Q4 2020 Hanover Insurance Group Inc Earnings Call
[music].
Good day and welcome to the Hanover Insurance Group fourth quarter earnings conference call for.
My name is Sarah and I'll be your operator for today's call.
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The show that's 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. The prepared remarks from Jack Roche, our President and Chief Executive Officer, and Jeff Farber, Our Chief Financial Officer available to answer your questions I'll share our prepared remarks, Bryan Salvatore President of.
Specialty lines and the gravy President of agency markets 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 Dot Hanover Dot com after the present.
Patients, we will answer the questions in the Q&A session of prepared remarks and responses to your questions today other than statements of historical fact include forward looking statements regarding among other things and our outlook and guidance for 'twenty and 'twenty, one the ongoing impacts of Covid pandemic economic conditions.
The impact of seasonality and all the factors impacting our company performance. There are certain factors that could cause actual results to differ materially from those anticipated. We caution you with respect to rely and some forward looking statements and in this respect and refer you to the forward looking statements section and our press release the press.
And at decent deck, and our filings with the SEC, which includes supplemental risk factors related to the COVID-19 pandemic and general economic conditions. Today's discussion will also reference certain non-GAAP financial measures such as operating income and accident share loss and combined ratios excluding catastrophes.
And while others and reconciliation of these non-GAAP financial measures to the closest GAAP measures and the historical basis can be found in the press release. The slide presentation. One of 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 Roxanne and good morning, everyone and thank you for joining our call.
I will begin with some commentary on our full year financial highlights and the context of the business and economic environment.
I will then provide a strategic view of our segments and our 2020 accomplishments.
Jeff will review, our financial results for the quarter and the year as well as our 2021 outlook and then we'll be happy to open it up for questions.
We reported outstanding results and the quarter and for the year delivering strong operating earnings and significant value for our shareholders.
And the face of unprecedented challenges, our 4300 employees and our company rose to the occasion and 2020.
We quickly and effectively adapt to the rapidly changing market conditions and customer expectations, while flexing, our agile operating model and driving innovation across our organization and the insurance value chain.
And the year defined by the coronavirus pandemic.
Social unrest economic disruption and challenging weather, we relied on and even further strengthened our unique collaborative and nimble culture and.
And made good on our promises to our agents and customers and communities.
And we continued to create value for our shareholders generating exceptional profitability and high quality premium growth. Despite the prevailing economic conditions ultimately thriving and ways. We believe position our company for even greater success in 2021 and the years ahead.
For the year, we reported operating earnings per share of $9 32.
The 14% from 2019 and a strong operating return on equity of 13, 1% in line with our long term target.
Our performance on a year of highlighted the overall effectiveness of our strategy the resiliency of our business and.
And our ability to drive sustainable broad based profitability.
And in particular I want to share of the following financial observations.
First we managed well in spite of the changing market conditions, continuing to enhance our operating model and invest and our capabilities positioning the company deliver strong profitable growth going forward.
Bite the many economic challenges related to widespread business limitations and restrictions we delivered.
Net written premiums of $4 6 billion for the year up from 2019.
After hitting the low mark and the second quarter, we delivered improved growth through the remainder of the year.
We expect exposure declines in 2020 will bounce back in 2021 as the economy continues to recover and distribution of the COVID-19 vaccines continues to ramp up.
Our resiliency and 2020 highlights the advocacy of our unique distribution strategy the <unk>.
Strength and commitment of our agent partnerships and our ability to provide a diversified portfolio of products and services to our customers and agents.
We are also very encouraged by improvements and the leading growth indicators ranging from commercial lines Pip growth to increase consolidation activity with our top agents and a gradual pickup and personal lines retention.
The momentum, we have reestablished and our businesses position us well to accelerate growth and the economy continues to strengthen throughout 2021.
Second we delivered strong underwriting results and all in combined ratio of 94, 4% for the year and 88, 1% excluding catastrophes.
And our robust underwriting performance in 2021 beyond the temporary frequency benefits, we realized and personal auto.
In fact, we delivered returns at or above target and all three major business units, while continuing to build our earnings consistency.
The 2020 was and active catastrophe year for the P&C industry overall, the impact of cash on our business was considerably more modest.
Our strong performance relative to the industry as a reflection of the many prudent underwriting actions, we have taken over several years as well as our continuing discipline with respect of property aggregation.
Our ability to outgrow the market going forward require as we consistently generate top quartile returns.
