Q4 2024 The Hanover Insurance Group Inc Earnings Call
Speaker Change: [music].
Good day.
Speaker Change: Welcome to the Hanover Insurance group fourth quarter of 2024 earnings Conference call.
Joe: My name is Joe and I will be your operator for today's call.
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Oksana: I would now like to turn the conference over to Oksana <unk>.
Please go ahead.
Oksana: 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 or <unk>.
Speaker Change: President of agency markets, and Bryan Salvatore President of specialty lines before I turn the call over to Jack Let me note that our earnings press release financial supplement and a complete slide presentation for today's call are available in the investors section of our website at Www Dot Hanover Dot com.
Speaker Change: After the presentation, who will answer questions in the Q&A session, our prepared remarks and responses to your questions today other than statements of historical fact include forward looking statements as defined under the private Securities Litigation Reform Act of 1995. These statements can relate to among other things our outlook in <unk>.
Speaker Change: Guidance for 2025, economic conditions and related effects, including economic and social inflation potential recessionary impacts tariffs as well as other risks and uncertainties such as severe weather and catastrophes that could affect the company's performance and or cause actual results to do.
Speaker Change: For materially from those anticipated we caution you with respect to reliance on forward looking statements and in this respect to refer you to the forward looking statements section in our press release, the presentation deck and our filings with the FCC. Today's discussion will also reference certain non-GAAP financial measures such as operating income.
Speaker Change: From an accident year loss and combined ratios excluding catastrophes among others have we conciliation 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 was there.
Jack Roche: Those comments I will turn the call over to Jack.
Jack Roche: You Oksana good morning, everyone and thank you for joining us.
Jack Roche: Our exceptional fourth quarter performance marked the culmination of a very strong year for our company.
Jack Roche: Across the organization our team executed remarkably well, we successfully implemented our cat mitigation actions, we delivered on our margin recapture plans.
Jack Roche: We continued to improve our claims response and delivery and we successfully executed on targeted portfolio management and innovation initiatives positioning the organization to deliver strong profitable growth going forward.
Jack Roche: Our company is stronger today than ever before poised to capitalize on some of the most promising growth opportunities in the marketplace.
Jack Roche: For the quarter, we generated record operating return on equity of 24.4%, we improved our ex cat combined ratio by two points seven points year over year to 87.5%.
Jack Roche: And we grew net written premiums by 7.4% a meaningful acceleration from recent quarters.
Jack Roche: On a full year basis, we delivered an operating ROE of 15.8% our highest on record.
Jack Roche: We increased net written premiums to north of $6 billion.
Jack Roche: Excluding cats, we grew our operating income by 29% demonstrating the inherent strength of our underlying earnings power.
Jack Roche: And notably prior year development was favorable across all major business segments further evidencing our commitment to prudent reserving practices.
Jack Roche: Throughout the year, we took a number of proactive steps to further mitigate our catastrophe exposure, increasing pricing modifying terms and conditions and making adjustments to our geographic mix.
Jack Roche: To provide some additional context over the last two years, we increased cumulative written renewal pricing by approximately 47% in homeowners and by 29% and core commercial property and over the past 12 months, we more evenly spread our risk geographically, we strategically reduced our personal lines.
Jack Roche: Our seat count in the Midwest by 10.2% and implemented new or enhanced deductibles across the majority of our personal lines book. These actions had a positive effect on our 2020 for performance.
Jack Roche: And they are expected to benefit our results in 2025 and in the years ahead.
Jack Roche: Also as part of our ongoing commitment to property risk management, we have successfully integrated sensor technology across targeted portions of our core commercial book of business to mitigate water and freeze losses.
Jack Roche: To date. This initiative has prevented millions of dollars in potential losses.
Jack Roche: Turning now to our segment accomplishments, starting with specialty which performed exceptionally well in the quarter and the year.
Jack Roche: Today, our 1.4 billion dollar net written premium specialty portfolio consists of nine businesses and 18 distinct product offerings, we set ourselves apart in the marketplace by providing select distribution across retail and wholesale channels diversified product offerings and well coordinated.
Jack Roche: Added service at both the distributor and customer level.
Jack Roche: As expected, we accelerated our top line growth to 8.8% in the fourth quarter after substantially completing the focus profitability improvement actions implemented over the past 18 months.
Jack Roche: In addition, a number of our most profitable lines E&S HSI health care and marine achieved double digit growth in the quarter.
Jack Roche: Through targeted investments in talent and technology and completing specific underwriting actions, we have positioned specialty to accelerate its growth trajectory in 2025 relative to the full year 2024.
And E&S, our new policy quote and issue platform is enabling our underwriting teams to prioritize and more efficiently respond to submissions for agent and wholesale partners.
Jack Roche: This platform is one of the many ways. We are building on our competitive advantage in the consolidating agency market.
Jack Roche: This dynamic environment requires continued operating model enhancements to yield process efficiencies.
Jack Roche: In Marine talent reputation and service are setting us apart from the competition. We're confident we will continue to strengthen our market position advancing our brand among agents as a leading go to carrier in this business.
Jack Roche: Across our specialty portfolio. We also continue to see profitable growth and new business opportunities in surety and our professional and executive lines.
Jack Roche: Additionally, we will lean harder on some newer opportunities, including smaller size specialty accounts wholesale distribution.
As well as a targeted appetite expansion in attractive classes in marine and surety among others.
Jack Roche: Focusing now on our core commercial segment.
Jack Roche: We delivered strong performance in the quarter and stable margins throughout the year underscoring the effectiveness of our disciplined underwriting and middle market property actions.
