Good day, and welcome to The Hanover Insurance Group's Fourth Quarter Earnings Conference Call. My name is Nick, and I'll 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 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 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 2026 guidance for level of profitability and premium growth, economic conditions and related effects, including economic and social inflation, tariffs as well as other risks and uncertainties such as severe weather and catastrophes that could impact 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. With those…

Thank you, Jack, and good morning, everyone. We are very pleased with our exceptional performance and strong execution in both the fourth quarter and for the full year, headlined by several records as our momentum continues to build across every major area of the business. We wrapped up the year on a high note with an excellent fourth quarter combined ratio of 89% as well as operating return on equity of 23.1%, one of our best results ever. Our full year combined ratio was a strong 91.6%, improving over 3 points year-over-year. Excluding catastrophes, our combined ratio in 2025 was 87.1%, decisively outperforming our original guidance for the year and 1.3 points better when compared to 2024. Catastrophe losses for the year of 4.5 points came in well below our original guidance, helped by generally benign weather and our property management actions, which continue to contribute positively to our CAT and ex-CAT results. Our expense ratio of 31.1% for the year improved 20 basis points from 2024, but was above our original expectations, driven primarily by higher variable agency and employee compensation, reflecting better-than-expected underwriting results and a much lower level of CATs. Additionally, we continue to make investments across the business to support future profitable growth. We remain committed to managing expenses carefully. Quarterly prior year reserve development ex-CAT, was favorable across each segment in both the fourth quarter and the full year. In Specialty, favorable prior year reserve development was 5.3 points for the quarter, with widespread favorability across multiple coverages. In Personal Lines, prior year reserve development was slightly favorable in the quarter. Homeowners' coverage continues to be favorable, while we made a minor increase to auto bodily injury in response to higher severity. We also updated our current year assumptions accordingly. And in Core Commercial, fourth…

[Operator Instructions] And the first question today will come from Michael Phillips with Oppenheimer.

Congrats on a nice year and quarter. Jeff, in your opening comments, you talked about adjusting the current year for auto BI severity. I assume you're referring to personal auto there given what we see in the quarter. So I guess -- and you also, of course, mentioned the Core Commercial accident loss ratio up a bit given the activity you took earlier in the year. We didn't see that activity for Core Commercial this quarter. I don't think we did. And I guess, does that mean that the pressure you felt from those casualty lines and Core Commercial, you felt less of a need to do so and maybe things are kind of easing there?

So your first question, yes, it was PL auto liability that we were raising picks in the fourth quarter. With respect to Core Commercial auto, yes, we didn't see a whole heck of a lot this particular quarter. It's been a relatively quiet quarter there. But we've been mentioning it all year long, and we've been increasing our IBNR reserves for auto largely for -- solely really for 2023 and '24 and '25. Years before that are quite mature. And I think we leave 2025 with the strongest balance sheet that we've ever had.

Okay. Jeff, appreciate that. Maybe more of a higher-level question, maybe for Jack -- or Jack. As we kind of get into a phase for the overall industry where pricing starts to come off a little bit and maybe more so as the year progresses, Jeff -- or Jack, can you talk about any changes that you might make to how you approach your agency partners, I guess, specifically, do you talk to them more from management teams? Do they hear from you more? Do they hear from you less? Does your message, what you say to them, change as we get into a softer environment? John "Jack" C. Roche: Mike, this is Jack. Thanks for the question. I'll say a few words here, and I'm sure Dick can chime in also. I think the dialogue that we're having with the top agents in the country is accelerating for a number of reasons. They're obviously becoming more strategic and operationally focused, and they're increasingly trying to work with carriers that can help them with their evolving operating model. So there's a lot of dialogue going on across our franchise. And as you know, our partner strategy really lends itself to this type of dialogue, including some great analytical tools that help agents as they're trying to become more efficient and more effective. So from a pricing standpoint, I wouldn't say that, that alone is changing our dialogue at the top of the house. What becomes really important is that our field teams and our underwriters are very proactive about which accounts are coming up when and how we want to approach those things. So we're being respectful of the client relationships that they have, but also at the same time, not acquiescing to an overall market condition. Each account needs to be looked at one account at a time. So Dick, do you want to supplement that?

