Good day, and welcome to The Hanover Insurance Group's Fourth Quarter of 2024 Earnings Conference Call. My name is Joe, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. By pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw a question, you may press star then two. Please also note that this event is being recorded today. I would now like to turn the conference over to Oksana Lukasheva.

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 investor 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 2025, economic conditions and related effects, including economic and social inflation, potential recessionary impacts, tariffs, 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 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 us. Our exceptional fourth-quarter performance marked the culmination of a very strong year for our company. Across the organization, our team executed remarkably well. We successfully implemented our cat mitigation actions, delivered on our margin recapture plans, continued to improve our claims response and delivery, and successfully executed on targeted portfolio management and innovation initiatives, positioning the organization to deliver strong, profitable growth going forward. Our company is stronger today than ever before, poised to capitalize on some of the most promising growth opportunities in the marketplace. For the quarter, we generated a record operating return on equity of 24.4%. We improved our ex-cat combined ratio by 2.7 points year over year to 87.5%, and we grew net written premiums by 7.4%, a meaningful acceleration from recent quarters. On a full-year basis, we delivered an operating ROE of 15.8%, our highest on record. We increased net written premiums to north of $6 billion. Excluding cats, we grew our operating income by 29%, demonstrating the inherent strength of our underlying earnings power. Notably, prior year development was favorable across all major business segments, further evidencing our commitment to prudent reserving practices. Throughout the year, we took a number of proactive steps to further mitigate our catastrophe exposure, increasing pricing, modifying terms and conditions, and making adjustments to our geographic mix. To provide some additional context, over the last two years, we increased cumulative written renewal pricing by 47% in homeowners and by 29% in core commercial property. Over the past twelve months, we more evenly spread our risk geographically. We strategically reduced our personal lines policy count in the Midwest by 10.2% and implemented new or enhanced deductibles across the majority of our personal lines book. These actions had a…

Thank you, Jack, and good morning, everyone. Our strong execution in 2024 is demonstrated by our record performance. On a consolidated basis, we reported excellent net and operating income per share for the fourth quarter and the full year, with each beating our previous records. We delivered a combined ratio of 94.8% for the full year, our best since 2020. Excluding catastrophes, our combined ratio was 88.4%, beating our original guidance handily, and a 2.9-point improvement compared to 2023. Our fourth-quarter overall combined ratio of 89.2% set a new quarterly record and marked a five-point improvement over the comparable period last year. Quarterly top-line growth was 7.4%, with a return to normalcy as we indicated. Consolidated full-year top-line growth was 4.7%, in line with our 2024 mid-single-digit growth guidance. With the vast majority of our targeted underwriting actions in middle market and specialty behind us, we anticipate improved growth across these segments in 2025. Cat losses for the year were 6.4%, including 0.7 points of favorable prior year cat development. Our approach to setting catastrophe loads is prudent as we select higher on the probability curve. Prior year development was favorable across each segment in both the fourth quarter and for the year. Liability loss experience and trends were largely within expectations, and we are continuing to exercise prudence in our picks given the uncertain environment. Looking at favorability in more detail, specialty was favorable by 3.5 and 7 points for the year and quarter, respectively. Favorability was widespread in several areas, notably driven by consistently lower than expected losses in our professional and executive liability claims-made business. Core commercial favorable development was 80 basis points for the year, and 50 basis points in Q4, with favorability in each major line of business, driven primarily by property coverages as we…

Operator, are you looking for questions? We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw a question, please press star then two. Our first question for today will come from Bob Farnam with Morgan Stanley. Good morning. So my first question is around the core commercial.

Understand that the growth is going to come from the small market. But you also mentioned that it seems like you are better positioned in the middle market for business in 2025 as well. Going forward, are there any lines of business within the middle market that you feel could be a great opportunity for growth? Maybe if you can unpack what are the things you are more optimistic about in the middle market as well? Thanks.

