Good day, and welcome to The Hanover Insurance Group’s First Quarter 2020 Earnings Conference Call. My name is Cole, and I will be your operator for today's call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Oksana Lukasheva. Please go ahead.

Thank you, operator. Good morning, and thank you for joining us for our quarterly conference call. We will begin today’s call with prepared remarks from John Roche, our President and Chief Executive Officer; and our Chief Financial Officer, Jeff Farber. Available to answer your questions after our prepared remarks are Rick Lavey, President of Agency Markets; and Bryan Salvatore, President of Specialty lines. Before I turn the call over to John, 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 regarding among other things. Our outlook for 2020 and the ongoing impact of the COVID-19 pandemic on company performance. 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 of our press release, the presentation deck and our filings with the SEC which includes supplemental risk factors related to the COVID-19 pandemic and general economic condition. 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 John.

Thank you, Oksana. Good morning, everyone, and thank you for joining our call. Before we begin, I would just like to say on behalf of the Hanover team that we hope each of you, your families and friends are safe and healthy and managing through this public health crisis as well as possible. Our Company delivered very strong results in the quarter while continuing to navigate the unprecedented challenging and very dynamic environment defined by the COVID-19 pandemic. We are well positioned to navigate this crisis and have the resiliency and resolve to continue to deliver on our commitments to all of our stakeholders. I will begin with some comments about our business in the context of COVIT-19 and the current environment and then I will provide a high level overview of our first quarter 2020 performance. Jeff will take you through our operating results by segment and in-depth review of our investment portfolio and provide thoughts on our 2020 financial outlook. We will then open the line for your questions. Over the past two months, COVID-19 has created unprecedented changes in the way we live and work. Today most people in the U.S. and more than two billion worldwide are under some form of stay-in-place order, but the families of over 200,000 whose lives have been taken by this disease this is an especially tragic time. Thanks to the selfless dedication of our health professionals and first responders with the unique collaboration of scientists and the overwhelming response from the private sector. I'm confident our country will meet this challenge head on just as we have so many other times throughout our history. For the Hanover's part, if anything has emerged from the Corona Virus crisis, is that our Company is resilient, nimble, and compassionate in the face of…

Thank you, Jack. Good morning, everyone. For the first quarter we reported a net loss of $40 million, or $1.4 per basic share, compared with net income of $122.4 million, or $2.97 per fully diluted share in the prior year first quarter. After tax operating income was $86.8 million, or $2.23 per diluted share compared with $80.7 million, or $1.96 per diluted share in the prior year quarter. The difference between net loss and operating income in the first quarter of 2020 primarily reflects the decrease in the fair value of equity securities, and to a lesser extent, fixed income impairments. These impairments are a subset of the adjustment made to reduce the unrealized appreciation of investment recorded in stockholders’ equity. Our combined ratio was 95.2% compared with 95.8% in the prior year quarter. Lower expenses and catastrophes contributed to the combined ratio improvements. While the current accident year loss ratio was slightly higher, like 0.4 points. Catastrophe losses totaled $37.9 million in the first quarter of 2020 or 3.3% of earned premium below our expectations for the quarter. Relatively quiet weather in January and February gave way to a more active March, with a notable impact from tornadoes that struck Tennessee, which accounted for a large part of the cat losses we incurred in the quarter. With respect to prior year reserves development, we were slightly favorable for the quarter. Small adjustments in some older legacy voluntary pools business, were more than offset by net favorable development in our ongoing P&C business. We experienced favor ability in workers compensation and certain specialty lines, which continue to develop better than expectations. At the same time, we saw unfavorable development in commercial and personal auto due to additional activity in prior accident years on the bodily injury side. However, we remain…

Thank you. We will now begin the question and answer session. [Operator Instructions] And our first question today comes from Matt Carletti with JMP. Please go ahead.

Thanks. Good morning. Just a few questions. Maybe I will start with Jack and Jeff. Is there any insight you can give us into what you have seen in April so far? And I appreciate your comments that we have no idea of you kind of how long this goes or kind of the shape of the downside and upside. But in terms of even just qualitatively new business production retention, endorsements, cancellations, just any color you could give on what you've seen so far in April, as we have gotten further into the stay at home stuff. It would be helpful.