I like the way you came at this question, Mike, is are we doing anything differently? Or do we have to lean in more differently? And I'd say, yes, we adjust kind of our activity and specifically our talk track with our agents, more time spent on helping them understand their economics and their behaviors in this kind of marketplace, watching the trends, kind of the leading indicators, really focused on the benefits of keeping accounts stitched together, right, in a bundled way because when you separate those out and you have perhaps 2 shopping opportunities, that creates issues for them in the future with potential risk to retention. So we spent a lot of time talking about that, how to -- the benefits of not only [ bundled ] accounts, but then in our case, we have a common effective date, which is really powerful because both of those policies renew on the same date. So we try to put data in front of them for their own book and for the industry. And our team, you've heard me say this before, it's a super power of ours that we bring data and we help agents understand their own situation. So that's probably what I'd add to Jack's response.

The next question will come from Mike Zaremski with BMO.

Maybe on Personal Lines specifically, if you can kind of just tease out directionally what the non-CAT property benefit was in home? I think there was a benefit for the year, just so we kind of can better understand the run rate. You guys have obviously done an excellent job improving margins there. And just maybe higher level overall Personal Lines, kind of like I see the comment in your deck about expecting policy count to grow a bit. But I guess what's kind of the North Star in the current competitive environment? Would it be kind of very low single-digit PIF growth? Or any comment there would be helpful.

Thanks, Mike. It's Jeff. I'll start on the loss ratio. A lot of moving pieces with respect to home. First off, we're getting price above loss trend, which is really earning in and being very powerful for us. But you also have issues like the benefit of the deductibles and even some consumer behavior. Clearly, favorable weather in 2025 and even particularly in the fourth quarter is having a healthy benefit. So it's -- I'm reluctant to spike that out, even though we've tried to estimate it because it's just -- it's too raw. I don't have enough confidence in it. But I think it would be wise to assume that the 47.5% that we did for the year will need to come up a little bit because of that particular benefit.

All right. And I'll take the question on the North Star Personal Lines. So thanks for that. We've really been maniacally focused on our North Star in Personal Lines, which is to be the best market in the IA channel for preferred accounts. So I do think of our future as like strengthening that strength, growing thoughtfully while achieving our diversification objectives, not only across states, but even within states where we have a lot of market share, pushing ourselves continuously upstream into that prestige account space, the $750 million to $3 million space. And then as you've seen, importantly, continue to invest in that account solution. So classic cars, schedule items and things like that. So we are -- we continue to be focused on that. I like a mid-single-digit growth objective kind of into the future. I think that's a good place to be. And as prices come down to more rational levels, that's always been our objective.

Okay. Sounds good. My follow-up, Jeff, a lot of commentary helpful on the reinstatement premiums. Can you just remind us what drove the reinstatement premiums? Is that CAT or casualty?

Sure. So again, with reinstatement premium, we had some incoming reinstatement premium on reserve takedown in 2024 quarter and some outgoing on an increased reserve for reinsurance. It was not CAT. It was generally property -- large property loss exposure in the property per risk program.

Okay. Great. And I guess lastly, just thinking higher level about lawsuit inflation in the United States and cognizant of the comments you made on personal auto. But it looks like you guys have been adding some conservatism to your loss picks throughout the year in commercial. I guess we'll see some data -- the stat data in a month or so. But any changes in your view of what you're seeing or maybe the industry trend-wise in terms of lawsuit inflation? Is it stabilizing at high levels, still maybe increasing, decreasing? John "Jack" C. Roche: Yes. Thanks, Mike. This is Jack. I think overall, what we're witnessing now is that the liability severity trends are presenting themselves in a pretty mature way. Will the severity levels continue to go up over time? Possible. But I think maturing might be a good word right now because there's not too many severe injuries that don't include a lawyer and lawyer representation. And the courts are obviously in full gear. So I think there is a little bit of a leveling out in terms of the environment itself. And I think the way we've tried to deal with it, as you referenced, is make sure that we have the right claim strategies and we're going at each individual claim in an appropriate way, but also to continue to be very prudent with our reserving. I think we have done our best to add to IBNR levels to look at the individual trends by subline and make sure that we're not one of the companies that gets behind. And so I have a high level of confidence, as does Jeff, in our reserve position, but also our claim strategies in this litigious environment.

The next question will come from Paul Newsome with Piper Sandler.

