Good day, and welcome to The Hanover Insurance Group's Second Quarter Earnings Conference Call. My name is Joe, and I'll be your operator for today's call. [Operator Instructions] Please also note that this event is being recorded today. 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, Chief Operating Officer and 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 excellent second quarter results reflect the extraordinary progress we've made as a company. We're proud of our solid execution and consistent discipline. Our team is energized and focused as we step into the next phase of our growth journey at a time that's both exciting and dynamic for our business. At the core of our performance is a deeply experienced and talented team, a team that is fully aligned on our strategy, delivering a specialized and diversified portfolio of products through a select distribution model that targets the best independent agents in the business. What truly sets us apart is not just our product offering. It's the relationships we built and the way we engage with the top agents in our business. Now more than ever, as agents and brokers across the spectrum are consolidating and actively redefining their business models, our differentiated approach is standing out and demonstrating great value. Today, with strong and broad-based earnings, our balanced and resilient portfolio is enabling us to remain agile and to perform very well through changing market conditions. We are intently focused on the dynamic market environment, which is characterized by significant variability across insurance product lines, industry classes and even geography. We are seeing a divergence between various lines and segments with property competition rising, while liability pressures are building and pricing in these lines is starting to firm. Our business outlook remains very positive. With widespread profitability and target level returns across most segments, we're well positioned to capitalize on emerging opportunities and to continue delivering high-quality results going forward. Turning to our second quarter highlights. Operating ROE was 18.7%, a record for the second quarter. Additionally, we delivered operating earnings of $4.35 per diluted share…

Thank you, Jack, and good morning, everyone. We are very pleased with our outstanding results in the second quarter, which reflect continued momentum in our earnings trajectory and an improving top line. Each segment of our business performed very well, further validating the strength and resilience of our diversified portfolio. In Personal Lines, we achieved significant margin improvement, supported by our targeted actions and strong pricing. Our Specialty segment outperformed our expectations, and in Core Commercial, as we anticipated, a few anomalous large property losses we experienced in Q1 subsided and performance in this book remains very strong. In the second quarter, we delivered a combined ratio of 92.5%, an improvement of 6.7 points year-over-year. Excluding catastrophes, our combined ratio of 85.5% improved 3 points compared to last year's second quarter. Our current accident year loss ratio, excluding cat, was 56.1%, improving 2.8 points from prior year quarter, led by strong improvement in personal lines and in specialty. Despite a relatively active quarter for severe convective storms, catastrophe losses of 7 points came in below our second quarter assumption, highlighting the effectiveness of our catastrophe management actions. This was inclusive of 0.4 points of prior year favorable cat development. Our expense ratio of 30.6% was consistent with our expectations for the quarter and was 20 basis points better than a year ago. We continue to maintain a thoughtful approach to expense management, keeping costs aligned with our financial goals. Net investment income increased 16.7% to $105.5 million and remains a significant contributor to our overall financial performance. Second quarter favorable ex-cat prior year reserve development of $18.2 million included favorability across each segment. We are experiencing favorability in property and at the same time, are exercising vigilance in liability lines. We continue to take a prudent and data-driven approach to…

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

I wanted to start with the Specialty segment. I kind of want to ask about the kind of decelerating rate environment there. And at what point does your current book kind of bump up against loss trends there, even though you're still getting phenomenal results. But maybe, Jack, your opening comments are part of the answer to that. In fact, I kind of want to see if that's the case because you're really focused on the E&S and the small retail accounts there. And maybe the answer is over time, that specialty segment starts to see a bit of a mix change than what your current book has. Anyway, that's the question.

Great. Well, thanks for the question, Mike. I'll let Bryan chime in here, but I'm really proud of the fact that over the course of the last decade plus, we've developed a really diversified now high-performing specialty business that really allows us to emerge to the market opportunities, but at the same point, understand where the competition lies and how we adjust to that. So -- but Bryan, you can speak more specifically about how you're managing through the competitive landscape.

Yes, sure. And Mike, a lot of your comments are really consistent with the way we're thinking about this, right? So I would start by saying the pricing is still resilient. It's still consistent with loss trend. And as you mentioned, the ongoing profitability of our portfolio looks very good. But then where you kind of touched on -- that Jack touched on, too, right, that we have increasingly differentiated ourselves in the ability to write that lower middle market and the small business where there is less volatility and the pricing can remain more resilient. And so as we continue to invest there and drive growth into the small part of our portfolio, really making meaningful differentiation for our agents because they're investing in streamlining the placements of that kind of business. We're just really well positioned.

Okay. And I hate to ask on this one because it seems like a small number, but -- the commercial auto charge, it's not a big piece of your business, but we've seen sort of a trend with a number of companies where 1 quarter makes 2 quarters, makes 3 quarters. So may just confidence that that's not going to be the case for you guys that this could be the start of a trend in commercial auto.

Thank you, Mike. We are favorable development in all segments. There's $3 million favorable in core. And as we said, CMP and workers' comp had some favorability in [indiscernible] auto, we added to reserves. All of those items in core commercial were single- digit nonmaterial amounts. For us, -- the commercial auto is a relatively small line. It's about $400 million of premium. We've actually had PIF shrinking over the last several years. And we've got a fairly small risk profile and the increase in reserves is IBNR. In fact, our case reserve levels are down and IBNR is up significantly.

