Good day, and welcome to The Hanover Insurance Group Third Quarter Earnings Conference Call. My name is Keith, and I'll be your operator of today's call. At this time, all participants’ are in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call over to your host today, Oksana Lukasheva. Mr. Lukasheva, please begin.

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 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 and guidance for 2022, economic conditions and related impacts, including inflation, supply chain disruption, evolving insurance behavior emerging from the pandemic 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 statements 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 accidental 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 by providing some context on our third quarter performance, share my perspective on the current environment, and outline our approach to address the prevailing economic and market pressures. Next, Jeff will review our financial and operating results by segment, outline our action plan in detail, and provide an update to our financial expectations. And then, we will open up the line and take your questions. Before I comment on the results, on behalf of the entire Hanover team, I'd like to acknowledge all those who have been impacted by Hurricane Ian. Members of our claims organization are hard at work doing what they do best, to help our customers recover as quickly as possible. As always, I'm very proud of the important work we do every day to help our customers in their time of need. As evidenced by recent earning reports, our industry is operating in a very dynamic macroeconomic environment. Continuing inflation in supply chain disruptions, turbulent financial markets and losses from Hurricane Ian created a confluence of headwinds for the P&C industry in the third quarter. As our track record demonstrates, we are executing very well on our catastrophe exposure management and continuing to diversify our portfolio over time. While our risk management discipline and strategic approach to the market enabled us to moderate the impact of recent macro challenges on our results, the accelerated pace of inflation and persistent supply chain issues surpassed our expectations. As a result, we are making meaningful adjustments to our short-term pricing and underwriting approaches and are taking specific actions to mitigate the effects of inflation more aggressively. All to bring our company back to target profitability and deliver on our financial objectives. We have a very strong highly regarded franchise and…

Thank you, Jack. Good morning, everyone. For the third quarter, after-tax operating income was $35.7 million or $0.99 per share. Our combined ratio was a 101% reflecting higher than expected inflation, supply chain pressures, and the impact of catastrophes. Excluding catastrophes, the combined ratio was 94.2%. I'm going to walk you through the key drivers of what impacted our business in the quarter as well as the actions we're taking and their expected outcomes. Catastrophe losses of $90 million or 6.8 points of net earned premium, included $28 million from Hurricane Ian and are likely better than the industry loss experience. Our relatively modest CAT loss experience from Hurricane Ian which was largely isolated to our commercial lines property book in Florida underscores the effectiveness of the exposure management and portfolio diversification initiatives that we executed in prior years. Our catastrophe risk premium in Florida is negligible, totaling less than 0.5% of our country-wide direct written premiums. Catastrophe losses in Personal Lines during the quarter were primarily related to wind and hail events in the mid-West. Our result in the third quarter included favorable prior year reserve development of $4 million primarily driven by Specialty Lines. We anticipate social inflation to reemerge fully in liability coverages and as such our team continues to vigilantly monitor the litigation environment. We continue to believe that some of the macroeconomic headlines around medical and wage inflation where the utmost caution as we prudently set reserves in longer tail lines. Our expense ratio for the third quarter of 2022 was 30.4%, an improvement of 0.7 points from the prior year quarter driven primarily by growth leverage and reduced incentive costs. We are pleased with the 50 basis point improvement in the year-to-date expense ratio from the prior year period, which reflects a beat to…

Thank you. [Operator Instructions] And the first question comes from Matt Carletti with JMP Securities.

Hi, thanks. Good morning.

Good morning.

Good morning.

First question, Jeff. I wanted to go back to your comments on expense ratio and how that give us 50 bips of improvement, is ahead of expectation. Can you expand on that a little bit, are there some one-timers in there that kind of got you to where you are or does it make you or is it more sustainable whether it'd be premium growth or otherwise kind of the leverage from it that makes you feel even better about kind of the guidance you've given on a go-forward basis being able to achieve it?

Thanks, Matt. Now withstanding the environment for talent and other pressures on cost. I think the earnt premium growth that we're seeing in the quarter is really helping us out a lot on the expense ratio. And then on top of that, we had some reduced incentives both agent and employee in the quarter relative to the current performance. So, I think some of that is sustainable and some of that might be viewed as a one time.

Okay, great. And then, one more if I could. Jack, you've spoken in the past about with the Specialty business. And I'm thinking about how you got a lot of kind of the existing core commercial customers that buy a lot of Specialty products elsewhere and then that was kind of viewed as a really good opportunity. Can you just update up on kind of the success that you've had there in terms of kind of bringing that package together for a number of customers or if a lot of the growth has been kind of new customers on a standalone basis and it hasn’t been that successful.

Okay, thanks Matt. I'll make a couple of comments but I'd love for Bryan to elaborate quickly. Our success in Specialty really comes from a combination of both of those dimensions that you talked about. Much of our success comes from a small-to-mid sized customers that buy Specialty coverages separately but very much through the independent agency chain or direct to the carriers and our operating models and our products and the way in which we worked together with our core commercial folks in the field is what gives us access to that business. We are increasing our success on cross sale or multiline exposures. But really our opportunity going forward is to continue really in both areas. So Bryan, I don’t know if you want to say a few more words about that?

