Q2 2021 Hanover Insurance Group Inc Earnings Call
Good day and welcome to the Hanover Insurance group's second quarter earnings Conference call. My name is Gary and I'll be your operator for today's call.
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I'd now like to turn the conference over to Oksana Luca Showboat. Please go ahead.
Thank you operator, good morning, and thank you for joining us for of course.
What are the conference call. We will begin today's call with prepared remarks from Jack Roche, Our President and Chief Executive Officer, and Jeff Farber of our Chief Financial Officer available to answer your questions. After our prepared remarks are Bryan Salvatore President of specialty lines, and <expletive> Lavey President of agency markets before.
On 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 presentation of who will answer the 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 regarding among other things our outlook and guidance for 2021 the ongoing impacts of the.
The COVID-19, pandemic economic conditions, and other risks and uncertainties 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.
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 share loss and combined ratios excluding catastrophes among others. A reconciliation of these non-GAAP financial measures.
Section of the closest GAAP measure on the 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 was those comments I will turn the call over to Jack.
Thank you Oksana good morning, everyone and thank you for joining us.
How.
By discussing our second quarter financial highlights and the context of the current business and economic environment all of them.
Then provide a strategic review of each of the segments during the quarter.
Jeff will review our financial results in more detail and provide some thoughts on the quarters ahead, and then Brian <expletive>.
Albert and I will be happy to take your questions.
We are very pleased to report outstanding second quarter results highlighted by strong growth with net written premium increases of 11.7% or 8.6% on an adjusted basis excluding the.
<unk> Act of 2020 premium returns driven by gains across all segments.
Operating income of $104 million for $2.85 per share on.
Operating return on equity of 14, 7%.
And the combined ratio of 94.4.
The empower strong underwriting results are a reflection of our ability to capitalize on evolving market opportunities while navigating the complexities of this dynamic underwriting environment.
From my perspective, there are 2 key takeaways for the second quarter results.
First our growth has accelerated and exceeded.
<unk> COVID-19 levels in all segments.
And second we continue to achieve broad based profitability with strong underlying underwriting results in each of our businesses.
I would like to briefly discuss each of these points in turn.
With respect to growth, we delivered a meaningful step up in.
The premium increases in each of our business segments compared to the first quarter of this year.
All of our major segments now are exceeding pre COVID-19 gross levels as the result of our disciplined and consistent pricing strategy strong retention and robust new business production metrics.
Strong relationships.
The premium with our agent partners provide an opportunity for solid growth potential going forward as we capitalize on our most profitable market sectors and leverage our state of the art technology platforms.
Additionally, we continue to enhance the level of sophistication within our claims data and analytics, including our real time driving.
Shifts in inflation monitoring tools.
<unk> never been more confident in our ability to grow profitably.
In personal lines, we delivered growth of 11, 6% in the quarter or 5%, excluding the effect of premium returns in the prior year period.
Our continued strong growth momentum in this business is a reflection.
Pat of sustained agent and customer interest in our attractive account offerings targeted pricing actions the strength of our market position and our ability to successfully adapt and navigate a competitive marketplace.
We grew our commercial lines of businesses by 11, 7% driven by the strong performance of our spec.
Collection portfolio as well as our small commercial business, which benefited from the economic recovery and is beginning to see the impact of the rollout of our new quote and issue platform tap sales.
Overall, we are well positioned to continue driving growth in all segments and we now expect to deliver mid to high.
Specialty digit growth for the remainder of the year.
Regarding loss trends, we are still experiencing some remaining lower auto loss frequency in the quarter, reflecting the fact that a meaningful portion of our customer base likely has the opportunity to utilize more flexible working arrangements. Additionally.
Additionally, in many areas of the country.
The single our data indicates reduced traffic and less congested rush hours as potentially lingering consequences of the pandemic.
We expect frequency will reach its new normal over the course of 2021, which may provide some persistent lower accident frequency in certain geographies, given our mix and customer.
Profile.
We believe this benefit will be partially offset by near term increased severity from materials inflation and more severe accidents, including elevated fatalities.
We.
Livered strong commercial lines profitability in the quarter, although we experienced some elevated property losses.
<unk>, including in other commercial which we do not believe are necessarily recurring are indicative of a trend.
We've been watching the overall property large loss activity for several quarters and.
And we believe it is consistent with that of the market.
Thus, we think that there is room for additional rate increases in the property lines.
<unk> is moving ahead.
And as always we remain very prudent on our loss selections.
We are mindful about the potential for increased social inflation medical information and treatment delays and other inflationary trends.
We are watching the economic recovery and the acceleration of business activity.
Closely.
As well as the full reopening and catch up of the court system in many jurisdictions.
While the impact on duration of inflation on our book of business is yet to be determined. We believe are comparatively short reserve duration positions us well to manage through that potential exposure with that.
