performance and then mention our 2024 outlook. We are very pleased with our strong start for the year, posting a first quarter combined ratio of 95.5%. We delivered a combined ratio, excluding catastrophes, of 89.5%, a 2.2 point improvement over the prior year quarter. Our current accident year loss ratio, excluding catastrophes, improved 1.9 points to 59.3% reflecting the continued earning-in of price increases. Our results were highlighted by a year-over-year reduction in the underlying loss ratio in Personal Lines and Specialty. Strong and steady margins in Core Commercial also contributed to the excellent performance. The continued improvement in profitability validates the effectiveness of our margin recapture plan, and gives us confidence that we are on the right path to deliver on our long-term ROE target of 14% or higher. At 30.9%, our first quarter expense ratio was slightly above our full year target of 30.7%, primarily due to the timing of certain expenses. Relative to the first quarter of last year, the expense ratio is higher primarily driven by changes in variable compensation accruals between the two periods as well as increased investments in our Specialty business this year, consistent with our growth and market share gain strategy. We remain on track to deliver a full year expense ratio of 30.7% in 2024. Catastrophe activity was within our CAT assumption for the quarter, accounting for 6% of net earned premium. Northeast floods in January and hail events in February and March were the main contributors to CAT losses. Ex-CAT prior year development was approximately $10 million favorable in the quarter driven by overall favorability in Core Commercial and Specialty. Each of the main lines of…

[Operator Instructions] And the first question will come from Michael Phillips with Oppenheimer.

First question, Jeff, on your comments there on Core Commercial, specifically GL, frequency is still down. good news there. I guess, maybe a brief description of why you think that's still the case and how long that could continue? And then part of that, too, is you said more complex claims. Can you talk about what you're seeing to describe those complex claims?

Sure. In terms of the frequency, I think we're seeing some of our insureds there's less physical activity going into the premises. And in some cases, people aren't going into malls, people aren't going into restaurants quite as often, and that's creating a reduced frequency. That's been pretty dramatic. In terms of the complex claims, you're seeing less minor claims, so the overall proportion of claims is growing with respect to the complex claims or more severity that's having lawyer involvement and the like.

Okay. And I guess, secondly, maybe just more higher level. You talked about in the Specialty business, the investments you're making, and some pressure on the expense ratio. How long will those investments continue? And then maybe just talk about growth opportunities or what those investments are going to accrue to you over the next couple of years? John "Jack" C. Roche: Yes, Mike, this is Jack. Thanks for that question. We're -- we're quite excited about the performance of our Specialty business. And as 2023 concluded, we made a decision to look at the best-performing areas of Specialty and make some additional investments from a resource standpoint. And we also invested in a platform that affected a few of our newer and profitable businesses. So I'll let Bryan kind of speak to that, but we know that the growth trajectory that we have ahead for Specialty will make the expense ratio very [ parable ]. And overall, what you should get from that is that we're investing in one of our key businesses.

Yes, sure. So I'll just give a little bit of more detail there, right? So for example, we've been leaning into technology for our E&S business, right? This is a fast-growing, very profitable area. We built out a completely new system for them. As you may know, they also have a lot of submissions and quotes in the E&S space. So we will get a lot of efficiency and upside from that type of investment. We're also adding staff to that area. And it's not just in our E&S area. We're also investing in the platform for our Industrial Property business, and we're investing in staff for our Marine business and our Healthcare businesses. So a number of our areas that we see is quite profitable, growing and having a lot of opportunity we're investing in. And I do think to Jack's point, that will earn through the revenue -- will earn through and that will absolutely help us on the expense side.

Mike, notwithstanding investing heavily in our most profitable and ultimately fastest-growing business. We're still committed to the 30.7% expense ratio for the overall firm.

The next question will come from Michael Zaremski with BMO Capital Markets.