Yes, sure. And thanks again, Matt. Yes. So, one thing I can share is that within our regions and our underwriting change to is its ongoing deliberate effort to bring what we call that a total Hanover experience to our customers and agents who are definitely seeing the progress. One thing that make me worth highlighting is when we think about new product development, that's one of the sort of the central drivers of the track is the ability to bring that total Hanover experience. And so, there's two data point's, right? Two of our newest areas are retail E&S business and 1/3rd of that business is written with customer generally existing Hanover customers. And then our newest area, Specialty general liability, 50% of our policies are written with customers of Hanover. So, we feel really good about the progress we're making there and then ongoing focus.

Okay. So, I'd wrap up. Thank you for the color.

Thank you. And the next question comes from Paul Newsome with Piper Sandler.

Hi, good morning. I want to ask a little or a little bit more color on the --. And so, the change that happened from an inflationary perspective across new bracket. And is it safe to say that essentially what happened is that you’ve had an assumption for towards inflation but its accelerating further than you expected from the quarter and that's what created the three ups and the higher levels of as expectation for plans perspective. Is that a fair assessment?

I think that's pretty fair. Most of it was in auto and home and we had assumptions about growth severity in auto and we had assumption about subrogation and salvage. And we revised those assumptions, we talked about that earlier in the prepared remarks and that there was a knock-on effect which needed to be addressed for the first and second quarter. And then in home it was a combination of some increased severity from materials and labor and things like that. It had its knock-on effect and then we saw some elevated non-weather related water type losses, think about things like toilets or washing machines or other internal things that are leaking and causing damage in basements, things of that nature.

So, as we look forward, and as your expectation is for both pricing and reserving's and I mean the expectation that you'll see a moderation in the claims inflation, it sounds like when you're talented that's the case and we need to talk about why we would see a moderation in claims inflation and maybe just how much you and think that moderation was added full.

Yes Paul, this is Jack. Let me get that response started. I think overall what you should see is that we're going to exercise the proper level of humility around how the combination of inflation and supply chain and other factors are exacerbating some of the property and physical damage related trends. I think we're much more on top of not only those trends but also some of the claim mix changes that we spoke to in our prepared remarks that start to influence the severity beyond just the multiplying effect of inflation and supply chain. So, I think we are clearly much more aware of how those all those changes are impacting our costs. We're not going to make any predictions about where inflation goes from here. We're going to assume in our pricing, in our underwriting actions, that current environment is what it is. And frankly, we have a market by which we can move very quickly and enhance our pricing to deal with these at least short-term trends that we're experiencing. So, I don’t want you to mistake that to mean that we're not looking for how those trends evolve from here both positively and negatively. But our assumptions in our actions right now are that the market or the environment is what it is and we need to price aggressively to get there. So, we have an action plan that's well underway and our personalized team and frankly our core commercial team on the property side are going at it extremely hard.

And Paul, Jeff. Just to add to that a little bit. So yes, as you know our action plan is very specific. So, we're going after strong renewal price change and excellent new business increases and those are really ramping up and have a tremendous year-over-year impact. We're getting ITV increases and inflation across the book particularly in home and even in commercial and some selected underwriting actions. So, we're optimistic about the trajectory and how we deal with the inflation going forward.

Thank you, very much. Clearly, always appreciate the help.

Thank you, Paul.

Thank you. And the next question comes from Grace Carter with Bank of America.

Hi, everyone.

Good morning.

Hi, Grace.

The Specialty segment clearly did pretty well in the quarter and doing pretty well year-to-date. I was just wondering if you could help us speak through the risks of some of these inflationary pressures that we've seen in other segment sort of going through results in that, maybe as well and just any sort of I guess barriers to protect the margins in that segment relative to recent levels?

Yes, thanks Grace. I'll be the first to react, this is Bryan. Again, so the exact measure to pour, right. Our books and we see some of the inflationary pressures. That said, it is a really diversified book and that really helps the sort of sustainability of the results, right. We have nine different businesses, over 20 different product areas that have a blend, maturity business, the professional liability, the manager liability. And that diversification has been has proven to be very helpful as we confront in places how. But I will add, right. If you look at our rates and agreement pushing rates it's collapsed and it works in the 8% range. And that was how we're being thoughtful about social inflation in trying to stand on top of it and so we feel good about what we're doing here.

Yes. I guess, this is Jack. The only thing I would add to that is that when you look inside of our Specialty portfolio, not only is it multiple products and multiple businesses, but even in Marine, and our HSI business or especially Industrial business, it's diversified within that and not all of those products and exposures are as susceptible to inflation as you would see for example in our core commercial business. One area that we pointed out in core commercial, that is really exacerbating as this business interruption exposure and we really don’t have that type of exposure for example in our large Marine business, they get exacerbated during this period. So, it's a mixture of property and casualty diversification but as well as different type of property business that reside there on Specialty business.