To that and once again, we generated excellent returns in 2020 neighboring us to take a more aggressive and opportunistic approach to growth and 2021 and beyond as the market provides opportunities.
Third we continue to be prudent and responsible stewards of our shareholders' capital.
2020 marked the 15th consecutive year, and which the Hanover increased its ordinary dividend.
In addition, during the year, we repurchased approximately two 2 million shares of our company's common stock.
<unk> $212 million and underscoring the confidence, we have and our company's financial earnings and growth prospects.
2020 was a very strong year for us and we begin 2021, feeling optimistic and confident.
We are well capitalized with a very strong balance sheet of proven business strategy unique and targeted distribution of approach and responsive and innovative products and services. We are intently focused on delivering value and outperforming the industry over the long term.
Turning now to our key strategic accomplishments for the year.
We successfully advanced our strategic imperatives and made important progress toward our vision to be the Premier P&C franchise, and the independent agency channel of franchise that delivers relevant and innovative risk management solutions, while helping our agents transform the way customers experience and value of insurance.
Our personal lines team delivered exceptionally strong earnings during the year continuing to effectively manage its book of business finding the right balance between rate and retention on our renewal book and.
And maintaining our commitment to sustainable profitable growth.
As an account writer, we take a disciplined and long term approach to renewal price across our home and auto policy, so as not to cause access of disruption for customers and agents.
That said, we took pricing actions and the second half of 2022 protect our profitable renewable and well.
We'll continue to do so as market conditions warrant.
Those actions started to have a positive impact and the fourth quarter and in January and we should see retention improving throughout the year essentially getting back to historical levels.
With respect to aggressive new business price competition, we believe some competitors and the personal lines auto sector are being shortsighted.
Pandemic related frequency benefits are temporary in nature, and we want to be responsive and our pricing without setting the stage for significant increases and the not too distant future.
And as auto frequency of returns and near normal levels, we want and be positioned for growth and non have to drive outsized increases and recently acquired customers.
Additionally, we remain mindful of increased severity and the current environment due to higher intensity incidents and the re emergence of social inflation as the nation transitions out of the pandemic.
Our recent new business indicators are beginning to suggest the return to positive growth momentum.
We signed a record number of consolidation of agreements with our partners and 2020, which we expect will provide a new business tailwind and 2021.
During 2020, we expanded our first lines product offerings with the introduction of home business solutions of <unk>.
And of business insurance products for homeowners, who manage home based businesses.
In addition, we gained further momentum with our Hanover prestige offering which caters to customers with more complex insurance needs and we added more than 7000, new Hanover prestige customer accounts during the year and exceeded our full year 2020, new business target with new business growth nearly 30% higher than in the prior year.
We also expanded our personal lines footprint to 20 states in 2020, beginning to write business and Maryland on the heels of adding Vermont and Pennsylvania over the last couple of years.
We start 2021 with enormous optimism and belief that our agency relationships consolidation commitments customer centricity and expanded footprint will enable us to reestablish our pre pandemic growth momentum and personal lines.
We are also very pleased with the performance of our commercial businesses in 2020.
Our commercial lines team successfully navigated and especially difficult economic environment, while continuing to focus on growth and our most profitable segments.
Our diversified industry mix and core commercial enabled us to deliver solid growth and the most vibrant and growing industries, such as technology life Sciences light manufacturing financial services and educational institutions, while also enabling us to continue to manage profitability and select property lines.
And specialty we are achieving double digit growth and management liability and the Hanover specialty property, which are among our most profitable businesses.
We continued to expand our products and capabilities strengthening our offerings for financial institutions retail E&S and cyber customers.
We also advanced our total Hanover strategy, leveraging our specialized capabilities across our commercial lines customer base.
Commercial lines net written premiums were up both for the year in the quarter as we capitalize on the hardening market to obtain rate with fourth quarter core commercial rate increases of six 4% and specialty increases of eight 9% up sequentially from five 7% and seven 2%.
And the third quarter, respectively at.
At the same time, we are seeing a tightening of new business versus renewal pricing, which indicates further market discipline and solid execution.
We believe there is more opportunity ahead to achieve additional rate increases with the continuation of many market catalysts, including low interest rates ongoing pressure and larger liability accounts size segments and social inflation.
Across our commercial book, we are seeing rate meaningfully exceed loss trends policy exposures and endorsements coming back and our policy counts continuing to grow.
These and other factors support our belief that our growth will accelerate throughout the year as the economy continues to recover and through continued market share gains with our agent partners.