Jack Roche: We remain committed to balancing thoughtful growth with profitability in this business, while proactively addressing accounts that don't meet our refined underwriting standards.
Jack Roche: Premium growth in the quarter was driven by standout performance with small commercial premiums up 9.3% and middle market Premium's up 5%, reflecting significant sequential momentum.
Jack Roche: Small commercial remains a real growth engine for us delivering strong performance in Q4 with notable new business momentum.
Jack Roche: Submissions increased approximately 25% in the quarter, a testament to the great transactional success and effectiveness of our tap sales quote and issue platform.
Jack Roche: Strong market penetration and excellent execution.
Jack Roche: We are leveraging technology and third party data to drive new business efforts supported by our talented and experienced team, which is the strongest it's ever been.
Jack Roche: In middle market. The vast majority of our underwriting adjustments are now behind us, which enabled elevated growth in the fourth quarter as expected.
Jack Roche: Our improved mix has enhanced our portfolio, particularly in property as we continue to retain our most profitable business setting the stage for strong growth and profitability in 2025.
Jack Roche: Turning to personal lines. This.
Jack Roche: This team delivered an outstanding turnaround performance in 2024, demonstrating strong market awareness agility and determination.
Jack Roche: During the year, we implemented critical and industry, leading changes in terms and conditions significantly increased pricing and meaningfully shifted geographic mix to a more balanced portfolio, while still growing premiums by over 4% for the year.
Jack Roche: Our margin improvement actions Mark this segment's sixth consecutive quarter of ex cat loss ratio improvement.
Jack Roche: We are exiting the year with personal lines price increases above 14% for the account, which moderated slightly from the third quarter, but still high relative to historic levels and current loss trend.
Jack Roche: The changes we have made to terms and conditions in our homeowners line are benefiting our cat results as you would expect.
Jack Roche: And our updated all peril deductibles, which we implemented across most of our states have had a positive impact on our ex cat performance as well.
Jack Roche: As higher deductibles reduced smaller claims we are benefiting from lower frequency on our ex cat loss ratio.
Jack Roche: The Swift improvement in personal lines profitability is enabling us to focus on accelerating growth and additional geographic regions reach.
Jack Roche: Regions that demonstrates strong potential for sustained profitability.
Jack Roche: Such as Wisconsin, Maryland, Pennsylvania, and Tennessee.
Jack Roche: As planned we observed a divergence in net written premium growth across regions with Midwestern states posting an increase of three 2% in the quarter compared with combined growth of 10.1% for all other states.
Jack Roche: We are actively pursuing pip growth in targeted regions to enhance diversification.
Jack Roche: The greater diversification across our book is enabling us to spread our earnings more broadly than ever helping to mitigate our exposure to risk and volatility.
Jack Roche: We're proud of the outstanding work, our personal lines team did in 2024, and we are very excited about the profitable growth potential for our market leading account focus franchise in 2025 and beyond.
Jack Roche: Before I conclude my remarks, I'd like to share some broader perspective about our go forward strategy and our business model.
Jack Roche: Our strategy remains highly effective supported by a strong operating model and continued technological advancements.
In today's rapidly evolving marketplace ease of use speed to answer and exceptional customer service are not just desirable they are essential.
Jack Roche: With this in mind, we continue to make substantial investments in innovation and the development of proven effective tools tools that enhance our value proposition in the market improving efficiency and analytical precision.
Jack Roche: In 2024, we continued to make progress in tech innovation complementing capabilities, we introduced previously.
Jack Roche: As a result today, we have one of the most effective quote bind and rating platforms in the market tap sales with versions in our personal and small commercial and relevant specialty segments.
Jack Roche: We have various application program interfaces that allow us to seamlessly plug into agents platforms.
Jack Roche: And we have digital workflow automation that allows for simplification of the quote submission process, eliminating the need for manual intervention for submission ingestion and Triaging, reducing response times significantly.
Jack Roche: Our updated claim system implemented over the past few years has now been built out with additional data elements from third party sources.
Jack Roche: Our ongoing investments in data and analytics have produced advanced capabilities like our enhanced jumpers severity escalation models, which improve our ability to predict and manage claims with escalating severity, enabling timely interventions and better outcomes.
Jack Roche: Additionally, we are now leveraging virtual appraisals of claims on approximately 80% of our auto physical damage claims streamlining settlement processes and improving customer satisfaction.
Jack Roche: We expect other recently added capabilities, such as real time text notifications and status tracking to further enhance efficiency and customer experience.
Jack Roche: Looking ahead, we are expanding our AI initiatives, such as data extraction triage models and model training oversight to drive further efficiencies and automation.
Jack Roche: While we continue to pilot innovative AI tools to enhance underwriting decision making processes.
Jack Roche: We are prioritizing capabilities that drive enhanced employee productivity and improved ease of use for agents and customers, while we maintain rigorous oversight of model development.
Jack Roche: Risk mitigation governance, and compliance are essential to our strategic technology and AI initiatives, ensuring our innovations are secure ethical and compliant with regulations.
Jack Roche: As we close out 2024, we are very proud of the performance we delivered for the year.
Jack Roche: Our diversified franchise with its specialized products and capabilities demonstrated exceptional resilience and growth potential.
Jack Roche: With our talented and agile team strong agency partnerships and innovative technological advancements we are confident in our ability to continue to capitalize on the many opportunities we see in the market.
Jack Roche: And to drive strong sustainable profitable results going forward.
