Good morning, and welcome to the Hanover Insurance First Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [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 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. 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 facts, include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995 regarding, among other things, our outlook and guidance for 2022 and beyond, the ongoing impacts of the COVID-19 pandemic, economic conditions and related impacts, including inflation and other risks and uncertainties that could affect company performance and/or 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 statement section in our press release, 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, and good morning, everyone. I'll begin today's call by offering our perspective on the broader insurance and economic environment and how it's impacting the Hanover. I'll then provide a strategic review of each of our business segments; Jeff will review our financial results in more detail; and then we'll open up the line and take your questions. We began 2022 with a very strong first quarter, in which we executed against our strategic initiatives and further strengthened our competitive position. We achieved the 15.7% operating return on equity and operating earnings per share of $3.26. At the same time, we grew our top-line by 9.7% to $1.3 billion in quarterly net premiums written, fueled by strong growth in each of our business segments. We are very pleased with our exceptional financial performance in the quarter, particularly as the industry encountered macroeconomic challenges, including meaningfully higher interest rates, inflation and continued supply chain disruptions. Russia's invasion of Ukraine exacerbated those issues, contributing to increased uncertainty in the global economy. The effects of inflation are evident across the P&C industry. Like many of our peers, we felt its impact throughout the first quarter, particularly in our home and auto property-related lines. However, we remain highly confident in our resilience and ability to successfully navigate each of our businesses through this dynamic environment. We are aligning our pricing in recognition of these higher exposures. In addition, we are leaning into our agency partnerships and organizational agility to make the necessary pricing and property valuation adjustments, while maintaining stability in our book of business. In the first quarter, we also sustained our auto frequency benefit at a similar level to the fourth quarter of 2021, and we believe this benefit should continue to soften the impact of increased property severity within…

Thank you, Jack, and good morning, everyone. Before I discuss our financial performance in the quarter, let me remind you that on March 28, we published select historical financial information reflecting the changes in our segment reporting announced on our year-end 2021 earnings call. Select historical financial information for 2019 through 2021 is available in the Investors section of our website, along with a supplemental presentation on our new reporting segments and additional descriptions and definitions. Turning to our consolidated results for the first quarter, we reported strong net and operating income per share and delivered a very strong operating ROE of 15.7%. Our combined ratio was 93.4%, compared with 98.8% in the prior year quarter, reflecting the benefit of lower catastrophe losses in the first quarter of this year. Catastrophe losses representing 3.6% of net earned premium in Q1 2022, which compares favorably with our expected Q1 CAT load of 4.8%, and with the 11.5% catastrophe loss ratio we reported in the first quarter of last year. Our expense ratio for the first quarter of 2022 was 31.1% compared with 31.6% in the first quarter of 2021 and in line with our 2022 full year target of 31.1%. We continue to benefit from fixed cost leverage, while remaining focused on driving operational efficiencies across the business to fund investments and further enhance our performance. Prior year reserve development was favorable in the quarter by $6 million, stemming from Specialty and Core Commercial. The Commercial lines favorability was partially offset by unfavorable prior year development in homeowners, which I will discuss shortly. Turning to a discussion of our underwriting results by segment, starting with Core Commercial. Our combined ratio, excluding catastrophes, improved 1.1 points to 88.9% from 90% in the first quarter of 2021. Our Core Commercial current accident year…

[Operator Instructions] Our first question comes from Matt Carletti with JMP. Please go ahead.

Hey. Thanks. Good morning.

Good morning.

Jack, you spoke a bit about your specialty business and I was hoping you could peel back the onion maybe a little bit more. And specifically, you've talked in the past about how part of the opportunity there relates to - particularly the agencies that you have really good relationships with, kind of using your agency analytic tools and identifying Specialty Lines of business that are placed elsewhere and the ability to kind of bring that over to Hanover and kind of create a bigger package for you. Can you talk a little bit about kind of how much of the growth we've seen in Specialty has been along those lines? Or where you stand in that process?