Our broad industry offering and specialty expertise combined with deep business insights and agency partnerships positions us to drive growth and and improving economic climate and and their firm commercial rate environment and 2021.
One of the most profound takeaways for us coming out of 2020 was how quickly things can change.
More than ever before our company flex, the agility and innovative spirit, and giving us even more confidence and our ability to continue to do so going forward.
We recognized as never before the opportunity that exists and becoming even more customer centric.
Identifying ways to be more efficient and easier to work with and all aspects of customer and agency interaction, including policy acquisition, quoting and underwriting customer service and claims settlement.
As an organization, we were well prepared to meet the demands of 2020, having invested significantly over the past several years to enhance our major underwriting and quoting platforms.
And in fact, almost every area of our technology stack had been upgraded or replaced over the last five years to enable our business solutions with a more open environment.
Our personal lines tap sales platform now has been deployed and all of our personal lines markets and we have started the rollout of our new small commercial underwriting and agent interface platform. This new commercial lines tap sales platform will be deployed across the country by the end of 2021.
Additionally, prior upgrades to our major claims and billing systems allowed us to move to a virtual environment overnight, providing our agent partners and customers with a high level of service.
We are also bringing our customer and agent connectivity to the forefront of our digital roadmap.
Through multiple agency management systems, and insure Tech solutions, we have and are committed to further enhance the overall effectiveness of data sharing between agents and customers and underwriters.
And 2020, we expanded customer online inquiry and self service to commercial lines, while also driving efficiencies with E billing and E delivery and personal lines.
Innovation also is playing a key role and claims as we increasingly use digitization and technology platforms to virtually complete auto estimates and re inspections using Hanover staff.
The same is true and the property side of the business Global 360, our downloadable self service application with virtual interactive inspection capabilities now and processes more than half of the losses that previously would have been adjusted and person.
These digital assets make it easier to do business with us today and they also improve our ability to identify loss trends enhance operational efficiency and allow us to fully address the needs and preferences of our customers and agents holistically.
The ability to innovate and an agile and thoughtful way is becoming one of the most crucial competitive advantages for insurance companies and we believe we have what it takes to continue to innovate efficiently. We're.
And we're proud of the accomplishments we've made to date, but as our growth mindset and innovative culture that will enable us to embrace the opportunities ahead.
And the year defined by rapid change economic and social strain and new customer expectations, we elevated our focus and and inclusion and diversity and are committed to making ours and even more inclusive and diverse organization.
During the year, we made important strides, including the further development of our employee led business resource groups continued unconscious bias and inclusive leadership training and the publication of our inaugural inclusion and diversity of report, which is available on our website.
These important initiatives had been central to our business success over the last few years and will enable us to prosper well into the future.
In parallel we are advancing our sustainability goals by further incorporating environmental social and governance factors as we manage our company's investment portfolio addressing environmental risks and implementing practices that promote and encourage environmentally responsible behavior.
These steps are essential and helping us continue to attract and retain outstanding talent and sustain our competitive advantage and maintain top quartile performance and a rapidly changing world.
I am extremely proud of our 2020 performance, which reflects the inherent strength of our company the effectiveness of our strategy and the versatility of our business model.
We begin 2021, and a position of strength, both operationally and financially.
And look to the year ahead with great optimism.
We have of proven and unique business strategy deep partnerships with the best independent agents and our industry and the talent and drive needed to deliver superior value for all of our stakeholders.
With that I will now turn the call over to Jeff for a review of our financials and 2021 guidance Jeff.
Thank you Jack good morning, everyone.
For the quarter, we reported net income of $164 6 million or for 43 per diluted share compared with $109 8 million or $2 76 per diluted share in 2019.
After tax operating income for the quarter was $112 million or three O two per diluted share compared with $80 2 million, where two of one per diluted share and the prior year quarter.
For the year net income was $358 7 million or 942 per diluted share compared with for $25 1 million were 10 and 46 per diluted share in 2019.
Operating income for the year was $355 million or 932 per diluted share compared with $331 6 million or <unk> 16 per diluted share and 2019.
Our fourth quarter earnings reflected a combined ratio of 92, 4% and improvement from 96, 2% in the fourth quarter of 2019 due to prior underwriting and rate actions and favorable loss frequency and favorable prior year development.
Our combined ratio for the full year improved to 94, 4% from 95, 6% and 2019 again, reflecting mix improvements and favorable loss frequency, partially offset by higher cats.