That as background I would now like to share. Some recent highlights by business beginning with personal lines. Our efforts to selectively apply rate adjustments were warranted have been very successful as demonstrated by our sequential Pip growth of 1.8% in auto and 1.7% and home during the quarter.
New business growth came in ahead of expectations and we are seeing significant sequential improvement in retention.
Our preferred customer focus and our value based approach represent significant competitive advantages, particularly as the agents become even more strategic with their personal lines operating models.
The area of replacement decisions.
Account business represents over 85% of our overall book, leading to a high level of retention and business stability our.
Our personal lines retention improve by over 2 points in the second quarter compared to the first quarter, demonstrating the agility of our approach and the.
And <unk> of our business strategy, even in this very dynamic environment.
In personal auto we expect our claims auto frequency to gradually approach new normal levels as the year progresses.
So the pricing environment remains competitive we are seeing clear indications that the rate deceleration has bottomed out.
And the industry is looking to increase rates.
This is to be expected given the nature of the personal lines pricing cycle as historically personal auto rates adjust the loss trends rather quickly we.
We believe we are more favorably positioned for the future given our prudent pricing strategy throughout the pandemic.
As a result, we have much less of the need to significantly increase rates and create customer disruption in the near future.
We continue to gain momentum with Hanover prestige, our full account offering for customers with higher value homes in autos and more complex insurance needs.
These customers.
For us represent a growing segment of the personal lines market, which further positions us as a strategic partner with agents.
The contribution of this offering to our overall growth is increasing every quarter with the second quarter benefiting new business growth by 3 points.
Turning to commercial lines.
We executed extremely well on our strategic priorities posting growth of 12% in specialty and 11% in core commercial driven by a pickup in new business rate increases and exposure growth.
<unk> top line growth in our core commercial business is expected to continue through the year.
Driven by the reopening of the economy continued rate increases and the successful launch of tap sales, our small commercial quoting platform, which is proving to be of Great addition to our already strong small commercial offering in.
In the second quarter, we launched this new platform and an additional 9 states, bringing the.
<unk> drilled the 20 states and we complete the implementation countrywide for our first product business owners advantage by year end.
As a reminder, this multi year of significant investment delivers a comprehensive set of capabilities to the marketplace at.
It includes the new user front end for our agents.
The total new products in the endorsements new states, new sophisticated pricing algorithms, a new policy administration system and new self service capabilities.
And those states, where tap sales was deployed in the first quarter of this year submission significantly increased and our hit ratio also improved.
And the response to this offering has been incredibly positive with agents praising the products ease of use and simplified quoting process, calling at best in market.
The efficiency gains are substantial enabling the quoting and an issuance of a single location risk and 50% of the time it required before.
The investments, we have made to modernize our infrastructure and enhance our capabilities across our business are being realized at a time when agents are consolidating and buying more agencies that have substantial small commercial books of business.
This is forcing them to become more strategic about the carriers with whom they do business.
Our account focus easy to use tools and product breadth are driving increased efficiencies for our agents and increasing our value proposition to them.
We are confident that our robust offering will provide further growth in the agency penetration opportunities for us in the quarters ahead.
The specialty we also delivered significant growth.
During the quarter, we achieved double digit growth in our marine E&S and management liability lines, which are among our most profitable businesses.
We continued to leverage our expanded products and capabilities in the financial institutions and retail E&S basis.
And as well.
And we also advanced our total Hanover strategy deepening the use of our specialty capabilities across our commercial lines customer base.
As agents continue to offer specialized products to more customers. We are confident that our specialty business will continue to generate critical growth.
<unk> is going forward.
We are pleased with the commercial rate environment and the exposure dynamics in our markets.
We achieved rate increases of 6.5% in core commercial and sustained strong retention at 84, 9%.
We continued to implement double digit rate increases in commercial auto.
For on upper single digits in property with granular pricing segmentation and a strong differentiation in price and retention by risk type.
Exposure growth exceeded historical levels in the quarter, which bodes well for our gross prospects going forward.
We achieved rate increases.
The 8.5% in specialty up from 7.5% in the first quarter.
In general specialty rates can fluctuate from quarter to quarter as a result of large account renewals and other unique items, but overall pricing in our specialty markets has been very strong with price increases.
<unk> of continuing to outpace loss trends.
There continue to be meaningful drivers that support the strength of the rate environment in commercial lines, including the potential of an increase in social inflation.
Property loss pressures from materials costs increased reinsurance costs and low interest rates.
We believe our focus on smaller accounts and differentiated offerings will help the shield us from meaningful pricing deceleration, which can occur in larger sized brokered accounts.
In summary, the exceptional growth we delivered during the quarter reflects the significant positive momentum we have established across.
Our business and set the stage for continued profitable growth.
We are performing exceedingly well in an uncertain environment, leveraging our unique distribution capability.
Stinker of agency and customer centric strategies disciplined approach to underwriting and pricing and broad and specialized product offering.
Offerings.
