Q2 2023 The Hanover Insurance Group Inc Earnings Call
Good day and welcome to the Hanover Insurance group's second quarter earnings Conference call. My name is Keith and I'll be your operator for today's call.
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Thank you operator, good morning, and thank you for joining us for our quarterly conference call. We will begin today's call with prepared remarks from Jack Roche, Our President and Chief Executive Officer, and Jeff Farber, Our Chief Financial Officer available to answer your questions. After our prepared remarks are <expletive> Lavey.
We present, the vacancy markets and Bryan Salvatore President of specialty lines before I turn the call over to Jack Let me note that our earnings press release financial supplement and a complete slide presentation for today's call are available in the investors section of our website at www Dot dot com after the presentation.
We will answer questions in the Q&A session, our prepared remarks and responses to your questions today other than statements of historical fact include forward looking statements as defined under the private Securities Litigation Reform Act of 1995. These statements relate to among other things our outlook and guidance for 2023.
The economic conditions and related effects, including inflation supply chain disruption potentially recessionary impact evolving insurance behavior emerging from the pandemic and other risks and uncertainties that she has she will weather and catastrophes that could affect the company's performance and or cause actual results to differ materially from there.
Those anticipated we caution you with respect to reliance on forward looking statements and in this respect refer you to the forward looking statements section in our press release, the presentation deck and our filings with the SEC todays discussion will also reference certain non-GAAP financial measures such as operating income and accident share loss.
Loss and combined ratios, excluding catastrophes among others a reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis can be found in the press release, the slide presentation or the financial supplement which are posted on our website as I mentioned earlier with those comments I will turn the call over to Jack.
Thank you Oksana and good morning, everyone. Thank you for joining us for our second quarter call.
<unk> weather patterns and persistent inflationary pressures have had a significant impact on our financial results. During the first half of the year, prompting us to further accelerate our margin recapture plan, including additional catastrophe underwriting actions.
The competitive landscape is changing rapidly in response to more frequent and severe convective storms and the continued inflationary pressures.
In response, we are leaning into the hardest market, we have seen in property, particularly in personal lines as we execute on our margin recapture plan.
We are determined to fully leverage our deep market knowledge underwriting expertise enhanced tools and strong agency partnerships to address the unprecedented loss volatility in property lines of business.
Our progress to date, our strong market position and our capable team give me the utmost confidence in our ability to succeed and deliver on the targets, we conveyed at our Investor day in 2021.
We have a long history of successfully navigating challenging environments and we are confident in our ability to do so going forward.
Underway.
Jeff will review, our financial and operating results in more detail and provide an update on our 2023 outlook and then we will open the line for your questions.
The catastrophe losses, we and the industry have experienced in the second quarter are extraordinary and particular the record breaking hail storms that impacted the Midwest and southwest.
Hail damage represented the vast majority of catastrophe losses, we experienced in the quarter.
The magnitude of those losses was amplified by persistent and ongoing inflation, which continued to drive up loss costs.
Nearly half of our total losses in the second quarter occurred in Michigan, where we have our largest personal lines presence.
By any measure this kind of extensive and widespread cat activity in the state of Michigan in a single quarter is very unusual.
With weather patterns changing in costs elevated we are highly focused on a broad set of integrated actions across our portfolio.
The positive news is that we are operating in an extremely hard personal lines market. One that allows us to reset our pricing meaningfully change terms and conditions and further refine our underwriting and risk appetite.
With this in mind, we are highly focused on executing the margin recapture plan, we initiated last year responding with a sense of urgency.
I'm pleased to report that we've made tangible and promising progress on our plan, we fully expect to build on that momentum, we have established driving improved and sustainable profitability going forward.
Looking first at personal lines, we are taking a number of steps to optimize pricing on our renewal book and to ensure new business quality and pricing are stellar.
As we non renewed or significantly repriced. This business, we expect our retention to decline slightly or our pricing to increase significantly in the second quarter. These planned actions drove a dip in middle market retention to just below 80% and we're pleased with this trade off consistent with our.
Focus on loss control and risk prevention, we further expanded water and temperature sensor installation in 2023, resulting in an increase in avoided property damage and business interruption claims.
We exhibited a 25% increase in protected accounts through the first quarter compared to the end of 2022.
This figure is now doubled through the first six months of 2023.