Jack Roche: Now is our time to take advantage of the opportunities we have created capitalizing our nimble and agile culture and business model.
Jack Roche: Key differentiators for our company.
Jack Roche: As we look forward, we are extremely optimistic and we have every confidence we will continue to excel in the year ahead.
Jeff Farber: With that I'll turn the call over to Jeff.
Jeff Farber: Thank you Jack and good morning, everyone.
Jeff Farber: Our strong execution in 2024 as demonstrated by our record performance on a consolidated basis, we reported excellent net and operating income per share for the fourth quarter and the full year with each beating our previous records.
Jeff Farber: We delivered a combined ratio of 94.8% for the full year, our best since 2020.
Jeff Farber: Excluding catastrophes, our combined ratio was 88.4%, beating our original guidance handily and a 2.9 point improvement compared to 2023.
Jeff Farber: Our fourth quarter overall combined ratio of 89.2% set a new quarterly record and marked a five point improvement over the comparable period last year.
Jeff Farber: Quarterly top line growth was 7.4% with a return to normalcy as we indicated consolidated full year topline growth was 4.7% in line with our 2020 for mid single digit growth guidance.
Jeff Farber: With the vast majority of our targeted underwriting actions in middle market and specialty behind US we anticipate improved growth across these segments in 2025.
Jeff Farber: Cat losses for the year was 6.4%, including 0.7 points of favorable prior year Cat development.
Jeff Farber: Our approach to setting catastrophe loads is prudent as we select higher on the probability curve.
Jeff Farber: Prior year development was favorable across each segment in both the fourth quarter and for the year liability loss experience and trends were largely within expectations and we're continuing to exercise prudence in our picks given the uncertain environment.
Jeff Farber: Looking at favor ability in more detail specialty was favorable by 3.5 and seven points for the year and quarter respectively.
Jeff Farber: The variability was widespread in several areas, notably driven by consistently lower than expected losses in our professional and executive liability claims made business.
Jeff Farber: Core commercial favorable development was 80 basis points for the year and 50 basis points in Q4 with favorably in each major line of business driven primarily by property coverages as we maintain our prudence around liability trends.
Jeff Farber: We are still benefiting from lower liability frequency relative to long term historical trends and from generally favorable industry and size mix.
Jeff Farber: Personal lines development was slightly favorable for the quarter and year, we are observing favor ability and auto collision coverages and in homeowners and we continue to monitor the book for elevated trends in personal umbrella, while increasing rates significantly.
Jeff Farber: We believe our strong balance sheet positions us well, which along with reduced frequency provides a buffer against the legal abuse environment in the industry and we continue to be confident in our ability to sustain our performance and navigate these trends effectively.
Jeff Farber: Our expense ratio was 31.3% for the year and above our expectations.
Jeff Farber: It is clearly a temporary spike and due to higher variable expenses.
Jeff Farber: Such as employee and agency compensation, which are reflective of much better than expected performance the.
Jeff Farber: The earnings beat relative to our original expectations was especially significant in the fourth quarter trigger.
Jeff Farber: Triggering a true up for the full year in the quarter.
Jeff Farber: Additionally, we continued to make investments in our future profitable growth, particularly in the specialty segment and believe our investments in talent and technology will allow us to further capitalize on profitable growth opportunities.
Jeff Farber: We remain fully committed to our long term 20 basis point per annum improvement trend and we have clear visibility to a 30.5% expense ratio in 2025.
Jeff Farber: Our financial plans for staff compensation get reset each year to account for future performance targets.
Jeff Farber: Improving underwriting performance is factored into our agent profit sharing expectations by planning for it every year with some continuing adjustments.
Jeff Farber: We're committed to managing our expenses effectively and appropriately we are very pleased with the delivery of a much lower combined ratio than we guided to despite the temporary expense ratio elevation.
Jeff Farber: Turning to our underlying underwriting loss performance, we surpassed our expectations for both the quarter and the year.
Jeff Farber: Our consolidated underlying loss ratio improved three three points to 56, 9% in Q4, and 2.9 points to 58, 2% for the full year helped by impressive improvement in personal lines better than expected results in specialty and stable loss performance in core commercial.
Jeff Farber: <unk>.
Jeff Farber: Diving into personal lines, our combined ratio, excluding catastrophes improved 7.9 points to 85.9% for the fourth quarter and 7.8 points to 88, 9% for the full year.
Jeff Farber: The improvement was driven by the benefits of earned pricing in both personal auto and homeowners along with lower frequency, which enhanced our margins.
Jeff Farber: Our personal auto ex cat current accident year loss ratio was better than planned for both the quarter and the year. A result of healthy price increases earn again and a continuing benefit from industry wide reduce frequency.
Jeff Farber: We expect some additional improvement in 2025 as written rate earns in above loss trend, albeit to a lower degree.
Jeff Farber: Turning to homeowners, we delivered outstanding ex cat current accident year loss ratio improvement for the year down 6.7 points and for the quarter down 12 points.
Jeff Farber: Higher earned rates were certainly a major driver of the improvement. We believe we have also benefited from a frequency reduction in small size claims driven by a gradual introduction of increased deductibles throughout the year.
Jeff Farber: Finally, there was a slight impact from lower than usual weather related claims primarily in the fourth quarter.
Jeff Farber: This said we continue to closely monitor activity on our P. L umbrella line in order to stay on top of evolving trends.
Jeff Farber: We are achieving healthy price increases up approximately 20% in the fourth quarter.
Jeff Farber: We expect the personal lines loss ratio to further improve from the 2024 actual.
