Good day and welcome to The Hanover Insurance Group's Third Quarter Earnings Conference Call. My name is Nick and I'll be your operator for today's call. [Operator Instructions]. Please note that this event is being recorded. Now I'd 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 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 Dick Lavey, 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.hanover.com. 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 the fourth quarter and full year 2020, the ongoing impacts of the COVID-19 pandemic, economic conditions and other factors 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 in 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 conditions. 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 and thank you for joining today's call. I will begin by discussing our third quarter financial highlights in the context of the current business and economic environment. I will then provide a strategic review of each of our segments and our accomplishments during the quarter and Jeff will review our financial results and outlook in more detail and then we'll be happy to take your questions. We are pleased with our third quarter financial performance especially given it was a particularly active catastrophe quarter across the industry. We reported earnings per share of $2.46 and an operating return on equity of 13.8% for the quarter. Our results reflect strong execution on the strategic tenants that drive our business forward. Our company and earnings stream are well diversified and position us well to withstand environmental challenges, including weather volatility and the ups and downs of the economy and market. We remain steadfastly focused on the hallmarks of our company. Our unique distribution strategy and approach, broad based profitability, disciplined underwriting, effective expense management and a thoughtful capital allocation strategy that includes returning excess capital to our shareholders. Turning to our third quarter highlights; first, we are very pleased with the trajectory of our growth and the consistent signs of building momentum in our top line. We achieved 2.1% growth in the third quarter, which represents a significant and expected recovery from the 2.3% premium decline we reported in the second quarter normalized for one-time premium returns. Our leading production indicators are quickly improving and we are encouraged by agency support and commitments, which once again validate the strength of our differentiated strategy and our broad and relevant product offering. Looking ahead, we are confident in our ability to drive growth across our portfolio and continue…

Thank you, Jack, and good morning, everyone. I want to reiterate Jack's comments about the strength of our book of business, which is reflected in our terrific bottom-line performance. For the third quarter, we reported net income of $118.9 million or $3.13 per fully diluted share compared with net income of $118.9 million or $2.96 per fully diluted share for the same period last year. After-tax operating income was $93.5 million or $2.46 per diluted share compared with $93.0 million or $2.31 per diluted share in the prior year quarter. We recorded an all in combined ratio of 94.2% compared with 94.4% a year earlier. Our ex-cat combined ratio was 88.4%, an excellent result compared to the 91.3% in the prior year quarter. The improvement reflects the continued benefit of favorable frequency primarily in personal auto. While frequency continues to be lower across several lines in our portfolio, we are seeing signs that it's returning to more normal levels as economic activity resumes. At the same time, we continue to maintain a prudent reserving approach in longer tail liability lines, given the continued uncertainty and the potential impact of increasing social inflation, as well as the potential for increased claim severity. We believe our balance sheet has never been in better shape. Catastrophe losses at $65.9 million or 5.8% of net earned premiums came in slightly above our expectation for the quarter. But we were much more benign than the industry experience. Our performance is a testament to proactive actions taken over the past decade to better manage our exposures by line of business and geography to maintain our disciplined approach to underwriting and to diversify our footprint. In addition, in the quarter we benefited from favorable prior year cat development of $9.6 million, which stems from a variety of…

[Operator Instructions] First question comes from Mike Zaremski of Credit Suisse. Please go ahead.

Good morning and thanks for all the insights in the prepared remarks. Thinking maybe first question, Jeff in your prepared remark, you mentioned the balance sheet has never been in better shape. I believe you're referring to loss reserves and if I am incorrect, feel free to tell me that. Are there any data points you can point us to, in order to elaborate on that comment? You guys have lot more insights than we do, when we look at kind of prior year reserve development, clearly, it's been positive, but it's been fairly small year-to-date in terms of - in the Commercial Lines I am speaking to kind of ex the catastrophe loss reserve development since have been trending less to that point. So any anything you can elaborate on there that could help us?

Thanks, Mike. Sure. Overall, as you know, the frequency in the second quarter and continuing to the third quarter have been much lower than it had been in previous years and previous quarters, particularly in the second quarter, it was down a lot and as we said it was still down more in the auto lines. But even in the second quarter it was down really across the board quite substantially. So our approach was to be concerned about whether there was any delay in claims reporting whether there was a social inflation or other additional legal costs. So we took the opportunity to really be more prudent on reserving for those matters, particularly in the longer tail lines. So it's a little hard for me to point to anything specifically, but I can say with a lot of confidence that we are further along in terms of percentage of expectation that we've been able to reserve really in the last two quarters. And if we look at how things are behaving in prior years, it's running off very comfortably. On a COVID perspective that $19 million is holding quite nicely, we're keeping it there on COVID reserves. We don't do travel, trade credit, event cancellations, very low workers' comp. So, we're feeling really good about our reserve levels at the moment and very well positioned, Mike.