This is Jack on for Mike. You touched on this in the prepared remarks, but just curious if you could offer more color on the deconcentration strategy and progress in Personal Lines. Specifically in Michigan and perhaps in the Northeast as well? Are you reducing concentration in those geographies meaningfully? Or are you losing fewer customers and expect as you successfully push improved terms and conditions, including higher deductibles? John "Jack" C. Roche: Yes. This is Jack again. I frankly couldn't be any more pleased with the execution that we're seeing within Personal Lines and frankly, the rest of the enterprise, because as we think about property aggregations and we think about spreading our risk and implementing terms and conditions, that requires the entire enterprise to kind of contribute. But specific to Personal Lines, we are right on target with the thresholds and the milestones that we set for ourselves so much so that with the implementation, particularly on the renewal terms and conditions, if that continues to go as well as we project that we can continue to change the dials on our new business appetite. We've already done that in 5 of our states. We're looking at the next 5. So I think of this as a big picture is we are making meaningful progress on our margin recapture and simultaneously advancing our diversification efforts at a really good clip. So I couldn't be more pleased with the way that's playing out in Personal Lines.

From a premium and insured perspective, you'll see some PIF shrink into 2025. But from a premium growth perspective, you'll start seeing some growth continuing to get larger from here on, from here forward.

And this is Dick Lavey, one last point to your question about the Midwest versus the Northeast. Yes, exactly as Jeff said, we're manufacturing the PIF reduction in the Midwest 3x to 4x the rate in other geographies. That's really where the confection storm issues have prevailed and the wind and hail deductibles are being in place. The Northeast doesn't have those perils. So our Northeast business retention is higher and PIF shrinkage is less.

And second question is on reserve development, which was healthy again this quarter. I was wondering if there's any change in your high-level view on loss expense trends? You talked about frequency trends normalizing for some Casualty Lines. But wondering if you're seeing any changes in severity. I'm just asking given that some other insurers have increased their loss inflation forecast recently?

Yes. So overall, we're very comfortable with our balance sheet and very prudent in how we set reserves. In Core Commercial, we -- every major line was favorable. So feeling really good about that. Overall, our Property Casualty mix, while a little bit challenging during the inflation in that period, serves us reasonably well as casualty trends spike up. And Specialty is also largely a claims-made policy construction, which will help us, Jack talked about the limit structure in his prepared remarks, where 93% is less than or equal to $1 million overall and 77% in Core. And we also talked about how comfortable we are and the approach we took around reserving both in 2016 and 2020. And then finally, the concentration or our geographic focus, we -- back in '17, '18, '19, we really wanted to deemphasize the major metropolitan cities. Think about L.A., Chicago, New York, and that has really, really served us well. So while frequency is down, severity is up dramatically, and I think we've been prudent at picking and preparing for that all the while bringing up our severity picks.

The next question will come from Meyer Shields with KBW.

Thank you. It's [ Jane ] on for Meyer. My first question is on the core loss ratio for commercial. It was flat year-over-year. Just curious what your expectation for here onward? Is the run rate that we should think about going forward?

We're getting rate meaningfully above loss trend. And so we feel optimistic about our ability to have some improvement in the loss ratio going forward. From time to time, you have particularly higher or lower individual losses for property. I think a year ago, we happened to have had some lower levels losses this particular quarter, a little bit higher. But I'm pleased with how that business is producing at 58.5%, but I think we have a little bit of opportunity to improve that going forward as the rate earns in.

Perfect. That's helpful. My second question is on Personal Auto. I saw like a slight reserve charge there. I know it's very small. Just wondering if you can add more color on that? Just want to make sure I'm not missing anything behind it.

Can you clarify the question? I think I missed a word or two. It was about Personal Auto and what was the concern on the slide?

It's not a concern, just there's a slight reserves charge on that?

So in Personal Lines, overall, we had no development. Auto was favorable and Home was slightly -- it was adverse. And in Home, it was actually the umbrella. And truth be told, it's actually Auto that's showing itself in the umbrella. And I think we talked in our prepared remarks about some of the catastrophic activities such as pedestrian hits and some of those things are driving us to increase our picks for both prior and current period for umbrella.