We learned a lot and are pleased with the effectiveness of the risk mitigation technology pilots through initial implementation over the last 18 months with the success, so far enabling us to surge ahead towards even higher implementation targets. This year.
We will be implementing 2500 to 5000, new sensors and commercial lines accounts, starting with 600 of our largest most sophisticated and most exposed middle market accounts. These risks are targeted for installation. This year and we will continue to expand this program in the future.
As a result of these actions we anticipate the underlying ex cat loss ratio in our property book to further improve.
While catastrophe outcomes are difficult to extrapolate we believe that our actions when fully implemented will reduce our vulnerability to winter storm losses substantially.
While our profitability improvement initiatives are already showing significant progress the pace of progress is expected to accelerate in the coming quarters as these actions price in and new ones are implemented.
Our specialty book continues to perform exceptionally well delivering robust pricing driven growth.
And an exceptionally strong combined ratio in the quarter and year to date, the specialty pricing environment is generally favorable overall, enabling us to achieve 11, 4% price increase in the quarter.
While the market environment in some of our segments is becoming more competitive and particular management liability our ability to deliver consistent profitability is a testament to our disciplined underwriting and rate strategy.
The continued successful growth of our specialty business is critical from a strategic perspective.
This business provides important diversification for our overall portfolio.
And consequently reduces our property in cat exposures, all while providing our agent partners with highly valued capabilities and business opportunities.
The value of our specialty portfolio to our agents and customers hinges on a highly competitive set of offerings account centric orientation efficient service and coordinated relationship management.
Our existing portfolio offers significant growth potential our specialty team is exploring complementary capabilities to support continued expansion of the business.
For example.
We are looking to further leverage technology to execute a low touch small specialty strategy and potentially to expand our specialty appetite slightly to align more closely with our core commercial customer set. So we can further maximize the benefits of our account and industry specialization strategy.
In conclusion, we remain committed to long term profitability targets that are ambitious and achievable.
We expect our ROE to be strong in 2024 and to improve steadily through 2026.
And we have every confidence we will be able to achieve our target profitability potentially beating our long term, 14% ROE target supported by strong underwriting income and much higher than originally expected net investment income.
We will of course continue to execute on our strategic priorities to continue expanding the top line in.
In the near term profitability is our primary focus.
With that I will turn the call over to Jeff.
Thank you Jack and good morning, everyone.
Let me begin with a high level overview of our results and then discuss the performance of each segment in more detail.
As noted in our pre announcement catastrophe losses in the quarter totaled $262 million or 18, 5% of net earned premium stemming from 19 convective storms across multiple states over 70% of the losses were driven by hail apparel.
Putting aside cats.
Lingering inflationary pressure in personal lines was offset by higher net investment income and strong underlying performance in both specialty and core commercial.
Prior year Reserve development was immaterial in the quarter with favorability in specialty offsetting unfavorable development in personal lines the.
The personal lines environment has resulted in some pressure on liability coverages, particularly auto bodily injury and umbrella, which is reported in home and other.
Umbrella is inherently volatile and we're monitoring it closely however, we continue to be very pleased with this product offering which remains one of the most profitable in personal lines.
In auto we preemptively increased our current accident year loss selections for bodily injury in light of our recent experience and broader industry trends.
In the same vein, we are also seeing slight pressure within commercial auto liability, which offsets the continued favorability in workers' compensation.
Specialty experienced continued favorability in the quarter, reflecting lower than expected losses in our professional and executive lines claims made business.
Our team continues to do a very good job in managing expenses delivering an expense ratio of 36% an improvement of 20 basis points from the prior year period.
Our results in the first half of the year position us well to deliver on our full year expense ratio target.
Now turning to our segment review starting with core commercial we were pleased to deliver a solid ex cat combined ratio of 89, 3% for the second quarter.
The underlying loss ratio of 56, 2% outperformed our expectations supported by significant improvement in commercial multiple peril as we have observed both frequency and severity of large losses subside.
The strong performance in the quarter and year to date underscores the effectiveness of our margin recapture plan, thus far reflecting the impact of accelerated pricing and the $25 million of middle market property non renewals, we completed last year.
Small commercial continues to deliver robust profitability and benefit from rate increases earning in.
On the top line core commercial generated net written premium growth of seven 2% driven in part by robust renewal pricing, especially in property.
Specialty delivered exceptional performance once again this quarter as we continued to successfully deliver on our operational and financial priorities.