Okay, that's helpful. And maybe that your answer kind of ties into my next question on the accident year ex-catastrophe loss ratio in Commercial Lines, it's been flattish year-over-year and year-to-date it's improved a little bit, but not a ton despite COVID benefit. I'm trying to get at like maybe if you can kind of try to quantify the non-cat weather was heavier this quarter, but it may be, you guys are like not even finally or maybe not lowering your picks as much as you potentially could on the underlying, but maybe you can kind of talk about the non-cat weather you've said that was something you called out and if it's quantifiable and I guess, long winded too maybe you can talk about your view on a commercial loss trend, if it's changed.

Sure. So I'll start. On the CMP lines specifically, Jack referenced the number of handful or so of large losses that we had in the third quarter and we think those are sort of anomalous and not likely to continue on a regular basis. If you roll back to the first quarter, we had one very large loss, which was a fire loss, which happened to hit the aggregate annual deductible. So was a 10 plus million dollar loss. So when you put that together, we believe we had an elevated property experience in both the third quarter and the year-to-date period. You then combine that with our interest in being conservative, particularly in the long tail lines, really across commercial, it really gives us an opportunity to be more prudent with our balance sheet and still react to the things that we saw. So I think the combination of those two is keeping those loss ratios relatively flat. Jack, maybe I'll pass it to you to cover rate versus loss trend, which we feel great about.

Yes. Thanks, Mike for the question and listen, overall, we have a lot of confidence in our Commercial Lines profitability and our ability to continue to grow profitably. As Jeff said, the CMP line had some property volatility in the quarter, we've done, as we always do extensive analysis to make sure that there isn't something that we didn't contemplate or something that's emerging and we really didn't find anything of significance. We look back really over the last five years and this has been a terrific line of business for us, averaging high 30s, low 40s loss ratio. So we have every confidence that when that line gets back in line, that we can show real favorable profitability and the prudence that we're showing in our liability and workers' comp, picks and reserves, I think will prove beneficial over time. We are definitely following that same philosophy that, Jeff, articulated in and although that's true for 2020, it's also true for the last few years. We have been exercising a much more conservative reserving philosophy that we think will pay dividends over time.

On the rate versus loss trend side of it, Mike, we're getting very substantial rate, it's 5.7 points on core commercial and on the specialty side, we're getting north of seven points of rate. When you compare that to long-term loss trend, it's substantially in excess of long-term loss trend, which bodes quite well for underwriting margins as we go forward.

Very helpful. And lastly just switching to Personal Lines and thank you for all the color on Michigan so definitely so far so good, but just more higher level - just trying to think through the dynamics there. It seems like you guys are still pushing mid single-digit rate increases, retention is falling though. Is profitability, do you feel like - and I know there's a lot of noise in profitability, that's why I am kind of asking is, do you think profitability is kind of where it needs to be? And you guys can let off the gas on rate increases? Or what's the kind of your outlook you think on growth versus margin in Personal Lines more broadly? Ex, I think, we're assuming or if you disagree that there's continues to be some auto frequency benefit.

Yes, Mike, this is Jack again. Listen, overall, we are very pleased with our Personal Lines performance and our confidence in being able to continue to bounce back to kind of pre-pandemic growth levels. The second quarter really was significantly impacted by, as you know, the premium refunds as well as the moratoriums. And so while we acknowledge that there is some competitive forces in the market, I think when you normalize our retention in the third quarter for kind of the catch up of those cancellations coming out of the moratorium and you look at, particularly our account business that's running at around an 83% retention ratio and the new business that is starting to pick up. I think we highlighted in our prepared remarks the signings that we're having and market consolidation, the increased success in our Prestige product, we believe that this is a high quality business and has the opportunity to continue to grow. So a lot of confidence in our loss ratio performance and increasing confidence in our ability to compete even in a competitive environment. And I would suggest to you that while we are not immune from the competition that's out there, our strategy to move toward kind of mid market and upper middle market account business and really being a preferred market for the high quality agents in the sector is providing us the resiliency and the pricing persistency that we were hoping for. Inside those pricing trends, I can assure you that we're adapting our pricing on a segmented basis and making sure that we're getting high quality new business and that we're protecting our best renewals. So over time, net-net, we believe that you will see our retentions drift back up to the mid 80s where they should be. And that our new business will elevate back to pre-pandemic levels.

Thank you for all the color.

Thanks, Mike.