Okay. And last one, a quick small one, Jeff. You mentioned in your comments on personal auto, bodily injury severity. Are you seeing more of those kind of higher type claims happen in this quarter that might suggest some more insights there? Or is there anything kind of anomalous this quarter?

Largely just prudence there. With the frequency benefit that we're seeing, it's just appropriate what we're hearing in the market and worrying about liability and lawyer involvement.

And our next question will come from Mike Zaremski with BMO.

On the catastrophe load guidance for 3Q, I believe I heard a number in the high 6s. Can you provide color if that's mostly -- that's better than, I think, consensus. Is that improved view coming from much more so personal lines or a little commercial lines, too? And is there still a potential trajectory for the cat load to improve in outer years depending on how kind of the homeowners reshaping takes place or that's baking in much of the portfolio reshaping?

Yes, 6.8% is the number that we gave for the third quarter. And again, that's an average annual load for the quarter versus a tail type of measurement. Over the last several years, we've done a lot of work in personal lines, as you know, with deductibles, and that's helped home a lot. And so personal lines will see some improvement, but also commercial lines in terms of thinning the larger PML items of cat risk. As far as future years, we continue to work on it. We're getting a fair bit of rate, and we're optimistic. But I think, Mike, it's a little too early for us to be giving you a view of 2026.

Okay. That's helpful. Pivoting to the Commercial Lines competitive environment, all commercial, not just core commercial. When we saw pricing this quarter, I think pricing held up a lot better than peers. I'm guessing that is mostly because you're a bit underweight property versus peers. I don't know if you have any thoughts on that. But I guess we're seeing signs of increased competition. Would you expect the pricing environment to subside a bit on a go-forward basis at a macro level? Or I guess a lot of investors also asked us about whether Small Commercial can enter a soft market.

Yes, Mike, this is Jack. I'll say a few words here and then let Dick Lavey chime in. I think this is a point at which the real diversification of our portfolio plays to our advantage, right? Not only personal lines to commercial lines, but also within commercial lines across core commercial and specialty. We still have a healthy percentage of our business in property, but we tend to play on the lower side of the spectrum. We're not getting caught up in the layered property or some of the dynamics that are particularly challenging in the middle market space or the higher end of specialty. But I think what we see is we're probably in a transitionary period where while there's some competitive pressure coming on property because the margins are improving so quickly, that the liability pricing is still building. And my guess is that if you're a balanced portfolio like we are, where you have a healthy amount of property and casualty that will create a different level of pricing stability than if you're, for example, an E&S property shop or somebody that's really overweighted in that part of the cycle. Dick, do you want to add on?

I think you said it well. Our resiliency comes from where we play. So the -- not only our account focus, but our small account focus where the pricing pressures probably they don't show up as much as they do in the higher-end property spaces. So -- and you've got puts and takes by various lines. So obviously, the property is coming down a bit, but liability, we certainly view as continuing to harden. Commercial auto definitely needs to continue to harden and drive more rate, work comp may be flattening, coming up at some point. So we believe because of where we play in those dynamics that will continue to show some resiliency. And then on your last point about small commercial softening, we just feel so strongly about our value proposition and what we offer in the market, broad appetite, ease of doing business, local presence, strong distribution strategy, a customer service center that helps drive retention up. All that comes together, and we just feel really optimistic about our Small Commercial sustaining the performance.

Got it. Helpful. And maybe lastly, sneak one last one in on investment income. The trend has been a friend to you all and investors from -- and we just simply use the forward curve. You have a lot more data than us, but it feels like there's some conservatism within the current guide, which we use to project the forward as well. Is there any -- is there any nuances to your investment income guide that would have some level of conservatism in it somehow? Or maybe we just need to go offline and we can kind of understand why we're materially higher.

Yes. Thank you, Mike. It -- we issue our guide at the beginning of the year, and we're comfortable with that. Nobody really knows at the beginning of the year what's going to happen with interest rates. And I think we've been very fortunate that interest rates have remained high. So each and every week, we've got things maturing at low coupons and they get replaced with things that are higher coupons. So we've been performing well. That performance is not anomalous. It's driven by strong cash flows and strong renewal, I should say, reinvestment rates, and I expect that to continue.

Jeff, could you share your reinvestment rate?

It varies day-to-day depending on spreads and rates. But generally, in around the 5% or low 5% level. And that's certainly accretive. It depends on each particular week what's rolling off, which tends to be lower than what the current portfolio yield is. So there's still quite a bit of pickup between the reinvestment level and what's rolling off on a daily, weekly, monthly basis.

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

I was hoping you could touch on a couple of broader issues. One is, could you talk a little bit more about what's going on with the distribution side of your personal lines business? I know you've been shifting around from a regional perspective, but are you in an active position to add a lot of states prospectively? And what are you thinking about with that over time?