As we begin the second half of the year. We are encouraged by our performance year to date and confident in our ability to advance our strategy and capitalize on opportunities for profitable growth going forward.
Before I turn the call over to Jeff I'd like to update you on our efforts to re imagine the future of our.
Our business and our workplace.
As I have said many times, we are extraordinarily proud of the work our team has done over the course of this public health crisis, delivering on our promises maintaining and even enhancing the levels of service, we provide to those who depend on us.
As we continue.
To drive our business forward positioning our company to deliver sustained profitable growth, we are being very thoughtful and opportunistic determined to emerge from this or deal as a better insurance company employer and corporate citizen.
We are closely monitoring the rapidly changing employ.
Employment trends and practices as well as employee preferences intent on strengthening our culture that for US has been an important competitive advantage, enabling us to attract and retain outstanding talent.
We have begun to invite employees back to work on a largely voluntary basis and expect the full.
Fully reopen our offices sometime during the fall assuming the public health environment is conducive to do so.
We are planning to embrace of progressive hybrid model, 1 that will enable us to provide agents and customers the products and services, they expect and deserve and to provide our employees of flexible engaging.
Beijing work environment, where they can build rewarding careers.
These are truly exciting times for those that are up for the challenge.
With that I will turn the call over to Jeff. Thank you Jack Good morning, everyone for the second quarter, we reported net income of $128.5 million or.
For $3.52 per diluted share compared with net income of $115.2 million or 301 per diluted share in the second quarter of 2020 <unk>.
After tax operating income was $104 million or $2.85 per share compared with $62.7 million or $1.63 per share.
Prior year quarter, the difference between net and operating income is due to the increase in the fair value of equity securities.
Book value per share increased 4.8% in the quarter driven by earnings and to a lesser extent an increase in unrealized gains on our fixed income portfolio.
Before.
Before I review, our quarterly performance in more detail I would like to acknowledge that some of the comparisons for the prior year quarter needs to be put in context with the very unusual nature of the second quarter of 2020.
With the economy, largely closed and most of the country placed under stay at home orders many.
And the lines of business experienced historically low frequency of claims last year in response to the fewer miles driven we returned some premiums to our auto policyholders, which impacted our reported net written premiums and underwriting ratios. In addition business exposures payrolls and receipts.
Were exceptionally low in 2020.
As the economy continues to open up an individual's returned to the road ways. We believe our more recent growth trajectory and loss experience as well as our original expectations for 2021 are better parameters by which to assess our performance.
<unk>, we are pleased with our overall combined ratio of 94, 4% in the second quarter of 2021 compared to 96, 2% in the prior year quarter.
Which a year ago reflected several large catastrophe events, including losses from social unrest.
In the second.
1 or 2021, we incurred catastrophe losses of $76.8 million or 6.5% of net earned premium 40 basis points above our quarterly expectation, primarily reflecting severe wind torrential rain and hail events throughout the Midwest in June on the heels.
Yields of a very light April and May.
Michigan, our largest personal line state was severely impacted by the rain and flooding events in mid to late June, particularly in the homeowners line.
Michigan is a very profitable state for us and historically runs at a low ninety's combined ratio. However.
<unk> when adverse weather events occur as expected, we do see losses.
We also experienced some favorable catastrophe development in the quarter from prior years, which is a testament to our prudent reserving approach.
Prior year Reserve development, excluding catastrophes was favorable in the quarter.
Adding $12.6 million to the bottom line, primarily reflecting continued favorability in workers' compensation personal auto and several specialty lines we.
We continue to be prudent in our reserving in commercial auto where extension of loss patterns and prior bodily injury development warrant.
Current a cautious approach.
Additionally, in light of the pandemic effect on loss patterns in 2020, we remain vigilant as we assess ultimate loss costs.
With the economy regaining momentum we are also mindful of the potential for reserving uncertainties related to social and economic.
Cannot make inflation delayed medical procedures and information as well as ongoing court delays.
Over the past several years, we have placed a considerable amount of emphasis on strengthening our balance sheet.
It is stronger than it has been in many years coming out of the second quarter and we believe.
Such prudence will serve us well.
Claims activity related to COVID-19 exposures continues to be very manageable and we are holding substantial <unk> in that area.
Our expense ratio for the second quarter of 2021 was 31, 2%.
This was in line with our expectations consistent with the second quarter of 2020, an improvement from the first quarter of this year.
We are confident that we can deliver of 30 basis point expense ratio improvement for full year 2021.
Overall current accident year combined ratio.
<unk> X cat was 89% in the quarter. This very strong underwriting result is a reflection of our diversified book of business, our earning in of rate increases and some lingering frequency benefit and auto lines.
Looking at our underlying underwriting results by segment.
Our commercial lines combined ratio, excluding catastrophes was 89, 5% up 2.7 points from the second quarter of last year, primarily reflecting the comparison to an extraordinarily low level of losses in the second quarter of last year.
Our CMP current accident year loss ratio.