Jeff Farber: As increased pricing continues to earn in and we benefit from terms and condition changes more fully particularly in home.
Jeff Farber: Personal lines topline growth was solid in the fourth quarter at six 6% and four 3% for the year net.
Jeff Farber: Net written premium growth was impacted by our deliberate strategy to reduce Pip count in select states to manage our cat exposure, particularly in the Midwest.
Jeff Farber: Importantly, we continue to achieve strong retention, our homeowners line ending the fourth quarter with retention of 83.2%.
Jeff Farber: Which demonstrates the market's ability to absorb continued price increases.
Jeff Farber: Personal lines pricing is expected to remain healthy in 2025 and as such the segment remains on track to return to target profitability on an earned basis this year.
Jeff Farber: In core commercial our current accident year ex cat loss ratio was 58, 9% in the quarter and 57, 8% for the full year.
Jeff Farber: The loss ratio for the year was approximately half a point higher than in 2023, primarily driven by prudently, adding I b in our reserves and commercial umbrella.
Jeff Farber: Our property continued to perform well maintaining the profitability levels achieved in 2023 in.
Jeff Farber: In liability lines, our business continued to benefit from lower than historical frequency because of geographic and industry mix choices. We have made in the past.
Jeff Farber: And our actuarial estimates for core liability lines remained consistent with our expectations.
Jeff Farber: However management increased our view of current accident year loss picks due to uncertainty around claim severities.
Jeff Farber: Overall, we are confident that our approach is thoughtful and prudent and is in keeping with our long standing track record of maintaining a strong balance sheet.
Jeff Farber: Our prudent view is driving increased middle market umbrella rates of approximately 14% in the year and double digit pricing increases in core commercial auto.
Jeff Farber: We expect our liability pricing to accelerate in 2025.
And we expect to see some improvement to the core commercial loss ratio in 2025 driven by property.
Jeff Farber: Core commercial net written premium growth was 4.2% for the year, reflecting the profitability improvement actions in middle market previously discussed by Jack.
Jeff Farber: In the fourth quarter growth accelerated to 7.5%.
Jeff Farber: Moving onto specialty.
Jeff Farber: This business continued to deliver exceptionally strong results. This specialty current accident year loss ratio, excluding catastrophes was 49.6% for 2024, and 48, 4% in the quarter coming in better than our expectations and favorable to our low fifty's tar.
Jeff Farber: <unk> for this business.
Jeff Farber: All sub segments performed very well with notable outperformance in marine and specialty industrial and E&S.
Jeff Farber: Specialty net written premium growth surged sequentially to eight 8% in the fourth quarter. Following the substantial completion of our portfolio adjustments to enhance profitability. Looking ahead. We expect continued strong growth positioning specialty as a significant driver of enterprise topline.
Jeff Farber: Mansion in 2025 and beyond.
Jeff Farber: Turning to reinsurance on January 1st we successfully completed our multi line casualty reinsurance renewal process, securing a similar structure to expiring agreements, we are comfortable with contracted rates, which increased as we expected driven by industry casualty pressures we will.
Jeff Farber: Remain pleased with our robust casualty reinsurance structure attaching at $2.5 million, which is one of the drivers of our resilience against the contemporary liability trends facing the industry.
Jeff Farber: Moving on to investment performance net investment income increased 23, 4% in the quarter and 12, 2% for the year to $372 6 million ahead of our original guidance for the year of a 10% increase.
Jeff Farber: Growth was propelled by strong fixed maturity income from higher earned yields and partially offset by lower investment partnership income throughout the year.
Jeff Farber: Excluding partnerships net investment income was up approximately 16, 5% for the year in 2024.
Jeff Farber: We've also benefited from some strategic repositioning within our portfolio as in the prior quarter. We continued to divest a portion of our lower yielding fixed income securities in consideration of expiring tax carry back capacity against gains from 2021 and 2022.
Jeff Farber: From an asset allocation perspective throughout the year, we reduced exposure to C. M. D S with reinvestment of proceeds into other high quality subsectors of securitized products, including a b S and RMB S.
Jeff Farber: We also extended duration of our portfolio from 3.9 at year end 2023 to 4.4 at year end 2024.
Jeff Farber: Overall, we maintained our weighted average rating of our fixed maturity portfolio at a plus with 95% of the portfolio being investment grade <unk>.
Jeff Farber: Against the backdrop of a volatile economic and interest rate environment tight credit spreads and expectation of somewhat lower short term rates toward the end of 'twenty five we believe we are well positioned.
Jeff Farber: We are pleased with our investment portfolio allocation and yields were also equally excited with strong underwriting profitability that helps to boost our cash flows enhance our asset base and position us to achieve meaningfully higher net investment income in the future.
Jeff Farber: Moving on to our equity and capital position book value increased 14.9% throughout 2024, ending the year at 79 point 18.
Jeff Farber: Driven by earnings as well as a slight reduction of the unrealized loss position.
Jeff Farber: Excluding unrealized book value increased 10.4% for the full year driven by very robust earnings.
Jeff Farber: In December we raised our quarterly dividend by five 9% to 90 cents per share marking 20 consecutive years of annual increases.
Jeff Farber: This milestone underscores our commitment to shareholder value and our confidence in the company's future and financial strength.
Jeff Farber: We reentered the market in Q4 repurchasing a 170000 shares in the quarter, we see repurchases as a good tool for enhancing shareholder value and expect to engage in repurchases in 2025.
Jeff Farber: Our dedication to capital management priorities and responsible stewardship remains unwavering.
