Good morning, ladies and gentlemen, and welcome to the Hanover Insurance Group second quarter earnings conference call. My name is Denise and I will be your operator for today's call. At this time, all participants are in listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn conference over to Oksana Lukasheva. Please go ahead, ma'am.

Thank you, operator. Good morning and thank you for joining us for our second quarter conference call. We will begin today's call with prepared remarks from Jack Roche, our President and Chief Executive Officer, and our Chief Financial Officer, Jeff Farber. Available to answer your questions after our prepared remarks are Dick Lavey, President of Agency Markets; John Fowle, Chief Executive Officer of Chaucer; 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.hanover.com. After the presentation, we will answer questions in the Q&A session. Our prepared remarks and responses to your questions today, other than statements of historical fact, include forward-looking statements, including our guidance for 2018. There are certain factors that could cause actual results to differ materially from those anticipated. We caution you with respect to reliance on forward-looking statements; and in this respect, refer you to the forward-looking statements section in our press release, slide two of the presentation deck and our filings with the SEC. Today's discussion will also reference certain non-GAAP financial measures such as operating income and accident year loss and combined ratios, excluding catastrophes, among others. A reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis can be found in the press release, the slide presentation or the financial supplement, which are posted on our website, as I mentioned earlier. With those comments, I will turn the call over to Jack.

Thank you, Oksana. Good morning, everyone. Thank you for joining our call. This morning, I will provide an overview of our second quarter performance. Jeff Farber will review our financials in detail and then we will open up the line for questions. We are pleased with our performance in the quarter. We delivered solid results, further demonstrating the strength of our company's agent-centered strategy and distinctive business model. We continued to build on our strong competitive position, successfully executing on our priorities and delivering superior returns for our shareholders. For the quarter, we posted an operating return on equity of nearly 13%, operating income of $95 million or $2.20 per fully diluted share, a consolidated combined ratio of 95.5% and a current accident year combined ratio excluding catastrophes of 91.3%, nearly a 1 point improvement over the second quarter of 2017. In addition, I want to call your attention to the following second quarter highlights. First, we delivered solid topline consolidated growth of 6.9%, while maintaining our underwriting discipline. We grew strategically in the quarter, focusing on markets with prospects for more attractive returns, including personal lines, small commercial and our more specialized commercial lines businesses. Second, we sustained positive underlying trends in our business, reflecting the ongoing benefit of prior underwriting actions and our thoughtful pricing strategies, which together mitigated the impact of loss trends. Our ex-cat accident year loss ratio in the quarter improved slightly to 57.4% compared to 57.9% in the prior-year quarter. Third, we improved our expense ratio by half a point in our Personal and Commercial Lines segment in the quarter. These improvements were driven by the continued benefit of our expense savings initiatives that were executed in July of 2017, as well as the benefit of earned premium growth. Our efforts to efficiently manage…

Thank you, Jack. Good morning, everyone. For the quarter, we reported net income of $99.3 million or $2.31 per diluted share compared to $78.4 million or $1.83 per diluted share in 2017. After-tax operating income was $94.6 million or $2.20 per diluted share compared to $72.3 million or $1.69 per diluted share in the prior-year quarter. Our combined ratio was 95.5%, consistent with the 95.6% posted in the prior-year quarter. Overall, catastrophes during the quarter totaled $63.6 million or 5% of premium, largely in line with our second-quarter assumption as well as prior-year quarter results. Domestic catastrophe losses came in at $59 million, with the largest impacts from wind, hail and tornado events in Michigan, Connecticut and New York in May and June, primarily in our Personal Lines business. Chaucer's losses were mild at only $4.8 million for the quarter. Excluding catastrophes, we reported a combined ratio of 90.5% compared to 90.8% in the prior-year quarter, driven by an improvement in our domestic business, mostly in the expense ratio. I will now review our underwriting results by business. Personal Lines combined ratio of 97.6% increased 5.8 points compared to 91.8% in the prior-year quarter. This was driven by elevated catastrophe experience and, to a lesser extent, unfavorable development mainly in auto. Our current accident year combined ratio excluding catastrophes improved by a half-point to 87.8%. This reflects the cumulative impact of the improvement in the expense ratio from our expense management actions executed in July 2017, as well as growth leverage on fixed expenses. Our accident year loss ratio excluding catastrophes of 60.1% was favorable to the prior-year, driven by the expense component of the loss ratio. The underlying loss trends in both auto and homeowners are largely in line with the prior-year and with our expectations. In the second…

Thank you. [Operator Instructions]. And your first question this morning will be from Paul Newsome of Sandler O’Neill. Please go ahead.