Fourth quarter, 2020, catastrophes totaled $35 1 million or 3% of earned premium which was below our catastrophe load assumption of three 6%.
Full year catastrophes totaled $286 7 million or six 3% of earned premiums.
And while full year cat losses were above our expectations due to a particularly active Q2 and Q3, our overall cat loss experience compared favorably with the industry as a whole.
In fact more than half of our cash above our expectation stem from losses associated with social unrest.
This underscores the effectiveness of our prior aggregation management initiatives.
Our diversified business mix and prudent risk management practices should continue to serve us well over the long term.
That being said and considering changes in weather patterns in certain geographies and the U S. We believe it is prudent to increase our catastrophe load for 2021 from four 6% to four 9%.
Even though our P M LS and 10 year average has remained relatively stable. We believe it is thoughtful to assume higher weather related catastrophe losses going forward, which should appropriately impact of pricing targets and return expectations in cat prone lines.
Excluding catastrophes, we delivered a full year combined ratio of 88, 1% well below our original guidance of 91% to 92%.
Our full year 2020 expense ratio of 31, 6% was flat with 2019.
Short of our original expectations due to higher variable the agent and employee compensation costs from better than expected profit.
We expect to achieve of 30 basis point expense ratio improvement for full year, 2021, which puts us right on track with our long term expense ratio of savings target of 20 basis points per year.
We executed well on our original cost management and efficiency targets for 2020.
We also achieved additional savings to address the lower premiums earned during the year due to lack of growth and premium returns.
For the most part these savings are permanent in nature, giving us confidence and our expected 31, 3% expense ratio and 2021.
For the year, we recorded favorable prior year reserve development of $15 5 million or 0.3 points of the combined ratio.
This was driven primarily by continued favorability in workers' comp, partially offset by pressure and auto bodily injury and commercial multi peril.
Our conservative approach to reserves reinforces our commitment to react quickly the trends in order to mitigate the potential for issues down the road.
From that standpoint, we concluded 2020 with the very strong balance sheet.
This is a direct result of our reserving consistency and discipline.
Several years of prudent underwriting and pricing actions and certain specialty lines and in commercial auto in addition to other initiatives to enhance profitability.
We continue to prudently hold COVID-19 reserves, although loss activity has been limited.
Our mix of business, specifically, not writing travel trade credit or event cancellations and our use of ISO based forms has served us well during the pandemic.
Turning to underwriting results and each of our businesses.
With the full year now behind US I will focus my comments on our full year 2020 results, but will mentioned quarterly movements where relevant.
Personal lines reported of full year combined ratio, excluding catastrophes of 84% down from 91, 6% and 2019.
This improvement was driven primarily by personal auto.
Our personal auto ex cat accident year loss ratio was 61, 3% and 2020 and improvement of 10.3 points from the prior year as a result of the claims frequency benefit associated with the pandemic.
While frequency has declined across our footprint, we benefited less in the second half of the year than in the second quarter as stay at home orders and business restrictions eased to varying degrees.
Going forward, we expect frequency will gradually returned to historical norms and anticipate ending 2021 with fourth quarter frequency relatively in line with levels before the pandemic.
Overall, we expect our personal lines loss ratio in 2021 will of course increase from 2020, but should remain a little lower than 2019, primarily due to the timing of remaining loss frequency benefits diminishing throughout the year.
And in homeowners, our 2020 ex cat current accident year loss ratio was 49, 1% up one two points from 2019 due to some elevated fire and property losses.
We continue to take strong rate of 5% and homeowners not including the inflation adjustment and the year and we expect profitability in 2021 to be relatively in line with ex cat results in 2020.
Personal lines net premiums written declined <unk>, 5% for the full year, including the impact of the premium refunds issued and the second quarter.
We believe our customer centric strategy and high level of engagement with agents will continue to drive growth once the benefit of frequency subsides.
During the year, we appointed 170, new agents and achieved record consolidation signings.
Turning to commercial lines, our full year combined ratio, excluding catastrophes improved 1.2 points to 99%, primarily reflecting a decrease and our current accident year loss ratio due to meaningful underlying improvement and other commercial lines and temporary frequency benefits and commercial auto.
No.
The loss ratio and our commercial auto book improved five eight points to 63, 8%.
We have generally only reacted to the favorable results and the auto property coverages, while maintaining our prudent approach to liability reserving and pricing.
Our commercial multi peril loss ratio increased one five points of 57, 7% due to some elevated large property loss activity and the first and third quarters of 2020.