I was hoping you could give us maybe a little bit more elaboration on the competitive environment in middle market commercial, which seems to be heating up. And I think there are investor fears that what we've seen in the large account pushes back down to the middle market. What's your perspective today on that? John "Jack" C. Roche: Yes. Thanks, Paul. This is Jack. I'll get us started here. I would say that there's no doubt that on the larger property schedules, and in certain sectors, there has been some heightened competition. But I would tell you, at the same time, there are particular areas, and I would spike out something like the human services sector where they have some real challenges in terms of market access, particularly in the professional liability and the sexual abuse and molestation lines and getting excess limits. So there's parts of the middle market sector, particularly on the liability side that are definitely on the front end of a firming market. And if I had a crystal ball, I would probably say that, that will continue that at some point in time, the property market will level off and the liability pricing will steal the headlines. But in the meantime, being a good account player primarily playing on the low- to mid-sized accounts and staying out of the upper middle market is serving us extremely well. And I think we're poised eventually to be even more assertive as the market starts to firm, hopefully sometime this year.

And then maybe a different question. Longer term, I think catastrophe management has been an effort. The 6.5% looks a lot like -- for next year looks a lot like it has been in the past, maybe more of a stable number. Are you thinking about trying to move your property exposure to have less CAT in the future? Or is this kind of the right level sort of broadly thought way? John "Jack" C. Roche: Well, I think our objective is to really focus on earnings volatility. And so I go there because the more we can address any micro concentrations and then look at the pricing and terms and conditions across the portfolio, then I don't think there's a magic number that we're shooting for. I think all of that adds up to us over time trying to drive the CAT load of the organization down, but the environment will dictate some of that. And as you've seen, the severe convective storms have driven some CAT loads up in some of our competitors. So we're trying to be very thoughtful about making continued meaningful progress in our CAT management -- in our property aggregate management, but to be -- not be -- to be still relatively conservative in terms of how we model that out and choose our CAT loads.

Yes, Paul, severe convective storm is the area that has given us some issue over the last several years with that volatility. And we've done a tremendous amount of work on thinning out the aggregations, putting in place the deductibles for the terms and conditions and making it -- so those matters are less severe, getting lots of rate and then also, particularly in the commercial space, putting in place new technology that is having a tremendously beneficial impact on limiting those CATs where people have devices that will let them know if there's either excessive cold temperatures or some water issues with pipes, and that's a real benefit for us.

The next question comes from Rowland Mayor with RBC Capital Markets.

I wanted to quickly get ahead of no longer getting expense ratio guide in 2027. Is the long-term goal there still to show year-over-year improvement? And I guess on top of that, the tech investments, are those neutral to the expense ratio right now as efficiency gains come in? Or is that still adding some pressure? John "Jack" C. Roche: This is Jack. Listen, I think what you should know is that we intend to be very disciplined from an expense standpoint and that we believe we have expense leverage as we grow the organization. And so I'll let Jeff speak to kind of our rationale of going forward on guidance. But I think you should expect us to scale each of our businesses. But obviously, the mix, our expense quotient is different across each of those businesses. And I would say from an investment standpoint in technology and data and analytics, the philosophy of the firm is that we are spending more, but we tend to do that by reducing some expenses in other areas as opposed to trying to drag that out of earnings. And I think we -- the team has been very disciplined in that regard to find savings to fund the additional investments that are required for our future.

Yes. I don't think that you should interpret our moving away from guidance as in any way, lacking financial expense management discipline. To the contrary, we're still every bit as disciplined as we always have. But a year like we've had this year where the loss ratio is or the overall combined ratio is much lower than we had guided to with or without CAT, it causes us to have an expense ratio elevation and just didn't really want to be slavish toward reporting against it or being held to it. Having said all that, there's an awful lot going on with expenses. We have expense needs and demands to make investments in technology and data and analytics in AI, in a variety of different places, and we're making those investments in a way that we'll spend a little bit of money before we'll get the benefits of that, which will come. But we're funding that. And so we have a very active process of looking at our expenses across the organization and creating the capacity that's needed to be able to make those investments.

That's super helpful. And I wanted to quickly then ask on the repurchase volumes, and they've been steadily walking up the past few quarters and even the January number looked -- I think it was the biggest probably month you've had in a very long time. Can you walk through the approach there and just how we should be thinking about your ability to buy back stock and maybe capital needed for growth needs?