Yeah. Thanks, Matt, for that question. And we couldn't really be more excited about our Specialty business and the trajectory we are on and I would tell you that we continue to have real momentum in the specialty lines that travel alone, if you will, on a monoline basis, with kind of an expert-to-expert experience that we create for our retail agents. Oftentimes, as you know, our bigger and more sophisticated agents have dedicated units. So we are very much talking to our franchise agents, but we are doing it in a more kind of specialized expert-to-expert experience. But increasingly, we are gaining momentum on kind of lines that travel, if you will, with the rest of the package. And that really requires us to be even more diligent with our operating models and our coordination with the field. So it's a really healthy balance of getting specialized business in the distribution directly, and then, also kind of a coordinated approach. And maybe I'll let Bryan Salvatore, kind of elaborate on that real quickly.

Yeah. Sure. Thanks, Matt. So look, as Jack said, a good deal of our business comes from that, call it, that standalone placement. However, I could share with you that more than 70% of our business comes from key Hanover agents that have large relationships with our Core Commercial business. And so, we continue to work very closely with our field folks. And frankly, even as we build out our technology and our capabilities like our customer service center, all of that is expanding our capabilities for the agents that we have longstanding and large relationships with. And, I guess I'll just add relative to the technology component, we – a piece of that has been building out portals. And as we built out and are building out those portals, we actually attach them to that TAP sales capability that we built in small, so that our agents have that one experience as they're looking to place multiple lines. So, all of that is really adding to our total growth.

Great. That's really helpful color. And then just one other question. You guys always give great kind of stats every quarter on kind of pure renewal rate change, as well as premium price change. And I know there is a – we hear a lot that obviously, the big difference there is the exposure and we hear a lot about kind of increases in exposure that a part of it acts like rate and a part of it doesn't. Can you help us understand that a little bit better just in terms of when we look at that kind of renewal price change as opposed to the pure price change? How you think about that increase in exposure and what might act as rate and what might act as kind of increased exposure in the true sense?

Sure. Well, the most obvious factor within the exposure basis that contribute to enhanced pricing, if you will, is on the Property Lines or the Property-related lines where we can get increased insurance to value in the limits themselves. Most of our losses obviously are partial losses. So if we can get more value to apply our rates to that in itself is kind of the rate that keeps giving and it's important in these inflationary times that we increase the insurance to value and get our property limits up appropriately. And there is a function of that, frankly, in really all of our various businesses to make sure that we're doing that. We also – when you look at lines like workers' comp or liability keeping up with the sales and the payroll and knowing where those increased payrolls and sales contribute truly to more exposure versus just essentially enhance overall pricing capability. So we try to do a pretty good job of segmenting that internally. But net-net, the biggest impact, Matt, is in getting those property values up appropriately. That truly allows us to overwhelm the partial losses that we generally experience.

Awesome. Thank you for the color. And congrats on a nice start to the year.

Thank you, Matt.

The next question is from Meyer Shields with KBW. Please go ahead.

Great. Thanks. Good morning all. Jack, in your introductory comments, you talked about, I don't want to get this wrong, challenges to the quality of new business flow and I was hoping that you could explain that. Is that the accounts are getting worse so that it's harder to get them because of retention?

Yeah. Thanks, Meyer. I think if you just think of most competitors are suggesting that they have kind of a high watermark in their renewal retention rates and then some of the more distressed business is making its way into the E&S market. So just mathematically, there is less new business to go around when those dynamics come forward. And as I said in my prepared remarks, there is less capacity for agents to remarket business on the margin. So, overall, what that means to the marketplace is that you have business that is most stressed from an underwriting standpoint or getting the most pricing increases that get offered to the underwriters and if you don't have real pipelining going on, if you don't have real partnership behavior to try to extract the business you want versus just simply react to the business that comes to the market, the quality of the new business in this stage of the cycle tends to deteriorate. So, that's what we are talking about and we, as you would expect, stress test this every month and every quarter to make sure that we are getting high-quality new business and not just whatever comes to the market.