And to a lesser extent and the fourth quarter.
A review of the portfolio of does not suggest any major systemic concerns. However, we continue to actively monitor our business mix and take rate where appropriate.
Our workers comp loss ratio remained essentially flat at 69%.
While underlying loss trends remain favorable we are maintaining our conservative approach to reserves given the current rate environment and uncertainty about future claims.
Other commercial lines loss ratio improved 2.9 points to 53, 6%, which underscores the success of prior year profit improvement actions in our specialty property and programs businesses are.
Our specialty portfolio is now delivering above target returns and growing the fastest.
Commercial lines net premiums written grew 1% and 2020, driven by solid momentum and our specialty lines, where rates remained on a strong upward trajectory with sequential increases each quarter of the year.
New business submissions continued their steady upward trend off of their March lows.
Core commercial retention remains at historical highs of 86, 2%, while cancellation endorsement activity moderated.
Small commercial submissions and consolidations are trending positively and we continue to achieve pricing above long term loss trends Primo.
Premium growth and core commercial ticked slightly lower and the fourth quarter compared to the third quarter in part due to exceptionally robust new business performance in the fourth quarter of 2019.
Looking ahead, we expect our underlying commercial lines loss trends to remain relatively stable.
Similar to personal auto we anticipate commercial auto frequency will return to historical norms by the end of 2021.
While overall rate will likely exceed loss trend, we remain very prudent with our liability selections given the continued risk of social inflation and uncertainty around workers' comp profitability in light of the many years of rate decline and that line.
We expect the overall commercial lines loss ratio in 2021 to be fairly consistent with 2020.
We believe growth will continue to accelerate in this business going forward aided by strong rate trends and continued economic recovery.
Turning to our investment performance, we generated net investment income of $70 2 million for the fourth quarter and approximately $265 million for the year the.
This was ahead of our mid year guidance for 2020, and reflective of better than expected investment partnership performance.
<unk> yields continued to pressure our portfolio and we expect that trend to continue into 2021.
Cash and invested assets at year end were 9 billion with fixed income securities and cash representing 85 per cent of the total.
Our fixed maturity investment portfolio has a duration of four eight years and is 96% investment grade.
We are of high quality, well ladder and diversified portfolio with the weighted average rating of a plus.
Moving on to equity and capital position.
We thoughtfully managed our capital throughout 2020, even with the broader market uncertainty and economic volatility.
In October we executed $100 million accelerated share repurchase agreement, which closed last week underlining our commitment to be responsible and prudent managers of capital.
Combined with activity earlier in the year, we returned approximately $212 million to shareholders in 2020 through share repurchases.
Including the final delivery of all shares under the ASR agreement, we repurchased two 2 million shares or 6% of the outstanding shares since the beginning of 2020.
Underscoring the confidence that we have and our strategy and growth prospects, we paid $99 5 million and dividends to our shareholders throughout the year and increased our recurring dividend payment in December 2020 by seven 7%.
With broad based profitability expense discipline, and and effective capital allocation strategy. We continue to target of return on equity of 13% or higher over the longer term.
Our book value per share of 80, 796 increased four 3% during the quarter and 15, 8% from December 31, 2019, driven by operating income and both realized and unrealized gains and our investment portfolio, partially offset by the payment of our regular.
Quarterly dividends.
Overall, I am very pleased with our full year performance, which reflects the clear execution of our strategic goals financial discipline and commitment to delivering top quartile returns.
I'm incredibly confident and the trajectory of our company and our ability to continue building on the strong momentum we have established.
Before opening the line for questions I will share our guidance for 2021.
We expect overall net written premium growth in the mid single digits, driven by growth and our most profitable businesses.
We anticipate acceleration and premium growth throughout the year. However, first quarter 2021, maybe a little lower than full year impacted by inherent difficulties with the direct comparison to the pre pandemic first quarter of 2020, and the timing of the economic recovery while.
While the second quarter comparison will benefit from customer premium returns and the second quarter of 2020.
We expect net investment income to remain flat compared to 2020 as the impact of lower new money yields will be offset by higher operational cash flows.
Our expense ratio should decrease by approximately 30 basis points in 2021 to 31, 3%.
The combined ratio, excluding catastrophes should be and the range of 90% to 91%.
We've set our cat load for the year at 4.9% as I mentioned earlier.
And we expect and effective tax rate to approximate the statutory rate which is 21%.