Yes. We bought back, as you said, $100 million of stock in the last 4 months, which is a healthy dose with growth being a little bit lower in the last 12 months and the earnings and profits being super strong, we're building a lot of capital, as you can imagine. It ends up being a high-class problem. And we've always been good stewards of capital. We've got choices. Growth is always at the top of the list, continuing buybacks, of course, dividends. We can consider things about reinsurance, perhaps even small inorganic or renewal rights deal. But we'll be balanced, Rowland, as to how we use capital. And I suspect the stock buyback will continue to play a meaningful role.

The next question will come from Meyer Shields with KBW.

Two quick questions on the line, if I can. First, at least in the third quarter of this year, we're seeing most Personal Lines coverages claim frequency decline. I'm wondering whether that broad picture matches what you're seeing in your preferred market?

Yes, definitely. We're seeing the frequency on the property coverages in the auto and the homeowner side of things. And certainly, some of that's related to customer behavior, we believe. Some of it's related to the terms and conditions that we put in place, certainly on the home side and the weather, ex CAT weather. And then, of course, as you know, on the auto side, the safety technology that is being implemented in the cars as they roll off the conveyor belt and more and more of those on the streets and highways is definitely having an impact on the number of accidents and frequency down.

Okay. Perfect. That's very helpful. When we look forward to the growth in the new states, I'm assuming that's the 11 states that Jack called out, you're going to continue to pursue growth there. Should we anticipate some level of new business penalty just or higher initial loss ratio, however you want to frame it from the fact that there's going to be hopefully an uptick in new business? John "Jack" C. Roche: This is Jack. I'll say a couple of words in that these are existing states that we believe are reaching a level of maturity and benefiting from the hard market that we came out that accelerated growth can come through at a very accretive level. So I would not think about it in a traditional way with new business penalty. Frankly, we've been through an era where new business pricing was matching renewal pricing for some time. So we're not still at a traditional gap of new to renewal pricing. So Dick, I don't know...

No, we've never been at a more adequate price level in our -- as we look across all of our states in the business. So we feel good about it. John "Jack" C. Roche: And needless to say, as we diversify from a capital allocation perspective and just an overall performance, we think it will help us because we have had to adjust CAT loads and we've had to think about weather differently. And so spreading that risk better, particularly on the homeowner side is having an additional positive impact.

The next question will come from Mike Zaremski with BMO.

Great. Just a quick follow-up. Does the -- is the winter storm recently in 1Q, is that big enough to -- we should talk about it? And is it -- if so, is it in the guide for '26?

So burn represented most of our January CATs this winter storm burn. And based on what we're seeing, there's no reason to modify our first quarter CAT estimate of 6.1%, Mike.

And the next question will come from Daniel Lee with Morgan Stanley.

My first question is on the Specialty segment. I was just kind of curious to hear just some more details on like competitive dynamics. I know you guys mentioned just competitive pressure across the Property Lines. But -- and yes, maybe with management liability and pricing stabilization across for professional and executive lines, how are you guys thinking about the competitive dynamics going forward for that subsegment?

Yes. Thank you, Daniel. I'll take that. It's Bryan Salvatore. And yes, to your point, we do see increased competition across the property lines, and we are reacting to that. We're really fortunate to have a very diversified portfolio. And the things that you mentioned, for example, management liability, really pleased with the progress we saw in the fourth quarter, right? Yes, the market has stabilized. But that along with the investments we've made in operating model efficiency, improving turnaround, we saw double-digit growth in the fourth quarter for management liability, and we see that continuing. And we also saw improvement in professional liability from the investments we've made there. So that diversified portfolio for us gives us a lot of confidence in our ability to appropriately grow in 2026 even in this environment.

Yes. So I guess my follow-up is, I'm also kind of curious on just the overall E&S demand that you guys are seeing out there. Is there still more robust submission flows that are coming in for E&S? Or do you guys kind of see that subsiding as a little bit of the [indiscernible] markets start to open up? Just curious.

So I'll react to that too. Sorry, I'll react to that, too. We have not seen any abatement in the activity in our E&S book. It grew double digits throughout the year. It grew double digits in the fourth quarter. The submission volume is quite high. And we do have a couple of benefits. One is where we're positioned, which is middle to smaller E&S, and so the competition there isn't as severe as you might see in some other places. Also, we have a real nice mix now of retail play E&S business and wholesale space. So we have different avenues, different access to opportunities. And so we continue to see that business growing for us in a nice, healthy way.

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

Thank you, everyone, for dialing in today. We're looking forward to talking to you next quarter.

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