Thank you. Next question comes from Matt Carletti of JMP. Please go ahead.

Thanks, good morning.

Good morning.

Jack, I wanted to ask you a question about kind of high level, I mean you touched on in your opening remarks. I mean obviously a core piece of Hanover is your strong agency relationships and it's a very differentiated approach. Can you talk a little bit about how those relationships have changed or how they've gone during this pandemic period over the past three to six months? What you've learned from those relationships as an asset to Hanover and maybe if those relationships have changed in any way?

Sure. Yes, let me give you some high level response to that and then I'll maybe ask Dick to chime in based on all the hard work that he has been driving through our partnership strategy along with Bryan. Listen, net-net, we think that this pandemic environment has caused us to be even more focused on our distribution strategy, showing our partner agents that we are going to do everything we can to help them be successful and assume that if we do that well, we'll be rewarded with profitable growth. And the reach out as we spoke about in our prepared remarks is significant. All of us on the senior team, all of our field leaders have been doing extensive work. I think we are one of the only companies that actually had our annual agency recognition function that we replicated virtually instead of being able to do it in person. We've done a number of CIAB calls instead of our ability to go to Colorado in that important industry function. We're doing agency town halls, we're doing branch visits virtually and frankly the response we're getting from our agency partners is really positive and not just because of the emotional part of it, but because they need help navigating through these dynamic times. And, so we're spending a lot of time not only talking about how this is affecting them and how they're generating new business activity and what help they need for us to do that, but also there's an increased focus as you would expect on the digital capabilities that are building the ability to bring expertise based content to the customers, the ability to service claims in a better and unique way all of that innovation work that we're doing with our agents is just becoming more relevant in this environment. So I would say the appreciation we're getting from the consolidators, the market agencies, the HUB Internationals, the USIs, all those folks all the way down to the small and mid-size agencies, I think they're feeling the strength of our partnership more than ever. Dick, do you want to add?

Yes. Only briefly, I mean, great answer, Jack. And I would suggest if anything, we've deepened our relationships in many situations during this time and it's also shown us that they have a real thirst for data and more importantly insight. So our Agency Insight tool that we bring to them is in higher demand and as referenced in our opening comments, we're working on the next generation of that tool to try to bring in more relevant insights. We're responding to their demand and need for digital marketing capabilities, right, during these times, whether that's a virtual expert or bringing some claims insights or some interesting industry content to the table. So our agility allows us to plug in quickly and our accessibility and connectedness is really paying dividends during this period.

Right, great, thanks. That's really helpful. And then just one follow-up, really a follow-up to Jack, you had some comments about fairly detailed on in the Specialty business. My question is I think when you guys have talked about this in the past, a big piece of the focus has been that you have existing Hanover customers that buy a Specialty product elsewhere and building this capability obviously will allow them to consolidate the relationship further with Hanover. And I'd be curious, just if you could provide some color on the success you've seen in the Specialty line so far. How much of it has been kind of along those lines versus kind of new customers to Hanover that were in a pre-existing relationship or a cross-sell?

Yes. Listen, I will make a few comments, but I think Bryan would love to share with you a few data points around that, but our bounce back in the third quarter in Specialty was significant. And I think what we saw, not only in terms of the growth, but also in terms of the agency interaction, there is even more focus, I think, at the large and mid-size agents to look at their portfolios and figure out how much of their specialized Specialty business, they should be placing direct to the carrier versus over relying on wholesalers. There will always be a need for wholesalers. They provide a very important function for either agents that don't have expertise or just don't have the capacity to remarket some of that business. But make no mistake, the agents that have been exercising a lot of M&A and have been consolidating the industry are increasingly looking at how they can get better economics and better serve their customers on the Specialty side more directly. And that's what we've built this company around, was the ability to get after that both capability and from an operating model standpoint. And it's really paying dividends right now. Bryan, you want to just make a few data points around that?

Yes, sure. Thanks, Jack, and thanks, Matt. Just a few things. So earlier Jack had mentioned, our growth of 5% in a number of our areas, right management liability, healthcare, E&S, specialty property all getting double-digit increases. And honestly, also even our marine and our professional liability areas getting decent growth. So nice growth across the book. And when we look at where it's coming from, it's disproportionately coming from our better Hanover agents. In fact, it's really a subset of the Hanover agents that are driving the vast majority of our business. So the proposition is resonating with them and one of those areas was the E&S capability that we expanded to be focused on the retailer, that's up by 10% just for the quarter, it's new and we're still growing it. We introduced a financial institutions capability in the beginning of the year, it's exceeding its plan for the year and across both of those, Matt, we're seeing some independent purchases, but we're seeing some really good purchasing from existing customers of Hanover or accounts that our agents are bringing to us and asking us to place in a coordinated way. So, I think, we have a lot of really good proof points from the work that we've been doing to really drive that relevance to our agent from our Specialty offerings. Hopefully that helps.