Our first quarter cat load is expected to be for 7% slightly below our full year ratio.
With that we'll now open the line for questions operator.
Thank you we will now begin the question and answer session.
Last quick question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
So let's draw your question, Please press star and team.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Matt <unk> with JMP Securities. Please go ahead.
Hey, Thanks, good morning.
Jack.
Jack and Jeff I caught and both of your comments you both mentioned record consolidation agreements with agents and in 2020 I was hoping you could just expand there a little bit and really what are your thoughts on kind of environmentally what was driving that I mean, obviously some of it had to be Hanover specific but.
Do you think certain things about the the pandemic brought that upon was it where the competitive environment forces that brought that upon just curious kind of what you think drove that and then also if you are continuing to theater and you think that will continue as we move forward.
Yeah. Thanks, Matt This is Jack.
Listen first and foremost.
We have worked hard over the last.
Several years building of the strategy.
The accounts and around specialized businesses, where agents want to keep and their partnerships with us at.
At the same time as you know the consolidation on the distribution side of the business as kind of aggregated and consolidated more and more.
Personal lines and small commercial.
Business and such.
Some of the mid size and larger companies across the agents across the land. So it's just natural debt at some point in time.
These organization and start thinking about.
Particularly personal lines and small commercial strategically, but also from an operational perspective, and so we think of that really the last 18 months in particular, there has been a real.
Pick up and momentum and the strategic dialogue with agents around the flow businesses, but also their organization and they are.
The desire to bring more and more of their their best business together into an account environment and with the carriers that they think will be able to help them service that business and frankly present, the level of pricing consistency and that allowed that business to stay put and be serviced over time. So.
We were very pleased and do we think the pandemic added to that momentum.
The Navy is people.
Got the legs underneath on the start to the.
About that business and turn.
As of how the how.
Highly focused debt with fewer markets, but I think I think the momentum was which was well ahead of the pandemic.
Great. That's really helpful. And then just one other one of if I can.
You also mentioned.
Policy exposures and the endorsement coming back and I was hoping you might be able to give us a bit more color there or are there particular.
Areas of the economy, youre seeing that more than others or are there other areas that still struggled a little bit or are there particular lines.
All lines of business, otherwise youre seeing that more and then all of the others.
Yes, I'll, let <unk>.
Nick and Brian and onto these comments and the career.
Your line space I believe.
We were one of the most.
Active carriers in terms of trying to address.
Midterm endorsement and exposure changes and that renewals for.
Customers that frankly, new they were not going to have payrolls and sales at the levels of day and originally planned for and our view was a that would allow them to address and cash flow needs, but also allow us to not go into 2021 with the headwind on return of premium audits and having to adjust for renewal base.
So we'll see how that plays out over time, but what you saw and the second quarter as we had a low watermark on in terms of.
The production.
Some degree was self inflicted by us being proactive and trying to be responsive to those customers. So.
If you want it and that maybe a little color exactly right and the small commercial segment, we saw and we're seeing those.
Endorsements coming turning positive and the second half of the year middle market is slower and slower to see that turn although we did see it turn positive and December to your question of where.
And this won't surprise you right we're seeing.
A lot of activity in the technology sectors professional services human services contractors.
And the laggards not surprisingly our restaurants hospitality so.
Nothing all that surprising, but we do see some nice momentum starting to come through.
And this is Jeff I would just add that hospitality and restaurants are of roughly 3% of the portfolio. So it's a pretty tiny.
Please.
Well great. Thank you very much for the answers and best of luck and 21, Thanks, Matt and thank you Matt.
Yeah.
Our next question comes from Mike Zaremski with Credit Suisse. Please go ahead.
Hey, good morning.
Maybe.
Sticking.
Starting with the outlook.
You can maybe kind of offer.
Some color on.
Our U, which which which lines of business, maybe personal lines versus commercial lines and you you'll feel the.
Better or worse about or I don't know if that's the if that's something you could provide but it feels like and you can give us some color on whether you think kind of personal lines profitability tapers off a bit.
And in commercial lines is kind of where you feel.
The the comments about rate meaningfully exceeding loss trend is that more of a kind of a commercial lines focus the comments and any color would be great.
Yes. Thanks, Mike This is Jack again.
Say, a few words about that and then ask my colleagues the chime in.
<unk>.
And a lot of ways I would start with the fact that we're really pleased that we have a broad based profitability across our portfolio.
But we do have different market conditions on the personal line side and the commercial line side, which is obvious.