Catastrophes was 57, 6% in line with most recent trends, but slightly elevated compared to our expectations driven by a higher incidence of property large losses we.
We believe that our experience is relatively consistent with that of the industry, adding to our continued.
<unk> expectation that there is room for additional property rate increases in the marketplace.
We achieved substantial CMP property rate increases in the second quarter and we believe this trend will continue.
In other commercial lines the current accident year loss ratio, excluding catastrophes was 55.3.
<unk>.
This result reflected the impact of a large loss and reinstatement premium triggered there on and are highly profitable Hanover specialty industrial business in.
In fact, this particular loss was offset by the overall favorability in our specialty business within the quarter.
To bring overall loss amounts generally in line with our expectations.
Our specialty industrial business runs at a long term combined ratio in the sub <unk>, we are confident in our underwriting capabilities and future strong performance in this business.
Our commercial auto current accident year loss.
3 pursuit of excluding catastrophes remains relatively consistent with the recent quarter's results. We are continuing to take substantial rate increases to address the industry wide multi year liability issues affecting this line.
Turning to workers' comp current accident year loss ratio was 60.
The ratio, 5%, which was generally in line with recent historical results. Our second quarter 2020 ratio was unusually low due to stay at home mandates for much of the country.
While the underlying trends in this line remain largely favorable we continue to be very prudent with our loss picks in light.
Of the rate environment, and the potential for new risks posed by office reopening for certain businesses.
Commercial lines net written premiums grew exceptionally well at 11, 7% in the second quarter powered by our small commercial and specialty businesses, we achieved strong operating metrics, including improved.
Improved rate meaningful increases in exposures returned to strong new business growth and a solid core commercial retention of 84, 9%.
Overall, despite some minor and expected variability in losses, we are very satisfied with commercial lines trends and underwriting.
Returns in the quarter.
Turning to personal lines, our combined ratio, excluding catastrophes was quite low at 85, 3%, but up from 76, 8% in the same period last year, reflecting the benefit of COVID-19 related auto claims frequency declines.
Our personal lines auto current accident year loss ratio, excluding catastrophes was 62, 2% below historical trends, but up slightly from 60% in the first quarter.
While frequency trends industry wide are quickly moving toward historical norms, our business is still benefiting slightly.
<unk> from lower frequency.
We believe there may be of modest longer term frequency benefit due to changing driving patterns from work from home flexibility of our customer base. So we are observing these trends carefully.
And we continue to do an excellent job managing the balance between.
Slightly rate and profitability.
Current accident year loss ratio on our homeowners line remained relatively consistent with prior results, but was slightly above our expectations elevated property loss activity and higher material costs indicate the need for future rate increases we are seeing a significant push.
We can grow in homeowners in the independent agency space.
Personal lines net written premiums grew 11, 6% in the quarter were 5% adjusted for last year's premium returns.
This strong result was driven by meaningful acceleration in new business. We also reestablished moment.
For rhythm in our renewal premiums as a result of lower rate increases in certain areas and improve retention.
The strength of our data and analytics team and Swift communication of market trends across our businesses positions us to opportunistically grow when market conditions allow and make well informed.
Momentum judgments when necessary.
We are pleased to see personal lines largely rebound to its pre COVID-19 growth levels.
We have full confidence in personal lines strong growth and profitability prospects.
Moving to investment performance, our net investment income was.
$75.6 million for the quarter up $17.9 million of 31% from the prior year period.
This is largely due to an unusual fluctuation and partnership income from period to period.
Net investment income in the second quarter of 2020 was adversely affected by a $4.6 million.
Formed loss on limited partnerships, while partnership income in the second quarter of 2021 was $16 million exceeding our expectations by $9 million.
Our partnership results through the first half of 2021 do not change our outlook for investment partnerships or overall net investment income for the <unk>.
End of the year.
New money yields continue to put pressure on our overall net investment income, although so far we've been able to meaningfully offset it with robust cash flows from operations.
We expect cash generation from our underwriting operations to remain strong.
Cash and invested assets at the end of the second quarter were $9.1 billion with fixed income securities and cash representing 85% of the total of.
Our fixed maturity investment portfolio has the duration of 5 years and is 96% investment grade.
We are of high quality portfolio with a weighted average of 8.
Balance net unrealized gains on the fixed maturity portfolio at the end of the second quarter 2021 were $357.8 million before taxes.
Moving on to our equity and capital position our book value per share of $88.23 reflects an increase of 4.8% in.
Plus.
We continue to be thoughtful stewards of our shareholders' capital and deliver on our capital allocation strategy.
Through July 26, 2021, we repurchased approximately $10 million of stock, leaving about $395 million of capacity under our stock repurchase authorization.
<unk> that the board expanded in May.
In addition, during the quarter, we paid a regular cash dividend of approximately $25 million.
Our capital priorities remain unchanged first we strive to maintain our strong capitalization and liquidity.