Thank you. And on the core commercial side, I mean you all mentioned that the re-underwriting actions going on in that book. It seems to have caused that the net premium is written growth to be a little bit lower than the total pricing change that you achieved in the quarter. I guess, just looking for it, how should we think about sort of the topline in that book trend as we think about the tension between ongoing rate and pricing actions and just the movement in re-underwriting different accounts that might need a little bit of margin help.

Yes, thanks Grace. That is, Dick. So, when we think about the growth of our core commercial business here, you really need to think about the two different segments. Our small commercial business has been growing in the low-double digits and we expect that to continue with the investments that we've made in our platform and the engagement that we have with our agents. And so, that's all systems go. Our middle market book is the book that we've done some underwriting re-underwriting and but it's a small percentage the $25 million that was mentioned in the prepared remarks. So, I guess that's a very targeted segment. Well, you should expect to see growth in that segment in that mid-single digit range going forward. We think that's prudent. We have -- with we've thoughtful growth plans by geography, by industry segment. So, it's very targeted whereas our small commercial is a broader base asset classes.

Thank you.

Thanks, Grace.

And the next question comes from James Bach with KBW.

Hello. I wanted to go back to the core commercial lines pricing acceleration in some cases. I wanted to know across the book which lines are rate increases are accelerating and on outside of workers compensation which are potentially slowing.

Yes, James. This is Jack. I'll just get started and then ask Dick to quickly elaborate. I think one of the things we're most proud of is that even I think when many have been talking about commercialized pricing and doing a little buck per workers comp. We really have not done that. We have been able to try to speak out some pricing in workers comp and not kind of use that as an excuse because we do believe the workers comp trends will eventually become more normal if you will and you need to be thinking about a pricing over those loss trends. That said, I think the biggest difference that Dick can elaborate on is the property coverages, right. We've been getting good solid pricing overall but as we see the property coverages requiring more-and-more rate in some additional re-underwriting we're going at it extremely hard.

Yes. That's exactly right. Our property plan is to lean into those rates across the country both in small and middle market business. I would just say that the market is bearing the kinds of rates that we're putting forward. The retentions look good, so we know that the messaging we have from the reinsurance providers are going to continue to push rate from their end and we'll do the same. So, we're leaning into that hard.

Okay. And obviously you cited the accelerating inflationary pressures and then you also mentioned some caution with respect to medical inflation. I just want to get a sense of how your views on medical inflation are potentially evolving in light of some of the other views on inflation.

Yes. This is Jack, again. I would say that we're watching medical inflation more than seeing any concerning short-term trends. And so, clearly in areas like workers compensation, we have fee schedules and other things that keep that from emerging too quickly. But in the liability lines, we're watching carefully to see whether there are some adjustments in the medical costs themselves or the types of procedures that end up exacerbating medical inflation over time. But I can't say that we're seeing anything in the short-term that is greatly concerning. But we've been prudent with our loss picks in both prior year and current year on the casualty lines to prepare for that, James.

Thank you. That covers it.

Thank you.

Thank you. And the next question comes from Michael Phillips with Morgan Stanley.

Thanks. Good morning. Anything you can share on the Specialty side on a little bit of a modest slowdown and the retentions there. And you can anything would what all change can talk about?

I'm sorry, Mike. And you were talking about Specialty retention?

Specialty retention, yes.

Yes. This is Bryan. The clear point with that is a slight slowdown. It's we're going to see variance in this quarter-over-quarter. We are watching it very closely. As I mentioned before, that we continue to think at that 80% rate change is appropriate. We can change it to first towards that and then which is watching what's happening in market place, watching what happens with our retentions. And to see if there's any really slippage. But I kind of look at it at the quarter but also really in this in the context of the full-year. And so, right now I would say overall it's holding up pretty well.

And Mike, this is Jack. I think also I think we've said this in previous calls. There are aspects of our Specialty book that are kind of anomalous in terms of how retention comes to. So, for example, we write a lot of build there's left in Marine which is non not-renewable premium. Surely, in the way that that business get forked when new bonds are come through for existing customers. That has an impact on renewal tension. So, what you'll see overall is that we have really robust retentions in Specialty. But because of the nature of the products, they'll come through at a lower retention than say core commercial book.

Okay, thanks. That makes sense. And Jeff, in your prepared remarks, you mentioned I think the phrase was in line you're pushing through some barriers in difficult states. Anything to elaborate there what you meant by that?

Yes, it's always a process. We've got 20 different states for Personal Lines and you obviously every state for commercial. But at this point we're feeling really good about the states that we're in and our ability to take rate and we don’t see any barriers there to get what we need.

Okay, thanks.

Thank you, Mike.

Alright. It looks like there is no one else in the queue. Mike, was it your last question?

Yes, he's come back into the audience.

Alright. So, thank you very much for all of your participation today. And we're looking forward to talk to you next quarter.

Thank you. The conference has now concluded. Thank you, for attending today's presentation. You may now disconnect your lines.