Good morning. Thanks for the call. I wanted to focus a little bit more on the expense cutting efforts and, obviously, there's the project you did. As we look out further, is there more expense cutting to be had? Is there a long-term goal in terms of how low you think you can get your expense ratio?

This is Jack. Thanks for the question, Paul. I think the way I would characterize it for you is that, along with the effort that we put forth in the third quarter of last year, we imposed kind of a higher level of rigor and financial discipline in the organization. And we did that with the idea that we were going to have to continually look at new investments that are important to our future and to the business growth and that we needed to kind of put ourselves in a position where we could continue to look at some of the expenses and some of the previously important resources that we had in the organization. So, what I'd like to believe is that, A, we have real expense leverage in our growth, which is where I think you'll see most of the improvement come from, but we've also positioned ourselves so that as we find investments that we think are important to our business, for the most part, we'll be able to fund those with some expense initiatives that we can generate inside the company. Jeff, do you want to follow-up on that?

Sure. Just to add to that, I think, over time, you'll see a shift of certain expenses from slightly less productive to more valuable expenses as we continually optimize how we're spending our money. But, for the most part, for your models, I would count on the continuation of the leverage on our fixed costs that we've been getting from the premium growth rather than see meaningful net reduction in expenses, but a pivoting to value add types of things.

Great. And then, my second question, I would love to hear a little bit more about the severity issue in personal lines on bodily injury. And, I guess, is there more than just rate that needs to be done here to make you more confident that the bodily injury severity reserve issues won't continue into the accident years of 2017 and 2018.

Yeah. I'll let Jeff speak to kind of the balance sheet reserve side of this. I would tell you that, overall, we are very pleased with the performance of the Personal Lines business. I think we continue to differentiate ourselves in the marketplace and be confident that the steps we took a half-dozen years ago to really take account kind of the pricing algorithms by line of business and bring them together to really have a true account proposition is proving to be quite important and helpful. And that's where we get, frankly, margin, is to deliver on a more stable pricing environment for high quality customers. And so, I think that factors into the kind of the overall environment. Relative to the bodily injury trends, I'll let Jeff talk to some of the specifics that we've been working through.

Paul, this quarter, as we said, we reacted to continued increased severity in our private passenger auto BI for the 2016 accident year. And we talked about the rate that we've been getting, and we'd be getting over 5% a year for each of the last two years. But I think also, meaningfully, we've studied the frequency trends. And when you look at specific cases, we have a lot of confidence that our frequency trends are a lot lower. So, while it's early in 2018, you've only got six months; and in 2017, you've got 18 months. If we compare that to the 2016 year for the same time periods, the level of cases is meaningfully lower. So, the combination of rate and frequency gives us a lot of confidence for 2017 and 2018. And, overall, we're very comfortable with our level of reserves. And as you know, from time to time, we will have some increases and decreases in individual lines as we react to those trends appropriately.

Thank you.

Thank you. And the next question will be from Larry Greenberg of Janney Montgomery Scott. Please go ahead.

Hi, thank you. How much did the last year's renewal rates transaction help the Personal Lines premium growth this quarter? And I assume it'll be on an apples-to-apples basis in the third quarter?

Yeah, I'll let Dick maybe respond to that specifically.

Larry, thanks. Yes, overall, it was approximately about a point of growth on the book. We look back on that transaction very favorably. It was a terrific boost to our book of business in Massachusetts. It opened up some new distribution points for us and offered up some opportunity actually for future growth as well. But if you look back just apples to apples, it was about a point of growth. And as we said in the script, that basically comes to conclusion in terms of the conversion. So, I think what you'd see is that it's sufficiently in the base today. And our hope and expectation is that some of those new distributors, in combination with our existing distributors, will continue to generate kind of above-market growth, but in terms of the conversion, that is completed in the second quarter of 2018. Just to add to that, we do have an exciting back half of the year in Massachusetts where we'll be introducing our cap sales and our Platinum product. So, it was nice to have those new agents on board prior to that rollout.