Second we continue to prioritize organic growth for which we generate plenty.
Plenty of capital and third we continue to maintain our policy of returning excess capital to shareholders through cash dividends and share repurchases.
We will continue to remain nimble and actively manage our capital with the best interest of shareholders in mind.
Looking ahead, we know.
Expect net written premium growth in the mid to high single digits in the second half of the year.
Based on our strong results in the first half of the year, we believe upper mid single digit growth for the full year as possible.
With 2 quarters of better than expected X cat combined.
Now if youll performance, we are improving our full year 2021 X cat combined ratio outlook from 90% to 91% to 89% to 90%.
As noted earlier, we remain on track to reduce our expense ratio by at least 30 basis points in 2021.
The ratio of 31, 3% and we expect our third quarter cat load to be 5.2%.
We are very pleased with our underlying performance on our ability to continue our positive momentum in the quarter, we are well positioned to sustain our robust growth momentum in top quartile.
The the ability delivering value to our agents customers and shareholders.
In addition, we are pleased to announce that we will be hosting a virtual investor day on September 20, <unk>, and which we will discuss the key aspects of our differentiated strategy go forward growth drivers.
<unk> and long range financial targets.
We will be providing additional details in the coming weeks and look forward to seeing you there.
With that we will now open the line for questions operator.
We will now begin the question and answer session to.
To ask a question you May press <unk>.
The profit then 1 on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
The first question is from Matt <unk> with JMP. Please go ahead.
Hey, Thanks, good morning.
Jack I got your comments on some of the areas of growth within the specialty and I was hoping that you or Brian could expand on that a little bit and specifically 1 question I have is as you look.
Look at kind of of the type of client or the relationship with the growth in some of those lines that are coming from and to what extent is it is the cross sell you talked in the past about kind of existing Hanover relationships, where they buy of specialty products somewhere else and the opportunity to consolidate that relationship is that a.
A big piece of the growth or is that something you know more yet to come.
Yes, Thanks, Matt for the question and it's a good 1.
1 we're excited to update you on.
I'll start with overall specialty growth I think that's a direct result of how well the performance of the each of these businesses.
As is in terms of the bottom line.
Where we're at that broad based profitability within the specialty business is really at its at its best and that is allowing I think Brian and his team the lean into the opportunities that are presenting themselves in the marketplace. So as we said in our prepared remarks there is.
Several businesses that are generating double digit.
Growth Theres, others that are very much in the upper single digit growth all of our businesses are well positioned.
Specific to your point around cross sell versus kind of individual business growth, it's still very much.
Driven by the individual businesses on lines of business.
Although we are definitely seeing.
Seeing an increase in the cross sell or what we would consider to be coordinated.
Lines of business sales to total accounts and we've mobilized.
Around that particularly in the small commercial space all the way into our service centers, where we are I think the only service center of that Ken Ken.
Bringing that together for an agent.
On the smaller accounts, so I think right now what you can see as of the majority of our specialty.
Is this coming from kind of specialized products into specialized agents.
Very much from our franchise agents as well as from specialized agents, but increasingly we are anticipating that more and more of that will come from kind of cross sell or coordinated business. Brian do you want to just maybe add.
Grow on a 2 pieces of the color there.
Sure.
Matt Yes. Thanks for the question very much of agree with what Jack said.
What I would add is that what we've been really working towards for the last couple of years is the strategy that we refer to as total Hanover.
That is really sort.
The consistent process.
We came back.
At the local level with our agents across businesses and so the Jackson's point on it. We're just in a very good place and our ability to grow across all lines of business. We are seeing some of that for.
On the benefit of working very closely in that.
Coordinated way of process, driven coordinated way and so that yields better better production generation from our agents that have great relationships with our core commercial broadband and the piece of that is is cross sell as well. So we're getting a lift from a number of things including that.
Great. Thanks, and then if.
The 1 other question kind of shifting gears, a little bit of the Jeff you made a few comments on on commercial auto and I heard everything you said about the cautious reserving and cautious accident year picks and all of that what I'm, what I'm, hoping to ask is if you could just peel the onion back a little bit and you know like you said, it's been a good act on your loss picks.
Stable for the first half of the year you know can you help us understand what if any impact there there might be from kind of continued frequency favorability or loss cost favorability from the pandemic versus maybe how much of that is just obviously you've been hitting this line with the rate for a very long time and just settling into.
If I can just a lot of a new norm of kind of where the line of business should hopefully run.
Matt we've been going after commercial auto for at least 3 years now with double digit rates and I think it's hard for anyone in the industry to say.
When we are there yet right because we've all been focused.
Some of it for you.
Nearly a decade now in terms of getting it right.
2020 provided an opportunity to be very very prudent and comfortable with that particular year and then in 2021.
In the first 2 quarters.
Just on we've seen some continuing frequency benefit not as quite as much as personal auto and it's been waning throughout the period.
