Good day, and welcome to the Hanover Insurance Group's Third Quarter Earnings Conference Call. My name is Alan, and I'll be your operator for today's call. [Operator Instructions] Please note this event is being recorded. And 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, Chief Operating Officer and 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 2025, economic conditions and related effects, including economic and social inflation, potential recessionary impacts, tariffs, as well as other risks and uncertainties such as severe weather and catastrophes that could affect the company's 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 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…

Thank you, Jack, and good morning, everyone. We are very pleased with our strong results in the quarter, marked by several third quarter records, including operating earnings per share of $5.09 and a combined ratio of 91.1%. This excellent performance reflects our continued momentum and underscores the strength of our positioning as we head toward finishing the year and look forward to continued success in 2026. Our combined ratio, excluding CATs, improved 0.2 points from the prior year quarter, primarily driven by improvement in Personal Lines. Catastrophe losses of 3 points came in 3.8 points below our third quarter assumption and lower than historical averages. Benign weather played an important role, and our property management actions have also contributed positively to our CAT and ex-CAT results. Our expense ratio of 31.3% was slightly above expectations, driven primarily by higher variable agency compensation, reflecting better-than-expected year-to-date results, including much lower catastrophe losses. We remain focused on managing expenses carefully while investing strategically in initiatives that drive our long-term success. Third quarter favorable ex-CAT prior year reserve development of $12.1 million included modest favorability across each segment. In Specialty, favorable development was $10 million or 2.8 points with widespread favorability, most notably in professional and executive lines claims made business. In Personal Lines, favorable prior year reserve development was $0.9 million driven by home. And in Core Commercial, favorable prior year reserve development was $1.2 million. Favorability across a few coverages was partially offset by increased reserves in commercial auto as we respond to increased severity. Now I'll further discuss each segment's current accident year results, starting with Personal Lines. This business posted an outstanding third quarter current accident year ex-CAT combined ratio of 85.8%, improving 3.4 points from the prior year period, primarily driven by strong improvement in our homeowners line.…

[Operator Instructions] Our first question today comes from Michael Phillips of Oppenheimer.

I wanted to start with the large account property and the middle market business just because we've had some kind of mixed stories from others. And I guess I'm going to hear your opinion of whether you think we've reached a floor for pricing there, first off? And then any impact specifically on your margins in the near term because of that? John "Jack" C. Roche: Mike, thanks for the question. This is Jack. I'll say a couple of words here and then let Dick obviously respond with a little bit more specificity. But I think overall, you know that we have remained fairly conservative in the upper middle market, whether it be property or casualty driven, that tends to be where the market softens the quickest or decelerates in pricing. And frankly, we differentiate ourselves in a more dramatic way in the low to midsized account particularly with our specialization and niches. So I do think that we are getting to the point where the competition that has increased has to recognize that the property pricing can't continue to go in the wrong direction and the liability trends are gradually going to need to be addressed. So we think there is likely hopefully some bottoming out of that, but that's not where we focus most of our energy.

Yes. I don't have too much to add to that, Jack. I mean I'd say it's -- we take each account one by one, and we look at what we believe to be our -- the technical pricing on those accounts. And we look at the full account, obviously. So we think about pricing property in the context of the other lines as well. So it's hard to say if the floor is here, but we're certainly going to remain disciplined, and we've been really disciplined about our ITVs and making sure those are in good order. So we'll continue to fight the fight account by account.

Okay. I guess turning to the Core Commercial and the accident year loss ratio. You said pretty clearly the 2.4 points was the large workers' comp and then the addition to commercial auto. But I guess given comments recently from you guys on pricing and loss trends there, I guess, ex that 2 things, your core loss ratio, it sounds like it was probably flat. Should we have expected some improvement there? And I guess what's your confidence that we might get some margin expansion in Core Commercial in 2026?

Mike, it's Jeff. We'll give our guidance on our loss ratio and the combined ratio when we get to January. But I think overall, we're very confident and optimistic about the price increases that we've been getting relative to loss trend. And it's hard to talk about individual lines, but I am optimistic about the firm overall, given the 9.9 points of price we're getting in Core Commercial. And I think that bodes well when some of the things that showed themselves in this quarter start to normalize.

Our next question comes from Matt Carletti of Citizens.