From a profitability standpoint, the specialty combined ratio, excluding catastrophes improved one six points from the prior year quarter coming in at 85, 6% in part due to favorable development.
We delivered an underlying loss ratio of 54% for the second quarter, which despite the year over year increase is well within our expectations.
Relative to the prior year period, the ratio increased one seven points, primarily driven by prudently raised loss selections in certain liability coverages and a comparison to lower than usual losses in specialty property lines in the second quarter of 2022.
Specialty topline growth was in line with our expectations as net written premiums grew seven 6% for the quarter propelled by growth in our most profitable lines retention also remains strong and as expected.
Pricing across the specialty portfolio remains robust helped by substantial increases of 15, 3% in property during the quarter inclusive of 23% in Hanover specialty industrial and 14% in marine our two largest property lines and specialty and lower but still very <unk>.
Reasonable pricing and casualty businesses.
Moving on to personal lines ex cat results.
Personal lines auto current accident year loss ratio, excluding catastrophes was 79, 1% in the quarter compared to 72% in the prior year quarter.
Loss picks for 2022 were adjusted upwards in the third quarter of 2022 to reflect higher inflation and repair delays.
Physical damage inflation remains stubborn, especially for parts and labor.
Frequency, while higher than 2022 is still better than our original expectations.
While we are seeing some stabilization in used car prices and parts. This measure has been volatile as of late <unk>.
Similar to recent industry experience, we are seeing an increase in liability trends primarily for bodily injury coverages liability trends are a continued area of focus and we are maintaining a prudent approach to setting our picks and by increasing our current accident year loss selections and continuing to file for higher rates.
Increases.
Homeowners current accident year loss ratio, excluding catastrophes was 62, 8% in the second quarter compared to 62% in the prior year quarter, reflecting an unusual spike in large fire losses.
While materials cost inflation has slowed higher labor costs continue to present a challenge in this line as well.
Personal lines generated net written premium growth of 10, 1% driven by robust pricing increases, which exceeded our original pricing targets for the second consecutive quarter.
Personal lines renewal price change is up 16% underscored by increases of 12% in auto and 22% in home while policies in force remained flat on a sequential basis.
These actions, including accelerated pricing and product changes are expected to reduce our ex cat personal lines loss ratio by mid single digits in 2024 compared to a full year 2020 to baseline.
Homeowners improvement will occur more rapidly than in auto given the ITV premium increases.
That said the ongoing personal lines inflationary trends have appeared to slow the pace of improvement toward our historically strong combined ratios.
We expect to achieve target profitability on a written basis in 2024.
Turning to reinsurance we successfully completed our property treaty renewals on July one.
Leading up to the renewal, we anticipated meaningful rate increases, but we were very pleased to secure the program with overall lower risk adjusted increases than expected, particularly in our per risks treaty.
The key elements and highlights of our current property reinsurance program are as follows.
The renewed per risk property program is very similar to the expiring program and structure retention and pricing.
We secured full capacity across our catastrophe occurrence program, maintaining our $200 million retention.
We placed the second tranche of the top $150 million reinsurance treaty layer, we maintained our multiyear placement with less capacity placed on an annual basis than last year.
And we closed on a new 150 million three year catastrophe bond with favorable terms and pricing only slightly above last year's $150 million bond issuance, which remains in place for another two years if unused.
Taken together. These changes have resulted in increased reinsurance limits and an occurrence program that exhausts at $1 8 billion compared to the previous one 6 billion for our highest concentration states.
Moving on to investment performance higher earnings yield and partnership income drove stronger than expected investment income of $87 6 million in the second quarter, which was primarily attributable to increased partnership income.
With respect to our customary quarterly catastrophe guidance I want to share. The following we are certainly experiencing an extraordinary cat year on top of fairly heavy loss experience. During the last couple of years, which has been well beyond our cat expectations.
This clearly requires a ground up reevaluation in addition to the thorough and granular process. We go through each year.
Our expanded process will include a reevaluation of our modeled catastrophe losses, our historical experience and supplemental non modeled risks using the most contemporary tools.
We will also incorporate the actions we are taking to address our cat exposure.
We will share the results with you in early 2024 for now we are laser focused on leaning into the hard market and addressing and resetting our cat risk profile.
We are addressing current challenges head on through strong execution of our margin recapture initiatives with the efforts of these actions compounding over time to drive margin restoration in our property business.