You notice the unfavorable development in that particular line and I would point out we show of about 7 different line. So occasionally youll see 1 with some unfavorable development it was not related.
Of the 20 year and it was clearly related to the earlier years and there was nothing that particularly showed itself, but we just wanted to make sure that we're conservative and have appropriate loss picks for all of the years and it was a good opportunity to do that.
Okay, great. Thank you very much.
The map.
The next question is from Derek on with K BW. Please go ahead.
Good morning. Thanks.
Back to your mid to high single digit growth guide for the second half can you just talk about how much of that is exposure group versus rates the re.
Reason why im asking is.
Because I saw that the commercial rate increases.
The accelerated sequentially, while retention drops, which I assume is partly due to nonrenewals.
So overall.
Obviously, you can see our rate increase from the second quarter was relatively consistent.
With the.
First quarter end and even slightly up we're seeing exposures bounce back sequentially on our assumption is retention will be relatively flat, where we'd like it to be about 85% I know it looks like it has come down a little bit from the 87%.
The center. So it was really over the last year, but a lot of that is a bit when data so to speak and that you had moratoriums and the had agents that weren't able to remarket and some other unusual things I think if you look at the retention for the first 6 months of the year, you'll see a better barometer.
Adjusted for that so I think all factors will contribute it'll be strong retention, good new business, a fair bit of rate and continuing bounce back kind of exposures.
Okay. That's helpful. And then just a second question a numbers question can you just try.
For the size of the large property losses that you saw on the commercial segment.
So in the commercial segment.
There were a few extra property losses, which were not terribly large losses in core commercial but they showed themselves largely fires and it's.
Trying to essentially been of continuation for a number of quarters across the commercial segment. We did mention that there was 1 meaningfully larger loss in Hanover specialty industrial and Fortunately, we have reinsurance and we dealt with the reinstatement premium.
But.
Importantly, if you look across other commercial lines, which is essentially our specialty business there were.
The other businesses, such as marine and even other areas.
Earlier period performance of long Hanover specialty <unk>.
Which offset that loss, so I would call. It just a couple of fire losses that seem to be elevated and that was really yet.
Okay. That's helpful would you be able to quantify the number for <unk>.
But lots of millions of dollars or heard last points.
<unk>, it's hard to say because if you always do exactly what to expect then you could look at the Delta. So there's lots of things going on but certainly less than a handful of type of meaningful losses, and they werent other than the Hanover specialty industrial they werent, particularly outsized routine losses just.
Yes sure.
Got you. Thank you for all of the answers.
Thank you for you.
Next question is from Paul Newsome with Piper Sandler. Please go ahead.
Good morning crush relations on the quarter.
I was looking at your guide in the.
A couple of issues of my math is not the best but.
Suggests I think the core combined ratio for the.
The second hole.
Could be higher than the <unk>.
First half.
Is there a range.
So for that in particular.
Actually think.
Of your seasonality.
On being a little bit more of the second quarter heavy weather kind of.
The issue, but maybe you could talk to that.
Yeah.
Okay.
Yes.
I'll have to look at that Paul I don't believe that's the case there is nothing that we.
We see going on in the second half that would cause the core commercial ratio to increase if I were to get underneath it for you of debt over time, I expect commercial auto to go up a little bit as the remaining frequency benefit.
The abated or disappeared and.
And then some of the larger loss activity both in core commercial as well as to some degree of that 1 large loss in specialty on the.
The.
Reinstatement premium will be lower so we'd have to go back and check that maybe it maybe we're being conservative.
To be the wouldn't be the first time in the let's say.
My second question I was hoping to get.
For further thoughts on how you folks think about sort of the underlying inc.
<unk> trend for the.
Commercial sort of excluding the workers comp.
The concern of the.
The day is debt.
It comes on charms Youre talking about essentially a point on.
2 of uptick in inflation.
And.
Given the 6.5% is of great number for commercial price increases but.
If the inflationary levels.
The.
$5.5 of the Chubb was talking about this morning, then that margin expansion is looking for smaller than it was before.
So maybe you could talk to sort of just broadly the those kind of concerns.
Yes, Paul this is Jack Thanks for that question I'll get us started.
Jeff for others want to jump.
I think I would just start with the fact that net net we have a fair level of confidence in our ability to monitor the various <unk>.
Aspects of inflation and the complexion of that inflation in terms of how it hits our business and.
And react accordingly.
As we said in our prepared remarks.
And then head into a comparatively short duration reserve position and even on a risk profile overall, it doesn't make us immune from inflation, but it certainly makes the impact on on particularly the casualty lines more muted or less impactful than.
Others that.
Our very large limit business, where have longer tail casualty business that clearly not only affects their go forward.
Fixed but to some degree there.
The reserves as you said so.
But theres also some natural offsets, including wages and receipts in the.
Right <unk> basis by which we get the collect premium. So in addition to adjusting our rates to reflect that increased cost of goods sold if you will.