Sure, Bob, this is Jack. I will say a few comments about that and then let Dick Lavey chime in. But we are really excited, frankly, heading into 2025 that not only are we continuing to have tremendous momentum with our small commercial both in terms of top line and bottom line, but also that a lot of hard work in the middle market area both in terms of addressing ex-cat volatility and also cat loads are substantially behind us. We really are in the best position we have been in some time. That said, we will watch the environment throughout the year to see how much we are able to elevate our growth in the middle market. We believe that small commercial can continue to drive high single-digit growth, but we are going to keep middle market more in the mid-single-digit area until we get that next level of confidence that the external environment kind of requires or allows us to kind of take that growth up a level. And that is our inevitably, that is where we would like to do is get middle market to participate, you know, substantially in our growth. So, Dick, maybe you want to be more specific?

Yeah. Sure. You know, Bob, I think, you know, we are a package player. So when we think about growth, we think about the account. We have one of the strongest account percentages in the market. But that said, we could continue to be excited about work comp and the near-term outlook for that and long-term outlook. So we will lean in even for some model line work comp, particularly in small, but definitely as part of a package in the middle market space. So those would be my comments on the line side. For the industry side, we pride ourselves on being a great underwriting company, so we think about some of your classic main street industries, manufacturing, professional services, but we also are very excited and continue to lean in and some of our more specialized areas like tech and life sciences being at the top of that list, but also human services, which is an area where we have some market.

Okay. Got it. No. That is very helpful. So my second question revolves around reserving. Understand that you are adding a little bit to the IBNR, specifically on the commercial umbrella side. Can you maybe help us think about the rationale behind that a little bit more obviously, social inflation and then being just a little bit more conservative on reserving? But just are there things trend-wise, are you seeing things could potentially be a cause of concern either on the severity side or maybe claim frequency things of that nature?

Hi, Bob. It is Jeff. Just to put it in perspective, we have seen favorability in all our segments for reserving. We have seen favorability in all major core lines of business. This accident year picks over the last few years, largely with IBNR. And I think we are well prepared for those casualty trends. I would remind you that we have seen substantial claims frequency since the pre-COVID levels that have been very helpful along with rate and prudent reserving. But I do not think it is a state secret that casualty trends have been more severe and so people are more likely to involve a lawyer and lawyers are more aggressive, but there is nothing in the specific terms in our current accident year that we are really seeing, we just want to be prudent and prepared.

Got it. So it is more conservatism than anything else?

Correct.

Okay. Thank you.

And our next question will come from Michael Phillips with Oppenheimer. Please go ahead.

Thanks. Good morning. Last quarter, you guys mentioned how for core commercial line, the core loss ratio could improve somewhat from 2024 levels given what you are seeing in pricing and loss trend. I guess, does the action that you just talked about, albeit a small action, does that give you any pause for those comments?

I do not think so. We are still very comfortable with them. We expect our liability pricing to accelerate in 2025 and we expect to see some improvement in the core commercial loss ratio in 2025 largely driven by property.

Okay. Jeff, I heard your opening comments on personal umbrella times how your margin loss trends there. And then I think on commercial umbrella, I think you said 14% rate. So thanks for that. I thought I heard you right. Thanks for that. But, you know, your commercial umbrella book, I believe, is about a third of your GL book. So, you know, not small. And I guess we know you do not write standalone basis, but wondering if you could share any kind of more quantitative comments or maybe a lost strength specifically. That would be nice. What you see on that book for commercial umbrella? Or maybe other quantitative comments like we do not raise standalone business could help us ease concerns that tough times could be ahead for the commercial umbrella. Thank you.

Yeah. Mike, this is Dick. Yeah. So you hit and I will start with that. We no longer write any monoline umbrella. We manage our limits very tightly. As you know, our limits are quite low relative to the industry. Our umbrella, our commercial umbrella is about 7% of our overall commercial portfolio. So that gives you some quantitative view. And, yeah, pricing is a critical lever. We are at 14% the quarter, but pushing that number up northward throughout 2025. I think it has been several years, if not longer, since we have written any monoline umbrella, just to be clear, not a new phenomenon. We have been talking about it since 2000.