We are moving with a deep sense of urgency a clear plan and a strong team in place and we look forward to providing further updates on our progress over the next several quarters.
We have great confidence in our ability to return to our traditional placement of profitability with that we will now open the line for questions.
Greater yes. Thank you we will now.
I will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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Yes.
And the officers and the first question comes from Paul Newsome with Piper Sandler.
You may be on mute.
Good morning, Thanks for the call.
I guess any more detail about.
That gives us increased confidence in that.
Sequential improvement, particularly in the personal lines underlying would be very helpful. I get the right and I get that.
The effects, but I think we've seen a lot of folks.
Not quite make it.
In terms of improvement because of all this inflationary factors I.
I guess <unk>.
More confident comments would be helpful. But also could you talk about sort of like.
As we go through the quarter or are we still seeing sort of an acceleration overall of inflation or maybe you could just talk about your inflation pigs as well.
Particularly in personal loans.
Hey, Paul This is Jack Roche. Thanks. Thanks for your question and then obviously the personal lines loss trajectory and our.
Acceleration of pricing in terms and conditions are really top priority for us.
In addition to our cost management efforts.
To answer your first question I think that the loss trend environment has been.
Difficult for the industry to fully.
Capture coming up in the post pandemic environment, we're all trying to understand.
How the frequency trends in the severity trends are presenting themselves there is a lot of.
Good work being done from a claims manager claims analytics standpoint to separate out.
The various different types of claims and not use the traditional frequency and severity methodologies as our exclusive way to get after that so I think what you saw in this quarter is that we acknowledge that.
Even after the reset in midway through 2022, we needed to acknowledge that there was some persistency and the inflationary trends.
And so we've made those adjustments we're committed to making sure that we don't get behind and that we do the best we can to acknowledge the loss trends that are presenting themselves. We do expect that that inflation.
As peaking or is going to peak here. There are some indications that that starting but we're not going to count on that in terms of how we.
Attack the profitability challenges that we have.
And I guess, the best thing that we can do that I think youre seeing us do is to accelerate pricing to the next level.
On both home and auto.
Relative to the cat exposure get even more.
And <unk> about the changes that we need to make in order to to address that aspect of our personal lines profitability.
Paul given the increases in price that we're getting that are really accelerating and some of the anomalous nature of what happened in the second quarter with fire losses. It would be very hard to imagine a scenario, where we're not seeing sequential improvement in personal lines.
Great.
I'm sure other people will ask you a bunch of personalized question. So maybe I'll ask a commercial lines one.
Obviously the results have held up much much better than personal lines.
Are you can you talk a little bit about sort of how you think.
Rate versus inflation in those businesses as well not so much for the next quarter, but as we're looking out into next year on path can we get some help on that.
Those businesses or is it all sort of about topline growth.
<unk>.
This is Jack again, I'll say, a couple of overarching comments and then let <expletive> speak to some of his perspective there.
Thank the headlines for us are that because we do have a lot of property in our core commercial mix.
We've been challenged more than some in terms of.
The cat in the overall property volatility the <unk>.
Upside of that is that.
We are able to really lean into a firm market on the commercial lines property side and make some meaningful adjustments not only in pricing, but also.
Some underwriting in terms of additions there.
So I do think that pricing is still the number one lever that we have.
But price over loss trend, we believe is very much going in the right direction.
<expletive> do you want to follow up on that just to amplify.
All we see the pricing environment as and are remaining steady.
Next line or geography, or account size and just if we should expect some reacceleration going forward given the property component of that book.
Great. So as I suggested earlier I believe that the property.
Lines within.
Commercial broadly are are further firming.
So I think the answer is yes going forward, where we're certainly pushing more rate.
We see the market following that but time will tell as we go through.
The next couple of quarters.
I don't know if you have any specific we havent.
Spoken specifically about commercial auto to us the other line, which also continues to be hard and requires us to continue to lean in there. So.
Our objective is to accelerate pricing in commercial auto as well. So I think you put those two together.
Youre going to see certainly.
A step forward not a step backwards.
I will remind you, though that we have tended to be a little bit kind of ahead of the market and maybe a little bit more disciplined with our core commercial lines pricing. So I'd like to think that youre seeing some people kind of come back to us and the question is where does it go from here, we think it goes up.
Thank you.
Thank you and the next question comes from Matt <unk> with JMP.
Hey, good morning.
Morning.
Just wanted to ask a question on from the actions you are taking up personal lines I think.