Jeff Farber: Turning to our annual guidance for 2025, we expect overall consolidated net written premium growth to be in the 6% to 7% range.
Jeff Farber: Specialty and small commercial growth are expected to exceed this range, while personal lines and middle market growth are projected to be below it.
Jeff Farber: We expect net investment income to increase by 12% to 14% from 2024.
Jeff Farber: Our expense ratio expected to return to its traditional pacing and decreased to 35%.
Jeff Farber: We have confidence given the reasons outlined earlier.
Jeff Farber: The combined ratio, excluding catastrophes should be in the range of 88.5% to 89.5%.
Jeff Farber: Which reflects an anticipated improvement from the 90% to 91% guide we provided a year ago.
Jeff Farber: And we expect an effective tax rate to approximate the statutory rate which is 21%.
Jeff Farber: Our cat load for the year is six 5% in our first quarter cat load is 6%.
Jeff Farber: The financial impact of natural catastrophe bookings in January 2025 is expected to be less than $10 million above the January monthly cat plan of $30 million.
Jeff Farber: California wildfires represents the overwhelming majority of January cats.
Jeff Farber: To wrap up we are beginning the year extremely well positioned for enhanced future performance supported by our diversified franchise, which not only strengthens our resilience against market fluctuations, but also positions us to capitalize on emerging opportunities.
Jeff Farber: As we continue to focus on delivering value our robust financial foundation and innovative approach will drive long term success and shareholder returns with that we will now open the line for questions operator.
Jeff Farber: Or are you.
Jeff Farber: Looking for questions.
Speaker Change: Pardon me, we will now begin the question and answer session.
Speaker Change: To ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If youre using a speakerphone please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: And our first question for today will come from Bob <unk> with Morgan Stanley. Please go ahead.
Speaker Change: Good morning. So my first question is around the core commercial understand that the growth is going to come from a small market.
Speaker Change: But you also mentioned that.
Speaker Change: It seems like you're better positioned in the middle market for business in 2025 as well.
Speaker Change: Going forward are there any lines of business within the middle market.
Speaker Change: Feel that could be a great opportunity for growth maybe if you can unpack what are the things you are more optimistic about them in the middle market as well thanks.
Jack Roche: Sure Bob This is Jack I'll say a few.
Speaker Change: Comments about that and then let <expletive> Lavey chime in.
Speaker Change: But we're really excited frankly heading into 2025 that not only are we continuing to have tremendous momentum with our small commercial business both in terms of topline and bottomline.
Speaker Change: But also.
Speaker Change: A lot of hard work in the middle market area. Both in terms of addressing ex cat volatility and also cat loads are substantially behind us and we really are in the best position we've been in some time.
Speaker Change: That said, we will watch the environment throughout the year to see.
Speaker Change: How much we are able to elevate our growth in middle market. We believe that small commercial continued to drive high single digit growth, but we're going to keep middle market more in the mid single digit area until we get that next level of confidence that the external environment kind of requires.
Speaker Change: Or allows us to kind of take take that grows up a level and that is our inevitably wet where we'd like to do is get middle market to participate.
Speaker Change: Substantially in our growth. So maybe you want to be more specific yes sure. Bob I think we're we're a package player. So when we think about growth. We think about the account we have one of the strongest account percentages in the market, but that said we are we continue to be excited about work comp.
Speaker Change: In the near term.
Speaker Change: Look for that and long term outlook. So we'll lean in even for some monoline work comp, particularly in small but.
Speaker Change: As part of a package in the middle market space. So that's those would be my comments on the line side for the industry side.
Speaker Change: We pride ourselves on being a great underwriting company. So we think about.
Speaker Change: Some of your classic main Street industries manufacturing professional services, but.
Speaker Change: But we also are very excited and continue to lean in and some of them are more specialized areas like tech and life Sciences being at the top of that list, but also human services, which is an area, where we have some distinctive offerings in the market.
Speaker Change: Okay got it now that's very helpful.
Speaker Change: So my second question revolves around.
Speaker Change: Reserving understand that you're adding little bit too.
Speaker Change: Ivy NR specifically.
Speaker Change: Commercial umbrella side.
Speaker Change: Can you maybe help us think about.
Speaker Change: The.
Speaker Change: The rationale behind that a little bit more obviously, social inflation and that being just a little bit more conservative on reserving, but just are there things trend wise are you seeing things that could potentially be.
Speaker Change: Be a cause of concern either on the severity side or maybe a claims frequency.
Speaker Change: Things of that nature.
Speaker Change:
Speaker Change: Hi, Bob It's Jeff.
Bob: Just to put it in perspective, we've seen favorability in all of our segments for reserving we've seen favorability in all major core lines of business.
Bob: And we've been steadily increasing our current accident year picks over the last few years, largely with IV NR and I think we're well prepared for those casualty trends I would remind you that we've seen substantial claims frequency since the pre COVID-19 levels, that's been very helpful along with rate and prudent.
Bob: Reserving, but I don't think it's a state secret that casualty trends have been more severe and so people are more likely to involve a lawyer and lawyers are more aggressive but theres nothing in the specific terms in our current accident year that we're really saying, we just want to be prudent and prepared.
Bob: <unk>.
Bob: Got it so it is more conservatism than anything else.
Bob: Correct Okay.
Bob: Okay. Thank you.
Bob: Thank you Bob.
Speaker Change: And our next question will come from Michael Phillips with Oppenheimer. Please go ahead.