Yeah. And, Jack, to be clear, sorry, we had to get different numbers. I said 30%. Referring just to the GL book. Your GL book. Yeah. Okay. Versus your 7%. So okay. Thank you.

And our next question will come from Paul Newsome with Piper Sandler. Please go ahead.

Good morning. Thanks for the call. Want to ask a big picture question on personalized. Now that you have kind of gone through, I think, the whole social perspective, the recovery. Are there some lessons learned or maybe some strategy changes that you are thinking about as you now that the book is all been so on back to profitability? And I am just thinking about, you know, whether or not you got the right geography, that kind of things now that you have sort of gotten through the process?

Yeah. Paul, this is Jack. Thanks for that question. There is no question that as the world evolves, and as our portfolio develops, we are thinking hard about what the future state of that next level of diversification looks like. And we have the proper humility and experience coming out of the back half of 2022 and 2023 that is much progress as we were making both property and casualty personal lines versus commercial lines geography, we needed to accelerate that diversification. And while we have a huge successful business in Michigan and the Midwest, relative to personal lines, it is outsized and so we needed to address that. And the silver lining of 2023 is that we are getting to move on that diversification and that portfolio improvement much faster than we ever could have but for the pain that we kind of took on in 2023 in particular. So the answer is yes. I do think about the specialty commercial, our small commercial business even sub-segments of our middle market business and not think about diversification for personal lines exclusively. And one other thought I would say about that, Paul, is that there are a lot of the states that we are not in in person lines are frankly not that desirable to us. So expanding our footprint in personal lines substantially in the short to mid-range is not one of the levers that we want to pull. Longer term, we will see how things play out, but we are dramatically changing our property aggregations in particular across the enterprise with the work we have done. I think we are really making progress in that diversification effort more broadly.

That is great. Paul, I will try to ahead of time. I am going to beat the casualty reserve horse one more time. Because we are getting a lot of questions on things. Sales, I get a lot of questions on it. Could you talk about sort of the trade-off of sort of the small increases in the IBNR for some of these casualty lines versus sort of trying to, you know, take a more aggressive view count. What would be the things that would trigger a change in how you are increasing your conservativeness with respect to cashier?

Oh, we are very comfortable with our reserve position and we have established ample conservatism in our loss picks over the last several years. What we were talking about earlier in the call, we are increasing our current loss pick by a relatively nominal amount to increase IBNR. Overall, I think we are very comfortable. And as I said, we have had a very substantial frequency benefit over the last four to five years which has offset a meaningful amount of the increased severity. So I do not think you should think about it as nibbling away at an issue. I think it is minor amounts of additional prudence in the current accident year to make sure that there is nothing going on going forward that gives us pause or concern.

Great. Congratulations on the quarter guys. Appreciate the.

Thank you.

And our next question will come from Michael Zaremski with BMO. Please go ahead.

Hi. Good morning. It is Dan on for Mike. Maybe just on personal lines, specifically homeowners. Yep. What percentage of your loss ratio is maybe hail or SCS related? And just how much do you think the, you know, the average deductible has gone up throughout the remediation cycle or throughout March and know, just the impact that deductibles have had to your go-forward expectation on the loss ratio. Thanks.

Yeah. I do not have the specific Hale component at our fingertips, but well, Dick is very familiar with the deductible.

Yeah. On the deductible side, we are seeing those go up between three to three and a half to five times depending on the state. So there are state differences as to what we are seeing, but it is significant. So it is having a meaningful effect on, as you have heard us say, some of the frequency of the smaller claims underneath those deductibles.