And all.
I do think that as we look into 2021 Theres a number of dynamics. Obviously, we think that we will see continued loss frequency benefits.
And the first half of.
And.
'twenty one and.
Predominantly and personal lines and there is a bit of heightened competition.
We believe that.
Does that range, we will see people adjust the dials, it's hard to price new business.
So competitively for a prolonged period of time without getting way behind more normal loss trends. So the history repeats itself, we will see those down and adjusted by our competitors and we're trying to.
The thoughtful about how we can be positioned when that comes back even if the loss frequency doesn't come back all the way to what it was how do we manage those dials. So that we maintain our good profitability, but also position ourselves for to return back to the growth levels that we do.
And to enjoy it.
To your point and commercial lines, it's hard to deny that the combination of of real firm market.
Our best profitability, we've had and some time.
And our really our focus with our agents. During this time, we think the combination of those present, a real opportunity for us too.
At least get our growth back to what it was pre pandemic, possibly better and I would say maybe.
And to.
Brian first because in specialty and you've seen a range trajectory has come up pretty significantly.
And the ability has improved dramatically over the last few years and are really our approach with agents, including the total Hanover and approach that we're using is really coming into its own.
Yeah sure Jack Thanks.
And I'll, just add onto that and I'll point back to the the comments you made earlier about the increased rate that we've been able to get quarter over quarter right.
Ending the year and eight 9% and the fourth quarter, following seven 2% and the third quarter and that continued true.
The December and into January as the we were able to achieve growth in Q3 and in Q4, and we feel good about what we're seeing in January as well. So I think you know that.
That feels good and when I look at it in terms of just to help the profitability of all of our book the sort of the way we positioned ourselves to grow our most profitable lines.
And frankly, if you think about the what's happened in the middle market space and the small commercial space. This week.
Have gone up right.
Where we focus and.
And so we're able to now continue to drive that rate and the expand our ability to capture more of that and middle market business.
And just more favorable due to the price increases that does as Jack said and allow us to better penetrate our agents and <unk>.
Our total Hanover approach, so I feel pretty enthusiastic about specialties growth opportunity and our profitability.
Okay great.
It's very helpful and comprehensive I guess my last question and so shifting to the capital management a bit.
The.
The stock.
The valuation has improved a bit.
Maybe you can kind of.
Give us some clues about how you think about payback period and in terms of buying back the stock.
And I guess, if we think about profitability dynamics for next year.
And it looks like profit levels are are trending at very healthy levels and growth.
We'll kind of <unk>.
Mid single digits, it's healthy but.
Maybe should we be thinking of buybacks can can be of material lever again, if valuation stay at current levels.
So thanks, Mike This is Jeff.
We left the third quarter and talked about it clearly we had added some capital through submission of debt that we issued and that created meaningful additional capital. In addition to what we already had we put a plan together at mid single digits and Youre right with the earnings where they are we create of.
A lot of capital in a year, we feel very comfortable on a payback period or valuation perspective, where the stock sits today. So.
We'd love to grow.
More rapidly and use more of that capital, but I suspect that stock buybacks will end up being.
Portion of our capital management throughout the year.
Okay. Thank you very much.
Thanks, Mike.
Our next question comes from Paul Newsome with Piper Sandler. Please go ahead.
Good morning.
And if the other day 2020 was once the pandemic of net negative or and the positives on the underwriting performance for your workers comp business.
The obvious offsets.
Ultimately shake out for the year.
Okay, Yes, I believe you said workers' comp I, just want to make sure I heard that correctly, Paul Yes, Yep workers.
Okay.
Listen I think.
And as we've talked about before.
<unk> been around the workers' comp business for three and a half decades I continue to be amazed at the.
The loss trend and trends and not not only benign, but the negative loss trends over a couple of the years and the last half of dozen. So this year is a little bit of 2020 was.
And we're still trying to understand the underlying loss trend.
And how that will come back when.
And when the economy gets more fully intact.
I think the answer to your question, though net net it was still a very strong year for us we're trying to be very thoughtful about our accident year picks.
We continue to generate favorable prior year development, just based on those amazingly low.
Low loss trends in the past debt were below our original picks.
The thing that we know is that as the economy picks up you have to be mindful of people that are coming back to work environment or people getting retrain and so you will see us continue to be thoughtful about our picks.
And.
But I'll kind of and with my final thought is around and I still believe the workers' comp trends into the future of.