Yes, Matt this is John, thanks for the question. I will tell you that it is still very early. We are pleasantly surprised that many of our agents have transitioned very well to the remote environment. I think as an industry, I'm impressed frankly, that the business of property and casualty insurance is I think going well and being responsive to customer’s needs. The early indications are that there is some new business submission activity that will come down. It is early to say that we see anything specific, but we also expected that ranges substantially by industry class, and to some degree geography. What we are encouraged about is that our work to use our analytical approach with agents and doing more active pipelining will help us through that period where we have accounts that we have identified that we want to work on with agents and that we are not just responding to the flow that comes out that may in fact get reduced. We do expect that retentions will escalate. I think that, early indications are that that will in fact happen. And then the wild card will be, overtime how much do we see in terms of cancellations midterm adjustments and exposures that will come into the factor and it at least affect the top line trajectory. But I will tell you in the early innings we are encouraged that there is a level of stability at the onset.

And Matt on the claims side, clearly we are seeing a reduction in claims across a lot of areas in there quite meaningful.

Okay. Maybe tying that into your some of the guidance pieces. Really my question centers around, you suspended the top-line guidance which makes complete sense to me, I think that is pretty common and I think anybody can benefit from each of there. But you affirmed the expense ratio guidance, which some peers have indicated they expect upward pressure on expense ratio, not downward, can you talk a little bit about that dichotomy there where, with the fuzzier outlook on net written premiums, the ability to kind of reaffirm your expected expense ratio improvement. Is that, Jeff, does that relate to kind of what you referenced in your comments about, you can make decisions about where to pull back and not pull back or you have more flex in the optional spend than maybe some other people?

Yes. So if you break the combined ratio into its two components, the expense ratio, we reaffirmed a 10 basis point improvement. So we have the ability to balance the long-term in the short-term and focus on expenses to be able to deliver on that in the expense scenarios in 2020 that we can see. From a loss ratio perspective, we are pretty confident that the claims activity will offset the decline that we are likely to see or seeing in net premiums.

Okay. Alright. And last one if I can just on capital management, maybe just give us an update on your views there. I mean we saw the ASR closed out in Q1. There were some additional open market purchases, either, I forget who commented, but you said you kind of halted activity and mid-March. How do you think about capital management looking forward? I mean, you referenced kind of at least near-term, likely some downward pressure or at least reduced growth on top line then obviously a stock trading at a lower valuation than it did recently. How should we think about that?

So Matt, yes as you said, we finished the ASR. We did another 40 million or so additional buybacks and then we paused in mid-March. And, I think our view on buybacks at the moment is really take a wait and see approach. So we haven't determined that we are going to jump back in. We also haven't determined that we are done for the year. It will really depend on how things go and how we feel about it. At the moment. We have ample capital and we feel good about operations, but I think we are being prudent to wait and see. It may go without saying, but just to be clear, we don’t anticipate any changes in the ordinary dividend would be impacted. My guess is any view of special dividends would certainly follow the same view as buybacks.

Great. Thank you very much for the color and best of luck.

Thank you Matt.

And our next question comes from Paul Newsome with Piper Sandler. Please go ahead.

Good morning. I have got just two questions. Normal two questions. One is big picture, one is very small. So, maybe the big picture first. Every time we have seen major really big, big events like this, we have seen changes in how people underwrite things. I’m wondering from your perspective, are there areas where you think the underwriting will fundamentally change in how either you or others look at risk?

Yes. Paul, this is Jeff Roche. Thanks for that question. Jeff had talked about some of the financial scenario work that we have done that look at our existing portfolio and start to contemplate what could happen and how would do we think the financials will respond based on the various factors that might coming at us. At the same time, Rick and Bryan have been actively working and absorbing kind of thoughts around, if this goes and prolongs and it is our hunches right that, the way we do business and frankly the way a lot of our customers do business are going to change at an accelerated pace. What would be the implications to the sectors of the business that we would be interested in or that might see some of aversion? So, the long and short of it that, when we have done that analysis, we are pretty proud of some of the shifts we have already made that Rick, maybe you can comment on this that, we have really reduced our penetration in some of the restaurants and hospitality and some of the areas. And we did that because of some of the liability trends that we observed a couple of years back. But, I think those will serve us well. We actually scaled back a little bit in the major metropolitan areas as part of that effort. I think that will serve us well. So as we project into the future, I think we see the service economy continuing to prosper, but in a much different way and we are doing a fair amount of scenario work to try to anticipate that and position ourselves for success in the future. Rick.