Yeah. And this is Jack. Just to remind you, we have really imposed the minimum all perils deductible in most states at around $2,500 and then a one or one and a half percent wind and hail deductible in the Midwest, in conjunction with some of the coastal stuff, although we are not really big coastal writer. So when you think of hail and wind losses in severe convective storm territories, we have made major improvement in terms of the self-insurance that is part of our proposition to a customer. So major, major differences. In many cases, a damaged roof would be really half covered by the customer in terms of their retention.

Thanks. That is helpful. And then maybe just similar with that. Know, just pit in the Midwest overall. You know, how strategically is Hanover thinking about PIF there? Is there, like, a target number for, you know, Midwest as a percent it is personalized portfolio, or is it kind of just throwing a loss ratio needle or back into something like that.

Yeah. I think the growth is really one of the levers that we are using to get our property aggregation where we are comfortable. And again, that is on an enterprise basis because we write commercial lines in the Midwest also. So we have what we think is an industry-leading approach to not only measuring our property aggregations and micro concentrations but modeling them relative to the various perils. And so our guardrails that we have imposed are really more about micro concentrations against an earnings volatility measure versus just some magical PIF count. That said, what you are seeing is that we are shrinking PIP mostly through less new business in the Midwest for a, you know, two-year period, to get us to where we want to get in conjunction with pricing terms and conditions, and overall micro concentration reevaluations in certain sub-territories. So we are well on our way to a much more balanced position. It is my hope and expectation as we get to 2026, we are going to be thinking about growth in a more balanced way and less defensive in the Midwest.

Thank you.

And our next question will come from Meyer Shields with KBW. Please go ahead.

Great. Thanks. I had one minor question and one big picture question. But starting with the minor, I guess, we saw premium growth in specialty for professional and executive lines pick up with the highest growth rate we have seen in a while. And I guess the sense we have is that pricing is not getting better for a lot of the lines there. So something that you talked to, what just what drove the growth in the quarter?

So this is Jack. Real quickly, I think one of the things I always remind folks and I do not have to remind you, Meyer, that our specialty book is broad-based, but it also tends to be retail-driven and on the lower end. And so some of the pricing I think that you are hearing about in the marketplace is kind of one octave or two octaves above where we play in terms of some of the pressure. That said, I will let Bryan speak to our growth patterns and kind of our overall thought around balancing pricing and growth.

Yeah. So thanks for the question, Meyer. I would start by saying I think what Jack said is important. Right? Where we play is important to us. We continue to get really nice pricing, 9.5% in the quarter. And I would add, you know, if I look across the portfolio, right, five years of rate in excess of trend. That is positioning us quite well. And so now as we are looking at growth in professional and executive lines as well in as a lot of our key lines, like marine, like healthcare. Right? There we see the margins here. We see the opportunity to be going after this business. And so we are planning for them to grow, and we are investing in them growing. A nice component of that is new business. We had our highest new business year in five years in 2024.

Okay. That is very helpful. And then I apologize. This is going to sound like a softball, but I really want to understand the mechanics of it. We have seen sort of across the industry maybe pressure on agency-intensive compensation because of reserve strengthening for casualty lines. And obviously, that did not happen at Hanover. And in the real world, how does that impact your ability to grow with agents?

So let me just make sure I heard you clearly. You are saying that you are observing pressure on agency comp because of the lost trend environment and since we have not experienced that, how are we thinking about our compensation with agents or how that affects our P&L, what can you help me?

How would it affect their willingness to grow with Hanover? I would assume that it is a matter of time because I do not know.

Yeah. I will say a couple of things on this, and if Bryan or Dick want to add in, we manage our agency relationships I think, more proactively than anybody, I think, that we compete against. We have tremendous local relationships that are regional vice presidents, you know, drive. We have a pretty, you know, focused national approach to the agents that are consolidating and growing. What we are observing is that agency compensation now is one strategic element of our partnership model. Many of those agents, as you know, are looking for a little bit more stability in their compensation. So we are able to model and negotiate something that allows them to get a little bit more predictability but also take some of the volatility out of the payments in aggregate over time a tailwind for us. But we are as well-positioned as we have ever been from an agency incentive perspective and compensation is part of that, but I think some of it has to do with how hard we work to help improve their economics operationally, and more broadly than compensation. So really could not be more pleased with the way this is playing out in really a consolidating time in the business on the agency side.