We will have some uptick on the commercial line side naturally through the exposure basis, which will.
Of which will elevate.
And then.
The explain the interest rate environment over time should help improve our net investment income, but we have to we have to let that play out. So listen this is an important topic for our property casualty business. So it's the right question of the day, but I think for US you should know that we've got our fingers on the dials, we've got great monitoring going on and.
Obviously on a relative basis.
Well positioned to deal with any inflationary effects.
I'd like to squeeze in 1 more if I can.
Breaking my 2 question rule, but the.
Is there much of a difference.
The.
Basically a year or so.
We feel free.
On the suits.
On quite a bit of passenger auto between.
With your business mix versus the national writers.
Sure.
And just maybe you can talk to that.
The regional differences.
And the new hopefully you versus moving.
Northwest.
Yeah.
We're glad to take the third question Paul.
It's an important 1 for us and I think we've worked hard over the last really 8 or 9 years to really build of differentiated strategy in personal lines.
We have migrated from trying to be the next.
On paper that was trying to win mono line auto often low limits auto through a multi variant pricing and we realize that was the losing strategy for us.
So with our strategy to be an account writer to over time move up the coverage a curve to really be there with agents for the kind of customer that.
<unk> value trusted advice, we repositioned our pricing models and our entire delivery system and we think this is paying huge dividends.
We think the persistency and our pricing has proven out really over the last several quarters I think at the end of last year of people we're talking about.
Wood repetitive it was and it was but I think we were able to show that we didn't have to be as responsive with our pricing and our loss trends in the frequency or just more stable frankly because of the customer base, we have and the geographies that we play in so let me just ask.
Victor.
The kind of add a little color there because I think this is a really important part of our strategy on where we're pretty darn proud of where we are in that evolution, yeah, absolutely and were watching these trends really closely Paul but to your specific question. We do think there of sustained advantages to having of frequency benefit based on the geographic profile and the.
The customer mix profile, if you think about.
Our book being northern Hemisphere kind of oriented mass, New York, Connecticut, Illinois, Michigan those economies have.
Comeback slip more.
More slowly than the southern states. So we see some persistency and frequency of their of course that likely goes away over time.
We have the customer mix.
As Jack said, we skew older we skew multi car, we skew higher liability limits.
These folks likely have a longer sustained work from home.
Type pattern and so on so we think that the commuting patterns, we'll look differently.
And that likely of the longer term benefit for us.
Thanks I appreciate it.
Thanks, Paul.
The next question is from Grace Carter with Bank of America. Please go ahead.
Hi, how are you all today.
Excellent.
I was wondering if we could talk a little.
But then you more about workers comp.
The core loss ratio was a little bit higher than the past couple of quarters.
Wondering how on loss costs are progressing of reopening progressive.
Where you see loss cost going from here.
Also of pricing.
Yeah. This is Jack great. Thanks for that question I'll get us started and I'm sure my colleagues will jump in.
Overall, we are definitely seeing some sort of some frequency move back to more normal levels.
As expected.
And.
We're certainly also seeing pricing.
Flattened off in net adds.
Flattened and we've been kind of in the Black if you will on pricing.
On what's still moving through the loss costs I think of this time is kind of the change in types of losses, what you saw over the last 6 or 7 years as debt.
Had a meaningful change in terms.
Of the types of losses that we experienced and.
And how much of that was really about work change and automation in new ways in which risk management was being applied we think that's worked through the system and it will start to move back in a more positive.
Positive way, but the last thing I would say on this is that we still.
I think our we see this as more of an opportunity that kind of challenge given our relatively low percentage of workers comp in our total portfolio. So if those trends start to become more normal Vale day will impact us a little less severely.
<unk>.
But it will also drive I think of different pricing dynamic, which we look forward to because as as we see some enhanced pricing come into the workers' comp line. We believe we can take advantage of that ROE that line of business that is very profitable for us and become even more total accounts or accounts.
Count centric, particularly in the middle market space. So we're kind of on our toes waiting for the pricing trends to catch up eventually.
What the longer term trends in the loss trends will be and we'll be we'll be ready to.
The step up.
Great. So I think if youre looking year over year, it's a very tough comparison because of all.
All of the shutdown order. So it was an unusually low percentage, even though we were quite conservative in how we established our pickup in the second quarter of last year for.
For the longer tail lines, it's up maybe.
The of point sequentially, and I don't think Theres anything, particularly going on there with either trends or whatnot. The exposures are coming back nicely. The rate is starting to increase a little bit and we're feeling good about it and I would just remind you overall, it's a pretty low percentage of our book and where we tend to write.
Right is the lower risks, we have a fairly tight risk appetite. The great. This is <expletive> just to put an exclamation point on what Jeff just said of our book is about 60% small commercial work comp.
Which performs that are significantly better than the in the middle market space and it's the space where price income.
When pricing doesn't come out of it comes back more quickly. So we're positioned well as these as the loss cost returns.