You guys have done, I think, a really good job in recent years of kind of staying ahead of the eight ball in a really challenging environment. Jack, you made some comments about remaining forward-looking, not just kind of in the past and gave a few concrete examples. I was hoping maybe you could zoom out kind of 30,000 feet. And as we look forward for Hanover over the next -- you pick your period, 1, 3, 5 years, kind of just -- kind of strategically where you want to take the business. I mean if I'm hearing from some of your examples, I think I'm hearing speed and efficiency and ease of doing business with your agents is kind of a key focus, but what else might be on that list? John "Jack" C. Roche: Thanks, Matt, for that question. And I can't -- I can tell you that I've never been more optimistic about our future sincerely. It's really hard in our business to build a diversified portfolio that has broad-based profitability. And frankly, we're right where we want to be in that regard. You're never going to get to the point where everything is perfect, but to have 4 major businesses contributing to our profitability, most of our geographies in relatively good position to grow, that's really the horsepower you need in order to lean into the current marketplace. We had obviously an opportunity to build on the momentum in small commercial and Specialty. And I really am optimistic that middle market will be able to contribute particularly next year in our profitable growth. And Personal Lines is already where we need it to be. The only restraint that we have is one that we self-imposed around diversification and making sure that our property aggregations are appropriate…

Our next question comes from Mike Zaremski of BMO.

I'm switching to Personal Lines. On the home insurance side, and I appreciate the comments about the percent that's bundled now, definitely higher than historical. Just so we can maybe better appreciate the durability of the current profit margins. Would you be willing to share how much lower the frequency levels are that you expect kind of under the new kind of terms and conditions and deductibles, et cetera, versus kind of the old portfolio?

Mike, that's really hard to say. The -- at present, the frequency benefit is substantial. We haven't really shared that, and I don't think we're prepared to do that. But both in terms of auto, particularly around collision and in homeowners, we're seeing it. And as most have talked about, it's really hard to tell in auto, whether it relates to safer driving because of technology, safer driving because people are concerned about premiums going up or just general concern where they don't -- they've actually had a claim and they don't want to make a claim for fear their premium would go up or all of the above. Going forward, we're trying to assess right now whether we think that frequency benefit is going to continue in both home and auto as we plan and ultimately as we give our guidance for next year. So stay tuned. When we come back to you in late January, early February on the call, we will do our best to give you that readout.

Okay. Great. Pivoting to the Core Commercial segment, the underlying loss ratio, you called out what might be some onetime on work comp, but then commercial auto, I think we'll assume that just given the state of commercial auto for a long time that maybe that's more run ratable, the impact it's having. So I'm assuming the -- in the past, I think you've talked about a 57% to 58% accident year loss ratio target in that overall segment. Is it fair to say that we should be thinking a bit higher?

That's hard to say. This year, as you know, it's 60%. A year ago, it was in the 58% range, and I think that's a reasonable target. I'm still optimistic about that. Even though we've raised our picks in commercial auto, the team is actively working that book and assessing and trying to obtain some price increases there. So still optimistic that that's the appropriate level going forward.

Okay. Got it. And lastly, just on the overall competitive environment. I know you've touched on this a bit already. But when we -- I think that one of the main questions we've been fielding for a while now from investors is just the rate of change on pricing power in commercial. The pricing is decelerating a bit, but it's not decelerating a lot. So maybe you can kind of talk about -- are you guys doing something different in the market with like underlying actions that's keeping pricing propped up? Or is just the market not as competitive as some might think it is when they look at especially the large account space? John "Jack" C. Roche: Yes, Mike, this is Jack. Thanks for that question. I think at the highest level, it's where we play and who -- and how we do business with agents. We're focused on the small to lower end of middle market business, not only in Core Commercial, but in Specialty. And that is, I think, something that is not as easy to kind of address for a lot of carriers because it requires a unique operating model and an ability to underwrite efficiently beyond just point-of-sale systems. So I think it's not exactly a moat around it, but I think it's much more stable business historically. And I think you're also seeing with some of the volatility in the upper middle market, both in Specialty and middle, that agents have less and less time to worry about saving a few dollars on the middle market, if you will. So I think that's part of the influence. But we do work hard in creating some value such that preferred accounts can stay with the preferred market. And I do think that is how agents perceive us. Maybe I could just give Bryan a chance on the specialty area, in particular, to highlight why we think we're kind of having sustained pricing even in a relatively competitive market.

Yes, sure. And I would say, Jack, to start, our play in that small and middle market segment, we see the competitive pressure, but it's definitely not as pronounced as we're seeing in other areas. And I think the work that we've done on our operating model to what I believe really solves a need for our agents, especially the larger agents, the consolidating agents and they're streamlining their placement platforms. And so our ability to turn the submissions around same day in a lot of instances and really help their economics in this space, it doesn't -- to your point, it doesn't create a moat around the business, but it absolutely provides us the benefit of their appreciation for the work that we do with them. And frankly, also just delivering a breadth of products that are healthy, so we can solve a range of their needs in a really efficient way.