Yes. So, just briefly adding some color to that. I mean, we do agree that, we think our core book sort of provides us a bit of resiliency in the downturn. To some of what Jack said, specifically restaurants, hospitality you think about those sectors as those being most effected here, that is less than 7% of our book, which is a small percentage. The work we did to move out of major metropolitan areas that is down about 20% over the last four years and certainly we know that those metro areas are - those that are more substantially impacted by a COVID. Maybe just one other color commentary I would make as, we look at classes and industries and how this may affect them certainly our underwriting today looks at their operations, but also their financial strength, and that will become an important component. You think about schools and things that are happening in that arena making sure their financial stability is rock solid. So, we think our current role will serve as well.

Alright thank you. I was getting a couple of questions on the commercial auto environment and you had some, maybe you could talk a little bit about what triggered in the reserve development there and I guess we all hoped that maybe this year would be the year of the turnaround in general. But can you just give us a little sense of what is going on there?

So. I would think if you look at our prior year development overall. Let’s remember, it was favorable overall. It was favorable personal lines. It was favorable in commercial lines overall, it was favorable in other commercial lines. And you are right, it was unfavorable in auto, offset by worker’s comp favorability. I think we feel very comfortable with our overall reserves. In this particular quarter, we saw some unique situations with auto, particularly commercial auto on bodily injury and we felt that we needed to react to those. We still feel very good about our 2018, 2019 and 2020 picks there and all of the rate that we have been getting really over the last six quarters and the are-underwriting. So I think we are in reasonable shape overall.

So that those are changes for what specific case issues or that is trend changes?

Mostly it is a specific case issues, so some unique issues. Obviously we are not immune to litigation trends. As people have seen really over the last few years, but mostly it is specific cases use there.

Great. Congratulations for the quarter guys.

Thank you Paul.

And our next question comes from Meyer Shields with KBW. Please go ahead.

Great, thanks. I think there is a question for Jeff. Can you talk about new money rates and whether there is any shift in your investment allocation strategy for new money now?

No, we really haven’t changed our portfolio mix in any material way. The new money rates are down. Obviously rates have come down and spreads have widened a little bit. So the spreads have covered some of that gap. And with a 4.2 year duration, it takes sort of about eight years for the portfolio to roll off. And because of the timing of cash flows, we generally don't do a lot of new investing in the first four months of the year tends to be later. So now we are about to go at that. So the new money yields are down a little bit and we have baked those levels into our guidance that we have given for the year. But no, we are not seeking or chasing a higher yield or reshaping the portfolio, Mayer.

Okay, thanks. Second question, can you give us a little insight into the expenses that you pull back on in the first quarter and maybe how that would impact operations over the rest of 2020?

So we really didn't make any specific decisions in the first quarter. I mean, expenses were down year-over-year, but they were not down as much in terms of our guidance, you know the expense ratio was down a little bit relative to guidance. So it was largely just the timing of new hires or things of that nature or some accrual adjustments. I think more importantly, as we think about the year, there will be some expenses that just naturally go down, like travel and entertainment, conferences, things like that. And then there will be other expenses that we have some flexibility around in order to be able to manage the decline in premium to deal with an expense ratio.

Okay. And then final question, It looks, as if my very rough math on the on the fourth quarter is right, like the Commercial Lines absolute, like the rate change slowed a little bit and that will be - talk about that.

This is Jack, let me make sure I understand the question. You are asking about the trajectory of our commercial lines pricing?

Yes.

And specifically rate?

Yes.

Yes. What we articulated in the script is that the rate trajectory within commercial lines continues to tick up. So we are having sequential improvement. What you saw in fourth quarter was that we had a pretty large pricing results that showed a particularly, high swing in the exposure side. And I think we tried to speak to that in the fourth quarter call. So people would know that 7.9 or whatever it was in terms of total pricing was a little bit inflated if you will, based on the exposure base that ran through that particular quarter. And I would say that there is a similar phenomenon in the first quarter where the exposure element is actually a little bit lower than what we normally would see, not affected by the economy, but by the normal ebbs and flows of exposure base. So when you look at that core 4.6% rate that is running through the book that is actually an improvement over what we have been getting. And if you look even further into our specialty portfolio, we are seeing some additional incremental improvement in that portfolio.

Okay. Fantastic. Thank you very much.

Thank you Meyer.

And this will conclude our question and answer session. I would like to turn the conference back over to Oksana Lukasheva for any closing remarks.

Thanks everybody for your participation today. We are looking forward to talking to you the next quarter and stay healthy.

Be well.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines and have a great day.