Okay. That's very helpful. Thanks. I also wanted to ask a question about workers' compensation, if I can. I guess we are starting to see wage growth in the broader economy. And I was wondering if you could talk about what you are seeing, what you are booking with regard to indemnity trends?

Yeah. We are watching this like a hawk. I think you know that the workers' comp market has continued to be quite profitable, but accident year trends have been increasing over time. And we are seeing the dynamic of a competitive employment market, driving up payrolls. The good news is that two-thirds of the costs in workers' comp are still medical payments versus indemnity payments. But we track that by industry and really by job type to make sure that we are keeping up with the payrolls and looking at the loss trends in terms of how that hits our loss costs on the back end. But I would tell you, net-net, because workers' comp is based on payrolls, you are able to keep up with that quite easily as long as you are auditing the accounts properly.

Okay. So it's not a net margin concern?

No. We've been very prudent with our loss picks over the last year plus just to make sure that the profitability - reduced rates that people are getting what that we are prepared for.

Okay. Fantastic. Thank you very much.

Thank you, Meyer.

[Operator Instructions] The next question is from Grace Carter with Bank of America. Please go ahead.

Hi.

Good morning.

Looking at Specialty results for the quarter, that was a pretty sizable reserve release relative to recent quarters. So I was just wondering if we could talk a little bit more about some of the underlying movements across different lines of business and accident years there.

Grace, it was pretty well spread across a variety of different elements. Bryan has talked before about the nine different businesses and then various sub businesses. So between various businesses and also accident years, there was no particular business that squeezed a lot of it out. It was very broad based and diverse.

Thank you. Thinking about rate in Core Commercial, I was wondering if we could just get kind of any more color on the rate being achieved across different lines of business and I guess just the how you see the gap between the rate being achieved and loss cost trends? And how that might evolve over the course of the year?

Yeah. This is Jack again, Grace. Listen, we are quite proud of the fact that our team is remaining very disciplined on our rate and overall pricing in Core Commercial. That's true in small commercial, as well as in middle market. As we continue to see property volatility, we are seeing increased opportunities to get more rate on the property line of business. And I think as we look at the potential of liability trends developing out, our folks are staying disciplined on the liability lines, including Auto. So overall, I think we feel like we are outpacing the long-term loss trends. And I think in some ways, may be outperforming the market, because of the discipline that we are showing and maintaining very high retention ratios, while we push for that rate. So, real pleased with the performance of the team.

Thank you.

This concludes our question-and-answer session. I would like to – I am sorry, we still have one more question that just popped in and that is from Bob Farnam with Boenning and Scattergood. Please go ahead.

Hey. Thanks. Good morning. So Jeff, I know we briefly talked about the net investment income and I just wanted to know kind of going forward, are you planning on changing the investment profile to capture more of the increasing interest rates out there? And I am just trying to get a feel for how quickly the net investment income can improve over 2022 and 2023, I know you mentioned that new yields are – or new money yields are much higher than the existing. So I am just kind of curious what we should expect from that line?

Bob, thank goodness you got in. That was close there. Delighted to have the question. So, new money yields for us are running about 150 basis points as we sit today, higher than what we would have planned for the 2022 year. So, 150 basis points is a pretty powerful impact. I'll do a little math for you, but most of the people on the call are very good at math. So it won't go too far. But one-seventh of the portfolio and our portfolio for fixed income is over $7 billion rolls off each year. So, quick and dirty, for 2022, the new money yields have a $5 million to $10 million favorable impact relative to what we would have expected or our NII guidance at the beginning of the year, keeping partnerships aside and 2023 impact will be $20 million to $25 million more favorable, again, excluding what happens with partnerships.

Great. Okay. I just wanted a little bit of color there. So that certainly helps. Thanks.

Thank you, Bob.

This concludes our question-and-answer session. I would like to turn the conference back over to Oksana Lukasheva for any closing remarks.

All right. Thank you, everybody for your participation today and we are looking forward to talking to you next quarter.

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