Okay. Thank you and then on switching to personal auto you had mentioned more consistent pricing over the past year of relative to some competitors. So I was just wondering.
During as you look for where you see pricing going trying to balance of a potential longer term of frequency benefit versus industry wide severity challenges and to the extent that you all are able to take lower pricing than peers, how to what extent you think that that might impact your growth rates in personal lines.
Grace, we're feeling really good about personal auto and being in that business and personal line in general you heard Jack talk earlier about our position and you know <expletive> amplified debt a little bit right now what's happening we're seeing some lingering benefit in terms of frequency.
In the marketplace.
Place the level of competition is starting to return to essentially a normal opportunity. Many of the major players have talked about needing to get rate youre starting to see some rate filings. There. So we're feeling really optimistic and the last point I guess I would I would make is we.
Also.
We're quite conservative in how we set loss picks throughout 2020 and into 2021. So to the extent there is a temporary bit of margin pressure I think the balance sheet has been prepared for.
Prudently for for.
Sort of a worst case scenario, so I'm feeling.
Very good about our ability to grow our retention the actions that our team has made in the late in the late third quarter and fourth quarter.
Yes.
Thank you thanks.
Thanks Grace.
Our next question is from Bob Farnam with Boenning and Scattergood. Please go ahead.
Hey, there good morning I've got.
A couple of questions on the tap sales platform and the first 1 is.
I understand the benefits you're going to be getting from the top of line as the agents of direct more business your way, but I was curious whether there is the underwriting component to that as well maybe more.
Granular in terms of are you expecting.
Our bottom line improvement as well.
And 2.
As I, you know I imagine you've got some tech savvy competitors that have similar products in the agencies. So how does the Hanover as product differentiator.
Differentiate itself.
Yeah. Thanks, Bob This is Jack I'm just going on.
Kind of really address the latter part of your question there and then ask <expletive> to talk to you about to really answer the first part of your question, which is an absolute yes.
But I would tell you that our small commercial offering.
In addition to the overall enterprise approach.
Cash that we use with the agents is very distinctive.
We are we have.
Underwriting risk appetite for BOP accounts as well as packaged accounts we are.
Are we.
We have.
Kind of World Class Service Center, we have.
Great proprietary price.
We've been able to make sure that it's not so volatile that the agency managers and csrs are constantly having to deal with pricing volatility coming out of the particularly the BOP business that they see from some other carriers.
We're really 1 of the best prepared markets to help agents when.
They consolidate.
Our kits, which oftentimes they are doing in this day and age so I.
Think it is important to say that we are really excited about the new tap sales platform and experience that we're creating that is multifaceted, but in the context of all the other things we do that we think make us distinctive.
Missing the small commercial space.
So to your specific question about improved underwriting results absolute yes on multiple multiple dimensions 1 of the elements of this broad based platform is the price pricing efficacy that comes along with the new rollout, where we've moved to a much more refined.
On pricing segmentation upwards of hundreds of cells.
Which we can slot customers and Thats informed.
<unk> third party data now so are the chassis that this is built upon can can integrate the third party data, which makes our pricing again more refined also improved underwriting knockout.
Knockout rules on the way in and also on the renewal side. So when a piece of business renews, we pull on third party data, we ask ourselves how is that risk changed and we can make appropriate adjustments. So so there's multiple dimensions on which we are we believe that going forward, it's going on there's going to improve the the loss ratio maybe a comment on how.
How this fits with others in the industry of the reaction, yes agents. So far we're getting fabulous reaction from the frontline.
Account managers and CSR is that use this to price and issue policies.
As Jack said in his commentary really are getting sort of best in class.
Commentary, it's 50% more efficient than our prior system and we believe the sort of the fastest system that's out there in the marketplace today. So.
We're thrilled that this is this has been a multiyear and multimillion dollar of investment and we couldnt be happier with the way that's being received in the marketplace.
Class.
And you're still continuing to rollout products I mean, youre talking about youre on your broad.
The capabilities, but not all of your products are on the system at this point. So what I know you just put the small business numbers of the platform outs of what's coming up next in terms of of what you're trying to push out there.
Well.
This is Jack.
Throughout the rest of this year, we will get the business owners. The advantaged products in every office of every agency that we have.
And then we'll work on the ancillary lines, which frankly are already very much a part of our account offering and it will just be further refined.
The place the product differentiation Bob lives in the core package. So that's why we led with the at the end of the day, where we differentiate ourselves in terms of coverage and pricing sophistication is in the package and then it is supported by auto and workers comp and umbrella so I would.
Line.
We're really excited about the impact of this will make in the second half of this year and then heading into 2022.
Great. Thanks for the color.
Thank you Bob.
This concludes our question and answer session I would like to turn the conference back over to Oksana Luca Shaw for any closing remarks.
I'd tell you everybody for your participation today and we're looking forward to talk to you at our Investor day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Thank you.
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