Michael Phillips: Thanks, Good morning last quarter, you guys mentioned, how four core commercial lines core loss ratio could improve somewhat from 'twenty to 'twenty four levels, given what youre seeing in pricing and loss trend I guess does the action that you just talked about albeit a small action does that give you any pause for those comments.
Michael Phillips: I don't think so we're still very comfortable with them.
Michael Phillips: We expect our liability pricing to accelerate in 2025, and we expect to see some improvement in the core commercial loss ratio and 25% largely driven by property.
Michael Phillips: Okay.
Speaker Change: Okay, Jeff I heard your opening comments on personal umbrella a couple of times, how you're monitoring loss trends there and then I think on commercial umbrella I think you said 14% rate.
Speaker Change: Thanks for that if I heard Yuri thanks for that.
Speaker Change: Your your commercial umbrella book I believe is about a third of your GL book.
Speaker Change: Not small.
Speaker Change: And I guess I know you don't write standalone basis, but I'm wondering if you could share any kind of more quantitative comments or maybe wall Street, specifically that'd be nice.
Speaker Change: What you see on that book for commercial umbrella or maybe other quantitative comments like we already standalone business that can help us ease concerns that tough times can be a head for the commercial umbrella.
Speaker Change: Yes.
Mike: Mike This is <expletive> yes.
Speaker Change: And I'll start with that we no longer right.
Speaker Change: Mono line umbrella, we managed our limits very tightly as you know we our limits are quite low relative to the industry.
Bella our commercial umbrella is about 7% of our overall commercial portfolio. So that gives you some quantitative view and yes pricing is a critical lever.
Speaker Change: At <unk> in the quarter, but pushing that number up northward throughout 'twenty five.
Speaker Change: I think it's been several years if not longer that.
Speaker Change: Since we've written any model on Enbrel it just to be clear not a new phenomenon, we've been talking about it since 2000.
Speaker Change: Yes.
Speaker Change: To be clear sorry, we it can be a different number as I said, 30% I was referring just to the.
Speaker Change: But yes your jumbo yes.
Speaker Change: 7%, Okay. Thank you.
Speaker Change: And our next question will come from Paul Newsome with Piper Sandler. Please go ahead.
Speaker Change: Okay.
Paul Newsome: Good morning, Thanks for the call.
I wanted to ask a big picture question on personal lines now that you've kind of gone through I think we'll functional perspective.
Paul Newsome: The recovery.
Paul Newsome: Are there.
Paul Newsome: Some lessons learned there may be some strategy changes that youre thinking about.
Paul Newsome: As you know that the book has all been.
Paul Newsome: So going back to profitability.
Paul Newsome: And I'm, just thinking about whether or not you've got the right geography.
Paul Newsome: That kind of things now that you've gotten through the process.
Jack Roche: Yes, Paul this is Jack Thanks for that question Theres No question that as the world evolves.
Jack Roche: And as our portfolio develops we're thinking hard about what the future state of that next level of diversification looks like.
Jack Roche: And we have the proper humility and experience coming out of the back half of 'twenty, two and 'twenty three.
Jack Roche: As much progress as we were making both.
Jack Roche: Property and casualty personal lines versus commercial lines.
Jack Roche: Geography.
Jack Roche: We need to accelerate that diversification.
Jack Roche: And while we have a huge successful business in Michigan and the Midwest relative to personal lines. It's outsized.
Jack Roche: And so we needed to address that in the silver lining of 2023 is that we're getting to move.
Jack Roche: That diversification in that portfolio improvement much faster than we ever could have but for the pain that we kind of took on in 'twenty three in particular.
Jack Roche: So the answer is yes, I do think about diversification, though as an enterprise we have opportunities to grow specialty commercial our small commercial business, even sub segments of our middle market business and not think about diversification.
Jack Roche: For personal lines exclusively.
Paul Newsome: And one other thought I would say about that Paul is that that we are.
Paul Newsome: There's a lot of the states that were not in in personal lines are frankly, not that desirable to us so expanding our footprint in personal lines substantially in the short to mid range is not one of the levers that we want to poll longer term, we'll see how things play out but we.
Paul Newsome: We are dramatically changing our property aggregations in particular across the enterprise with the work we've done.
And I think we're really making progress and that diversification effort more broadly.
Paul Newsome: That's great.
Paul Newsome: Apologize ahead of time.
Paul Newsome: The casualty reserve horse one more time.
Paul Newsome: Because we're getting a lot of questions.
Paul Newsome: So it sounds like a lot of questions on it.
Paul Newsome: Can you talk about sort of the trade off of sort of small increases in the <unk>.
Paul Newsome: <unk> casualty lines.
Paul Newsome: And sort of the tone to them.
Paul Newsome: You can take a more aggressive view.
Paul Newsome: What would be the things that would.
Paul Newsome: Trigger.
Paul Newsome: A change in how you.
Paul Newsome: Ill.
Paul Newsome: Increasing considerably withdrew spoke to casually.
Paul Newsome: Well, we're very comfortable with our reserve position and we have established ample conservatism in our loss picks over the last several years, what we were talking about earlier in the call. We're increasing our current loss pick by a relatively nominal amount to.
Paul Newsome: Increase in our.
Paul Newsome: Overall, I think we're very comfortable and as I said, we've had a very substantial frequency benefit over the last four to five years, which has offset a meaningful amount of the increased severity. So I don't think you should think about it as nibbling away at it.
Paul Newsome: Issue I think its minor amounts of additional prudence in the current accident year to make sure that there's nothing going on going forward that gives us pause or concern.