Very helpful. Thank you for the color and best of luck going forward.

Thank you, Matt.

Thank you. Next question is from Paul Newsome with Piper Sandler. Please go ahead.

And good morning. Thanks for the call. I was hoping you could just kind of review with us the math behind your capital management and how you got to the $100 million of accelerated buyback? Just to give us a sense of kind of where you are from a capital perspective, as well as how you're thinking about it, if there has any material changes as well?

Thanks, Paul. As we've talked about before, we have a number of different capital metrics we use, we have our own economic capital, which is sort of our True North, S&P has a capital model and then Moody's has a framework around gross underwriting leverage and PMLs, etc. But we always keep a set of redundancy in terms of our cushion to keep plenty of capital and also have plenty of opportunities for growth. In the current year, our earnings were very strong and we had more modest or subdued growth, so that created a substantial capital redundancy that we feel we had to do something with. So through, let's say, today we probably had already bought a little over $100 million of capital and we felt very comfortable with $100 million in an ASR. That coupled with the valuation levels provides an extraordinarily low payback period in terms of buying back the stock.

I guess, it goes without saying that the prioritization. If we think about future buybacks has not materially changed?

Well, we still have ample capital and that's excluding the capital that was raised in August when we issued $300 million of debt and paid down $175 million subordinated debentures which has a 6.35% coupon. So that capital is earmarked to be redeployed hopefully with larger rebounded growth in 2021. We anticipate with the improving margins, rate versus loss trend, the rebound in the economy that we can grow at or above industry levels getting into 2021 mid single digits or even better and much of that capital can be redeployed. But again, depending on the level of earnings, the level of cat you have in any given year, we still feel good about opportunities for stock buyback as well.

Terrific. Thanks, guys. Appreciate it.

Thank you, Paul.

[Operator Instructions] Next question comes from Meyer Shields, KBW. Please go ahead.

Thanks. I want to focus on personal auto, I understand what you're saying and since it matches with regard to the recovering frequency, but it does seem like there's a lot of moving parts right now with maybe more people working from home than they had in the past or higher unemployment or an aversion to public transportation. Can you talk about, I guess, how quickly can you make rate changes as these factors evolve and how important is that level of agility in your target market?

It's critical, Meyer, so thanks for asking that question. As you may recall, a couple of years ago, we spent a significant amount of money rebuilding our platform in Personal Lines with this exact purpose in mind. The added benefit of that Personal Lines point of sale and infrastructure build is that we have a much better ease of doing business and a much better appeal to our agent, account execs. But make no mistake, the major rationale for investing in the new Personal Lines infrastructure was to be able to have a more sophisticated home product pricing and also to be able to more rapidly update our multivariate pricing models and get them to market quickly. So it is super critical, and even though it is our direct strategy to try to provide our customers and our agents with some level of pricing stability, there is a lot of variance inside each state and each kind of segmentation that allows your pricing to be potent and to be effective. So this is a huge part of our Personal Lines strategy is to have the capabilities of a multi-variant product, but then deliver it to a customer set that isn't as pricing sensitive, but you still need to be able to maneuver in a way where you're getting market pricing, but you're getting the right segmentation of that pricing so that our quality of your customer base continues to improve.

Okay. That's exactly what I needed to know. Second question, as of the end of September, are the delayed cancellation in non-renewals have those all been cleared or will it be an effect in the fourth quarter?

I think we will have through, the majority of them. Right. We've seen the trend start to reverse so cancellations are coming back to normal and we're actually even seeing some positivity coming through on our endorsements as people are adding vehicles and other adjustment. So I believe the majority of that's behind us, Meyer.

And if you remember, back to the second quarter, we really pushed ourselves hard to make sure that even beyond the cancellations that were coming out of the moratoriums, we were also looking very carefully at the exposure basis in our Commercial Lines business and making sure that we are capturing as much of that as quickly as possible, so we weren't having to reconcile that in 2021. So we'll see how that all plays out for us and for the industry, but I think we've been as conscious about trying to get our earned premium as accurate as we can, so that we can grow in a substantial way going forward.

Okay, excellent. Thanks so much.

Thank you.

This concludes our question-and-answer session. Now I'd like to turn the conference back over to Ms. Oksana Lukasheva for closing remarks. Please go ahead.

Thank you everyone for your participation today and we're looking forward to speaking to your next quarter.

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.