Our a and eventual tailwind for our growth that we believe the profitability of our book and the relatively low penetration level, we have particularly in middle market will allow us to become an even more fulsome accounts.
Account writer and more robust workers' comp underwriter.
And that pendulum swings back and you start to see rates move back into the the.
Business, and we did see and 2020.
Lower discretionary credit on our book and.
And some improvement and the underlying state rates.
That give me that encourage me about how we can proceed and 2021 just to amplify those remarks of little bit. If you were to look at the P&L from workers comp in terms of either prior year development or the current accident year loss ratio you'd see it is largely the same and 2020 as it were.
Was in 2019, however, the frequency underlying that is down very substantially and as we said and our prepared remarks, we took the opportunity to be really conservative with 2020 loss picks because of the uncertainty around rate and then also as Jack mentioned the uncertainty about what losses are going to be like.
Over time, but I suspect once the uncertainty resolves itself, we will look back at 2020 fully developed and find that it was quite of a.
And a profitable year for the firm.
Thank you.
And I want to make sure I've got the.
Simple math right.
With respect to your guidance.
On premiums next year.
Youre getting mid single digit rate.
You were flat this year.
Hopefully the.
And on the.
And the effects of the pandemic go away and.
And my right to say the essentially what youre thinking about next year and sort.
And of the stable price environment, and some kind of rate increases but.
Essentially the exposure declines going away next year and the.
Headwind, becoming sort of calm ones I guess.
And at the right way to think about it.
So I think over the course of the year, you'll see some changes so the exposure will start springing back and then we'll continue.
And with more rapidity of as you get later in the year.
We expect rate to continue and be strong, particularly in the commercial lines and even more so in the specialty businesses.
And where.
The commercial retention should maintain itself and we're optimistic that personal lines retention will actually increase over the course of the year.
Thanks, a lot I appreciate it thank you Paul.
And again, if you'd like to ask a question. Please press Star then one.
Our next question comes from Meyer Shields of <unk>.
<unk> got the old. Please go ahead.
Great. Thanks, Good morning, all good morning there.
Jeff You mentioned and I think in your comments, you expect frequency for personal and commercial auto to.
And get back towards the prepaid debt for to get back to pre pandemic levels by the fourth quarter I know that the thesis bouncing out a round out the bouncing around out there.
Expecting more people to work from home and therefore lower frequency than before the pandemic was hoping you could talk about your flexibility to quickly adjust rates if that lower frequency scenario plays out.
I think Dick is probably best positioned to.
To cover the flexibility and Ryan yes, absolutely.
Some of our we are the.
The investments, we've made and our technology.
And really enable us to be quite agile with this on this and this notion.
And we're watching the frequency question intensely right.
We built the towering strength of in our organization and claims.
And the claims analytics function, where we can watch the trend real time, what kinds of claims are coming through how are they presenting themselves. What's the duration, so with claims and actuarial and business sort of watching that and then of course, making determination of how to act and we can act very quickly.
And we've instituted the ability to adjust caps inflation guards and those don't require finally right. So we're not waiting for state filings to come through.
And on the new business side should.
Should we decide to do that we've made some tweaks.
The adjustments to hearing are very easy for us to make so it's a matter of putting in place and you start to see the effects of <unk> 60 days later.
Okay.
For a second question totally unrelated, but when we look at business coming through for.
And the various consolidations agreements does that business typically carry a different <unk>.
And ratio than other new business that you would be generating.
This is Jack Mayer weak the way we've tried to assess that over the last half of dozen years as we've ramped more and more of ours and new business in both personal lines and small commercial and to some degree into our small specialty business.
Looking at leading indicators of claim frequency and looking at the mix of the business that comes true.
Kind of market consolidation or pipelining vs the flow or more transactional.
There is no doubt that the business thats coming through market consolidation and leveraging our analytics our agency insights tool has a better mix.
And and had some initial benefits in terms of claims frequency. So that we think that the strong leading indicator of that that business is as good or better.
And and that is important because as you know new business pricing is always a little bit more aggressive than renewals and the marketplace.
And if you can have an advantage on the maturation of those loss ratios that can be hugely helpful to your retention and eventually your profitability. So net net is yes, we believe that that business is favorable to mix and favorable to our profit.
January.
Okay outstanding and hoping for that.
Hello, Sharon do we have.
And you want and the Q.
This will conclude our question and answer session.
I would like to turn the conference back over to Oksana <unk>.
All of us for any closing remarks.
Thank you everybody for participating on our call 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.