Paul Newsome: Yes.
Paul Newsome: Congratulations on the quarter guys I appreciate it. Thank you Paul Thank you.
Speaker Change: And our next question will come from Michael Zaremski with BMO. Please go ahead.
Speaker Change: Hi, Good morning, Dan on for Mike, maybe just on personal lines specifically homeowners.
Speaker Change: What percentage of your your loss ratio is maybe hail or SCS related and just how much do you think.
Speaker Change: The average deductible has gone up throughout the remediation cycle or throughout March and just the impact of deductibles have had to your go forward expectation on the loss ratio I don't have the specific hail component at our fingertips, but well <expletive> is very familiar with the <unk> yes.
Speaker Change: On the deductible side, we're seeing those go up between three to three 5% to five times.
Speaker Change: Depending on the state so the state differences, we're seeing that.
Speaker Change: It's significant so it's having a meaningful effect on as you've heard us say some of the frequency of the <unk>.
Speaker Change: Mahler claims underneath those deductibles.
Speaker Change: This is Jack just to remind you we have really imposed a minimum all perils deductible in most states at around $2500.
Speaker Change: And then a one or one 5% when inhaled deductible.
Speaker Change: In the Midwest in conjunction with some of the cultural stuff, although we're not really a big coastal writer. So when you think of hail and wind losses.
Speaker Change: And severe convective storm.
Speaker Change: Territories.
Speaker Change: We've made major.
The improvement in terms of the self insurance that is part of our of our proposition to our customers. So major major differences in many cases.
Speaker Change: Damage roof would be really.
Speaker Change: Half covered bye bye.
Speaker Change: By the customer in terms of their retention.
Speaker Change: Thanks, that's helpful. And then maybe just a similar sticking with that just passed and the Midwest overall.
Speaker Change: Strategically is how we're thinking about the test there is there like a target number for Midwest as a percent of personalized portfolio or is that kind of just.
Speaker Change: Throwing a loss ratio needle.
Speaker Change: We're back into something like that thanks.
Speaker Change: Yes, I think the growth is really one of the levers that we're using to get our property aggregations, where we're comfortable and again that's on an enterprise basis, because we write commercial lines in the Midwest also so we have what we think is an industry leading approach to not only measuring our progress.
Speaker Change: Pretty aggregations and micro concentrations.
Speaker Change: But modeling them relative to the various perils.
And so are our guard rails that we've imposed are really more about micro concentrations against an earnings volatility measure.
Speaker Change: Versus just some magical pip count that.
Speaker Change: That said, what you're seeing is that we are shrinking.
Speaker Change: Shrinking Pip, mostly through less new business in the Midwest.
Speaker Change: For a two year period to get us to where we want to get in conjunction with pricing terms and conditions and overall micro concentration revaluations in certain sub territory. So we're well on our way to <unk>.
Speaker Change: A much more balanced position.
Speaker Change: And it's my hope and expectation that as we get to 'twenty six.
Speaker Change: We're going to be thinking about.
Growth in a more balanced way unless defensive in the Midwest.
Speaker Change: Thank you.
Speaker Change: And our next question will come from Meyer Shields with <unk>. Please go ahead.
Speaker Change: Great. Thanks, I had one minor question on one big picture question, but starting with the minor I guess we saw.
Speaker Change: Net written premium growth in specialty and for professional lines pickup with the highest growth rate we've seen in a while.
Speaker Change: And I guess, the first we have the pricing getting better for a lot of the lines I was hoping you could talk to what yes, what drove the growth in the quarter.
Speaker Change: So this is Jack real quickly I think one of the things I always remind folks and I don't have to remind new mayor that our specialty book is.
Speaker Change: Broad based but it's also tends to be.
Speaker Change: Retail driven and on the lower end and so some of the pricing I think that you are hearing about in the marketplace is kind of one octave or two octaves above where we play in terms of some of the pressure.
Speaker Change: That said I'll, let Brian speak to our growth patterns and kind of our overall thought around balancing pricing and growth. Yeah. So thanks for the question Meyer I wouldn't I would start by saying.
Brian Meyer: I think what Jeff said is important where we play is important to US we continue to get really nice pricing nine 5% in the quarter.
Speaker Change: And I would add if I look across the portfolio right five years.
Speaker Change: <unk> rate in excess of trend, that's positioning us quite well and so now as we're looking at growth in the professional and executive lines as well as a lot of our key lines like marine like health care area.
Speaker Change: We see the market here, we see the opportunity to be going after this business and so we are planning for them.
To grow and we're investing in them growing and a nice component of that is new business, we had our highest new business year in five years in 2024.
Speaker Change: Okay, that's very helpful.
Speaker Change: And then I apologize this is going to sound like a softball, but I really want understand the mechanics of it we've seen sort of across the industry, maybe pressure on agency incentive compensation because of reserve strengthening for casualty lines, but obviously that didn't happen at Hanover and in the real world how does that impact <unk>.
Speaker Change: To grow with agents.
Speaker Change: So let me just make sure I heard you.
Speaker Change: Clearly youre, saying that youre observing pressure on agency comp because of the loss trend environment and since we haven't experienced that how are we thinking about our.
Speaker Change: Yes.
Speaker Change: Our compensation with agents or how that affects our P&L.
Speaker Change: Help me how the how.
Speaker Change: It affects their willingness to grow with Hanover, I would humidity because I don't know.
Speaker Change: Hum.
Speaker Change: Yeah, I'll say, a couple of things on this and if Brian or.
Speaker Change: Nick want to add in.