Great. And what was the impact from better partnerships in investment income?

In the quarter, if you look at the financial supplement – what page it's on at, Tom [ph]? Yes, if you look at page 17, we detail that out. Larry, I would say that, in the in the first quarter of 2018, we saw an outsized impact that we shared with you in the first quarter. In the second quarter of 2018, obviously, investment partnership income moves around a little bit, but it was a more traditional level of positive returns in the second quarter of 2018 versus a real outsized level of return in the first quarter.

Great. Thank you.

My pleasure.

[Operator Instructions]. The next question will be from Christopher Campbell of KBW. Please go ahead.

Yes, hi. Good morning. Congrats on the quarter.

Thank you.

I guess, my first question is on the Commercial Lines pricing improvement. I'm assuming a lot of that is commercial auto. But just what lines is that coming from?

Actually, Dick and Bryan can probably speak to some of the specifics. I would say, overall, you're right that we continue to push in commercial auto. And also, on the workers' comp side, even know the pricing is still quite competitive, we had some marginal improvement in the second quarter. So, if you will, less negative which helped lift the overall commercial pricing. But, Dick, I don't know if you want to provide some more detail.

I think you hit the headlines right. We're seeing positive pricing in all lines but work comp, as Jack said. So, positive rate increases, the highest of which is in auto in the mid-to-high single-digits and we expect, frankly, those to go higher going forward. And we're seeing broad-based acceptance of that rate. We did see improvement in work comp. however, it's still negative and then positive rate in the property and GL lines.

Yeah. And this is Bryan. And I would that we're actually seeing solid pricing across really all of our specialty businesses. Our new money is strong. The retention is strong with that. So, we're seeing that really across our businesses, with real particular contribution from our Professional Lines areas.

Okay. That's very helpful. And then just – Jack, you had mentioned, I think, in your opening monologue that commercial rates are still below your long-term loss cost trends. So, should we assuming Hannover's commercial loss cost trends are, like, 550 bps, 600 bps, something like that?

Chris, thanks for the question. We don't get to that level of specificity. What you should assume, though, is that as we look across all the lines of business, and we're monitoring like everybody else, what's happening externally to commercial auto and what could be happening as the economy continues to push that what's in our pricing, as we've articulated in the past, is a combination of rate and exposure. And so, we certainly consider the part of the exposure that is attributable to insurance, the value for property as part of our pricing that is going to cover loss trend, and we continue to focus on long-term loss trend. We think it's a trap to look at some benign activity in workers' comp or even some of the things that we're observing in the CMP lines as not how to think about it, to think about it in terms of pricing over the long term. And when we sum all that up, we see ourselves still slightly below that loss trend. As we also said, though, that we believe we have plenty of underwriting improvement and mix change that is sufficiently covering that gap. And I think this quarter shows again that we have strong underwriting performance driven by all those levers.

Okay. And then, I guess, another question on the reserve. I think Paul asked the question on the auto reserves. Have you seen any issues in GL? Like, I know that's been an issue in the past. So, anything you're seeing on the liability side that would be concerning?

I don't think there's really anything to update in the quarter. Our general liability experience was frankly consistent with our expectations and there was no real story there.

We always worry about liability and always look at it closely, but not really a story developing in 2018 at the moment.

And then, Jeff, I think this last one is for you. Just a numbers question. I notice the interest expense trended downward sequentially, but the debt levels seem to be remaining the same on the balance sheet. Any color here?

Chris, I have to look at that. I didn't – I'm not aware of anything that should be driving that. We haven't really done anything with our – it's been over a year since we bought a little bit of debt back, I think, a year or so ago. So, it really shouldn't be doing much, but we'll take a look at that. I didn't notice a meaningful piece.

Yeah. Because it went to like $11.6 million this quarter. And that was down like $800,000 from $12.4 million last quarter. So, just wonder if there's anything happening there.

We'll take a look at it and see. It could be some accounting or something with a lease that ends up there, but I'll take a look at it. But nothing we did with our debt – nothing reset that should be doing that.

Okay. Thanks for all the answers. Best of luck in the third quarter.

Thanks.

And, ladies and gentlemen, that will conclude our question-and-answer session. I would like to hand the conference back over to Oksana Lukasheva for her closing remarks.

Thank you, everybody, for your participation today. We are looking forward to talking to you next quarter.

Thank you. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.