The next question will come from Grace Carter with Bank of America.

Hi, everyone. The data on limits that you gave for the Liability exposures in Core Commercial is really helpful. Just kind of looking at continued growth in the Small Commercial book versus the underwriting and Middle Market over the past few quarters? Even though that's kind of geared towards the property side. I was wondering if you expect any sort of perceptible impact on the limits going forward in the liability book just kind of given maybe a greater emphasis on smaller accounts? John "Jack" C. Roche: Yes, Grace, this is Jack. Given our current trajectory of growth patterns, I think those -- that limits profile will be either equally as impressive or maybe even a little bit better because we are growing our smaller business, both in the Core Lines and in Specialty at a faster clip. And we believe we have a real competitive advantage in both of those areas. That said, I think as we move through this liability environment. Longer term, our hope and expectation is, is that we can put ourselves in a position so we can participate in the mid-range Specialty business and eventually middle market in a more robust way. But this is an environment where I think caution and prudence is appropriate. But I don't want you to miss the point that our relevance with agents and our ability to take the company to the next level, has some bearing on whether we can navigate these trends that we're all going through and grow all of our businesses into the future. So that's how we're approaching it.

And I guess following up on that, I think last quarter, you all had mentioned maybe a greater emphasis on Liability Lines versus history going forward. I was just wondering if given kind of, I guess, the noise is growing loud around social inflation around the industry, if there's been any tweaks to that plan so far on the magnitude of the shift? And just kind of any sort of progress on how you're thinking about that so far? John "Jack" C. Roche: Yes. I think we -- I think at the time, we were clear about the fact that this was not going to be a major step change in one direction or the other. We were clearly disadvantaged last year by having more property in our mix than some of our competitors. I believe we'll be less disadvantaged and potentially advantaged going forward if the liability trends continue to present themselves. So I think to your point, Grace, we're not having an identity crisis with our book mix, we're trying to optimize. And where we see particularly in certain geographies, in certain sectors. We are moving forward on our liability mix. Bryan spoke about that, particularly in E&S and the lower end of Management Liability and our Healthcare businesses. We have great margins, great transparency to what growth looks like. So overall, I think you're right, it will be somewhat balanced. We're pretty excited about our business mix going forward.

The next question is a follow-up from Michael Phillips with Oppenheimer.

Just your last couple of questions there. On Small Commercial kind of prodded me on this one. Small Commercial has been kind of a sweet spot for the industry for a while. You guys are killing it there. But I guess because it's been such a sweet spot, it seems like -- it feels like at least going back a couple of years, that's a place where many people said they would want to go. And not sure you've seen them come into that space and maybe the competitive landscape has changed? And if not, here's why not? Maybe what's the moat to get into that space and be as successful as you guys are? John "Jack" C. Roche: Yes, Mike, I think that's very perceptive, and I'll let Dick speak to that. But I do believe that Small Commercial a business that takes significant investment and frankly, insight in terms of where the profit pools are? What pricing sophistication needs to look like? And so it is not something that you can just turn the switch and get into, and there have been carriers that have highlighted that and either not made the progress that they intended to make or in some cases, regressed. So Dick, maybe you can build on that.

You hit it well. I mean this business is one where ease of doing business wins the day, and I know that's an overused term, but that means all the elements of the operating model aligned from the people, the way you have them, the way you do new business, the way renewals are handled. And of course, the platform that you put on the agent's desktop for them to submit and issue business. So as you know, we've made significant investments going back 3, 4 years on that. Our first product BOP is now completely rolled out, and we're working hard to get more comp added to it. So other competitors haven't frankly made those levels of investments. There are some that we compete well against day-to-day, but we're absolutely thrilled with where this business is and looking into the future, now that the platform is nearing completion, we feel comfortable actually expanding distribution and finding other points of access.

This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Oksana Lukasheva for any closing remarks. Please go ahead.

Thank you, everybody, for your interest and participation. 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.