Speaker Change: We manage our agency relationships.
Speaker Change: I think.
Speaker Change: More proactively than anybody I think that we compete against we have tremendous local relationships that our regional vice presidents.
Speaker Change: Drive and we have a pretty.
Speaker Change: Focused national approach to the agents that are consolidating and growing and what we're observing is that agency compensation now is one strategic element of our partnership model.
Speaker Change: Many of those agents as you know are looking for a little bit more stability in their compensation. So we're able to model and negotiate something that allows them to get a little bit more predictability, but also take some of the volatility out of the payments in aggregate over time.
Speaker Change: Frankly that has been.
Speaker Change: A tailwind for us and so.
Speaker Change: But we are as well positioned as we've ever been from a agency incentive perspective.
Speaker Change: And compensation as part of that but I think some of it has to do with how hard we work to help them improve their economics operationally.
Speaker Change: And more broadly than compensation.
Speaker Change: So really couldnt be more pleased with the way. This is playing out and really are consolidating time in the business on the agency side.
Speaker Change: Yes, the only thing I would say Meyer is that if you asked in Asia that question, David It begins with the <unk>.
Speaker Change: Customer and what's right for the customer replacing them with the right carrier with the right coverages, but naturally the state of the partnership comes into play I think as what Jack Jack is getting out there.
Their desire to grow with certain markets based on all the elements of the value proposition that they bring to the table for that agent.
Speaker Change: I wouldn't say they look at specifically about the way the mechanics of our profit sharing plan works.
Speaker Change: To then go right to giving a carrier one piece of business or not.
Okay. That's very helpful. Thank you very much.
Mary: Thanks Mary.
Speaker Change: Again, if you have a question you May press Star then one to join the queue.
Speaker Change: Our next question here will come from Bob Farnam with Janney. Please go ahead.
Hey, good morning.
Speaker Change: Questions first for Brian I, just wanted to talk about the excess and surplus lines business, specifically just how submission trends are looking there and in 2025 are you are you looking are you leaning more towards property risks or casualty risks.
Speaker Change: Or it doesn't matter.
Yeah. Thank you for the question so.
Speaker Change: So first off.
Speaker Change: Our E&S activity the submission activity the quote activity remained very high and growing increasing throughout 'twenty four.
Speaker Change: I would call out you have E&S across our portfolio. So it's not just the traditional.
Speaker Change: Property and casualty that you might think of but it's across all lines any in E&S. It is the activity is growing and so on the.
Speaker Change: The books of business.
Speaker Change: Much of that mix, what I would share with you is that our portfolio is pretty close to 50 50 in terms of property and casualty and we like that balance right given what we're seeing in the casualty environment right now.
Speaker Change: Having that balance of property and casualty and the way we have it is attractive to us and we very diligently manage to not getting overweighted on either side.
Speaker Change: And I would also say what's also attractive about that property casualty mixes our property in E&S as you would expect is a little less cat sensitive.
Speaker Change: So that that kind of helps us in the enterprise view of bringing in some property business that doesn't really.
Speaker Change: Materially add to our property aggregations actually one more thing.
Speaker Change: I would just ask that we keep in mind that our portfolio also always skews towards the middle market and lower type of risks. So a limit profiles are a little bit different than others and so we like the way that portfolio, we start building for us.
Great. Okay. Thanks for that color.
Speaker Change: Second question is.
Speaker Change: How do you respond.
Speaker Change: To investors. They may just take a look at the P&C sector overall, and say Hey look.
Speaker Change: Rate increases are decelerating, we're kind of past the hard market peak.
Speaker Change: Maybe the story has played out.
Speaker Change: Kind of getting down in the market.
<unk>, obviously, you've got a lot of things going but you're trying to have to convince our investors to continue to look at the stock.
Speaker Change: Yeah. Bob This is Jack I would tell you if you look long term or even mid range I think.
Speaker Change: This is a time in our business, where the world is getting increasingly risky and loss trends are stable to up and so I don't see that as being a stage in the in the market, where we're going to have.
Speaker Change: Some peak pricing I think tomorrow's pricing has everything to do with how these loss trends play out.
Speaker Change: From my perspective, the liability trends or are deteriorating within the industry. The weather is continuing to be challenging.
Speaker Change: So.
Speaker Change: I don't share the view that we're somehow at the top of the cycle and about way to go down it depends on what sectors you play in and so what I would leave you with is what makes me. So excited about heading into the 25 is that we have the most balanced portfolio, we've ever had across our four major business.
Speaker Change: Says all now producing.
Speaker Change: Double digit Roe and allowing to participate in our growth and thats, what it gives us resilience and the ability to be opportunistic on the right areas at the right time, and then where appropriate have some defense.
Speaker Change: That's the recipe for good profitable growth going forward on a more tactical level, Bob I think about articulating a view where personal lines has additional margin improvement coming in 2025.
Speaker Change: Core loss ratio is likely to improve.
Speaker Change: On property improvement NII has dramatic improvement going forward and even some marginal expense ratio improvement. So Jack did a nice job explaining the whole industry, but I think in terms of our value proposition. There is a lot of opportunity for <unk>.
Speaker Change: Strong investor returns.
Speaker Change: Terrific. Thanks for the thanks for the answers guys.
Speaker Change: Thank you Bob.
Speaker Change: And this concludes our question and answer session I'd like to turn the conference back over to Oksana <unk> Szabo for any closing remarks.
Speaker Change: We appreciate everyone's time today and your support and looking forward to talking to you next quarter.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.