Yes, Paul, this is Jack. I'll start this off and see if Dick has something to add. I think overall, we're comfortable with our geographic footprint as it is today. While we have the ability to move into additional states at the right time, we're really not moving swiftly in that direction. What we are doing, though, is further diversifying our business across the PL footprint that we have. And part of that accelerated growth in some of the states where we're less penetrated is coming from adding additional agents on top of just penetrating the ones that we have. So as you might imagine, being the best account writer in the independent agency space attracts a lot of attention. We have an awful lot of agents that are coming to us versus us going to them saying, we'd love to have the Hanover Platinum and Prestige capability at a time when people are struggling, particularly on the home side of the business. So we're leaning into that opportunity, and we're doing that without compromising our select distribution approach. But there's no doubt that adding more agents in the right territories to help us grow and diversify is a deliberate part of our strategy.

And then a very different question. You spent a lot of time in the opening remarks talking about your efforts on technology and segmentation, which all sound great. But as an outsider, we have a devil of the time trying to figure out which company is doing a better job than others. Do you have thoughts on sort of where we should look specifically that we can say, listen, here Hanover has definitely got something that's different and unique than others. I think in the past, you had sort of an interesting way you help brokers evaluate their own businesses. But just curious if there's something that we can point to as outsiders that we can say, listen, this is really where we can see the difference.

Yes. Paul, first of all, it's a very good and important question. And so I'm going to say a couple of things, and I'm going to allow Dick to chime in here because you probably saw that in enhancing Dick's role earlier this year to be our Chief Operating Officer, the main focus beyond running the businesses that he runs today is to help lead and work with our Chief Investment -- or excuse me, Chief Information Officer to pursue targeted tech-driven investments that are geared towards further enhancing our operating models and our operating efficiency. And frankly, we're quite excited about some of the pursuits that we have -- and Dick, along with Will Lee, our Chief Information Officer and the other business leaders are having an even more coordinated effort about where is it an enterprise effort versus a bespoke effort to one part of the organization, whether that be business unit or operating engine. So Dick, do you want to -- maybe I'll share something...

I'll add a few points and try to get to the heart of your question, Paul. It's a very good one. And I think it is hard for an outsider to see the impact or benefits of it, but I would just challenge you to keep asking questions of carriers as where they're placing dollars and what benefits they're seeing from it. So I could geek out on this topic -- and we could spend some more time on it. But we absolutely are targeting our efforts on our transformation work, thinking about it as a growth enabler really to help us scale the company. So it's about scalability. And so that means getting into your operating models and your end-to-end kind of process improvements across your domains, underwriting, operations, claims, but then also in a horizontal domain, like you heard some of Jack's commentary about submission, triage, call synthesis. So when those things come online, you will see impact and benefit. So it's going to take some time, but we are thrilled. And I would say a differentiator about us is that our size is our friend in this space because I'm able to get all the business leaders and the functional leaders aligned on those priorities. Larger companies have a heck of a time kind of gaining that alignment. So that's going to be an advantage. Back to where you started the question, yes, I would tell you, our ease of doing business, our TAP Sales platforms, they're as good as the best in the industry, hard to differentiate perhaps at the top of the stack. But our agency insight tools and capabilities are bar none the best in the industry. And that leads to our consolidation capabilities, which, as you know, is becoming more and more important now in the flow businesses as agents buy more agents and attempt to consolidate the markets that they use. So that I would put at the top of the list. So we will try to bring more to -- as we get further along in our development. But I think one of the reasons why I highlighted it this particular quarter is because we're really starting to see movement and some progress that I think will demonstrate that value. And in future calls, we'll try to be even more specific about what that looks like.

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

I just had a couple of quick modeling questions. First, did the reserve adjustment in commercial auto translate into any changes to the accident year '25 loss pick for that line?

We did increase our loss pick in commercial auto in core commercial in the current year. So while overall, it was a sequential meaningful decline by a few points, it was probably 80 basis points or so higher than year-over-year, but largely just prudence to reflect what we were doing in the prior years.

Okay. So that's embedded in the quarterly loss ratio?

Correct.

And these are 2 separate points. But when we look at, I guess, reinsurance pricing on the one hand and the expected inflection in homeowners’ policy count going forward, is there any change in the underlying loss or underlying combined ratio trajectory from either of those 2 factors?

Reinsurance itself, as we spoke about during our prepared remarks, the cost of reinsurance, while it goes up in total, on a risk-adjusted basis, it comes down. So it should be on the margin, helpful to the overall economics of the homeowner’s line.

Okay. And then is there something analogous to the personal auto new business penalty when you start growing homeowners?

Yes. This is Jack. I mean, listen, we -- generally, new business penalty in our industry comes from 2 basic areas. You don't know that business as well as you do your renewal book and you tend to price it more aggressively to get it and then mature the pricing over time. We're at a very unique time in the cycles where the pricing on new business and renewals is remarkably similar and particularly in home, where we're being very disciplined and the competition is not terribly aggressive. So I would say in the short term, we're at a very unique time where we're very comfortable with home pricing and frankly, the quality of the business that we're bringing through the door, and that gives me great confidence.

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

Thank you, everybody, for your participation today, and we're 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.