Yeah. The only thing I would say Meyer, is that if you ask an agent that question, they would say it begins with the customer and what is right for the customer, placing them with the right carrier with the right coverages. But, naturally, the state of the partnership comes into play. I think is what Jack, you know, Jack is getting out there. Their desire to grow with certain markets based on all the elements of the value proposition that they bring to the table for that agent. So it is, you know, the say they look at specifically about the way the mechanics of a profit-sharing plan works to then know, go right to giving a carrier one piece of business or not.

Okay. That is very helpful. Thank you so much.

Thanks, Meyer.

Our next question here will come from Bob Farnam with Janney. Please go ahead.

Hey there. Good morning. A couple of questions. First, for Bryan, I just want to talk about the excess and surplus lines business specifically, just how submission trends are looking there and in 2025, are you looking are you leaning more towards property risks or casualty risks? Or it does not matter.

Yeah. Thank you for the question. So first off, know, our ENS activity, the submission activity, the quote activity, remained very high and growing, increasing throughout 2024. You know, I would call out we do have ESO across our portfolio, so it is not just the traditional property and casualty that you might think of. But it is across our lines, any ENS it is the activity is growing, and so are the books of business. Know, in terms of that mix, what I would share with you is that our portfolio is pretty close to 80/50 in terms of property and casualty. And we like that balance. Right? Given what we are seeing in the casualty environment right now, you know, having that balance of property and casualty the way we have it is attractive to us, and we very sort of diligently manage to not getting overweight on either side. I would also say what is also attractive about that property/casualty mix is our property in E&S, as you would expect, is a little less cat sensitive. So that kind of helps us in the enterprise view of bringing in some property business that does not really materially add to our property aggregations.

Yeah. Actually, one more thing. I would just ask that we keep in mind that our portfolio also always skews towards the middle market lower type of risks our limit profiles are a little bit different than others, and so we like the way that portfolio is building for us.

Great. Okay. Thanks for that color. Second question, is alright, so how do you respond to investors that may just take a look at the P&C sector overall and say, hey, look, rate increases are decelerating. We are kind of past the hard market peak. Maybe the story has played out, you know, if they are kind of getting down and the market how do you respond to that? Because obviously, you have got a lot of things going, but you are trying to have to convince investors to continue to look at the stock.

Yeah. This is Jack. I would tell you, if you look long-term or even mid-range, I think of this as a time in our business where the world is getting increasingly risky and lost trends are stable to up. So I do not see that as being a stage in the market where we are going to have some peak pricing. I think tomorrow's pricing has everything to do with how these loss trends play out. From my perspective, the liability trends are deteriorating within the industry. The weather is continuing to be challenging. So I do not share the view that we are somehow at the top of the cycle and about way to go down. It depends on what sectors you play in. So what I would leave you with is what makes me so excited about heading into 2025 is that we have the most balanced portfolio we have ever had across our four major businesses all now producing, you know, double-digit ROEs and allowing to participate in our growth. That is what gives us resilience and the ability to be opportunistic on the right areas at the right time, and then where appropriate, you know, have some defense. I think that is the recipe for good profitable growth going forward.

On a more tactical level, Bob, I think about our articulating a view where personal lines have additional margin improvement coming in 2025. The core loss ratio is likely to improve on a property improvement. NII has dramatic improvement going forward and even some marginal expense ratio improvement. So Jack did a nice job explaining the whole industry, but I think in terms of our value proposition, there is a lot of opportunity for strong investor returns.

Terrific. Thanks for the answer guys.

Thank you, Bob.

And this concludes our question and answer session. I would like to turn the conference back over to Oksana Lukasheva for any closing remarks.

We appreciate everyone's time today and your support, and looking forward to talking to you next quarter.

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