The strong growth this quarter, the high retention and also the high price increase that we're getting, I think, is good evidence that Bryan's strategy is clearly working.

[Operator Instructions] Our next question comes from Paul Newsome of Piper Sandler.

I was hoping you could maybe give us some thoughts -- updated thoughts on the expense ratio goals. At one point, you're kind of looking for about 20 basis points of improvement per year, but that kind of got derailed by some other issues and some mix changes. As we look at '25, are we at kind of a place where you can think about returning to that goal? Or is that something that you just have to revisit entirely?

Over the long run, we are committed to that goal of 20 basis points per annum improvement, and that was built into our guide of 30.5%, and we'll address that end of January, early February when we do our fourth quarter call. What I've said from time to time on these calls when asked about it, when we have years or periods where the loss ratio is below what we had guided to in the combined ratio and also when CATs are below our guide, there are scenarios where the expense ratio has to increase a bit, but that would be a small offset to the overall decline in the combined ratio. So even if you think about CATs, when we have lower CATs, there are slightly higher agency profit share that has to be paid. So it's a little harder to deal with the expense ratio in and of itself. But overall, Paul, we are committed to that long-term objective.

Our next question comes from Meyer Shields of KBW.

Great. I wanted to really get Jack's thoughts on both core and contingent commission rates. In the past, as pricing has softened, I think the brokers' hands have gotten strengthened and they've been able to push for more. And I'm wondering whether you're seeing that and whether consolidation of the smaller account space among the larger brokers is playing a role? John "Jack" C. Roche: Thanks, Meyer. Listen, I can tell you that as recently as the CIAB conference in October, we have had what I think is some of the most strategic dialogue with the biggest and best agents in the land around how we have a unique opportunity to work together to better serve customers in a more efficient way. And frankly, we've been really upfront that we don't get there by exchanging the last nickel that we both earn and move our margins into brokers' margins. What we've been successful in doing heretofore, and I think we can continue to do that is use our capabilities to help agents improve their margins, particularly on the lower face value business and to grow their business in a very strategic way through our partnering approach. And I really believe that the way in which we engage with agents keeps us out of a tug of war for the last nickel. And so we have not seen any major pressure in that regard. In fact, the bigger the agents get, the more they want some stability in their contingencies. So we negotiate a proper balance of guaranteed supplemental type of stuff so that they don't come up dry on a less good year, but we simultaneously negotiate kind of taking some off the top to pay for that over time. So I feel great about the way we're working with those agents in a very strategic way, and we're going to continue to push that as part of our strategy.

Okay. Perfect. That's good to hear. Related question, when you see technology that's certainly better to a lot of the competitors that are out there and the business that you win from that perspective, should we think of that as recurring? Or is that like a one renewal cycle and then you've already gotten what you're going to get? John "Jack" C. Roche: Maybe you could clarify for us a little bit, Meyer, when you say a onetime benefit. Tell me what you're thinking.

So wondering whether you go through a year and Agent X has technology that gets responses much faster and stuff like that. So you've boosted the new account wins on that basis. Does the accelerated growth, is that something that persists going forward? Or is it just similar growth off of a higher base? John "Jack" C. Roche: Let me let Dick kind of respond to that more holistically. But I think we're in a phase where agents are looking at who are their most strategic markets that can help them become more efficient and better serve customers at the right level. And all these things are tools. So I think embedded in all that is if you're positioned as a top-tier market, whether it be in small commercial or in Specialty, particularly on the small end, you're creating a kind of a strategic position that has some sustainability to it in terms of profitable growth. But Dick, you can update on the technology side.

The other color I'd add to that, Meyer, it isn't just about the technology on the way in the front door, your technology, your system, your operating model needs to wrap around that customer throughout the year through your renewals that persist. How are you at handling endorsements and certificates and calls on billing, right? So it's a collection of services that brings forward a terrific experience. So the customer is happy with the carrier, happy with the agent. And as you know, particularly in the small commercial, the retentions are quite high. We have some of the highest retentions in that market segment in the industry. So we've been at this for years to obviously have a forward-facing ease of quoting so that comes to us preferentially. But then the stickiness of that business is dependent upon all the other components that you have in your operating model. So I would argue that it sustains the growth model.

Yes. And if I could -- this is Bryan. If I could just add one more thing. We've also worked really diligently in the small space on making the renewal process very low touch on those small simple policies. So I would definitely say it's not just on the new business, but it goes through the process.

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

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

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