The Hanover Insurance Group, Inc. (THG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the 2020 Annual Meeting of Shareholders of The Hanover Insurance Group, Inc. I would now like to introduce Mr. Kevin Condron, Chair of the Board of the Hanover Insurance Group and the presiding officer for this meeting. Mr. Condron, you may now commence the meeting.

Thank you. My name is Kevin Condron, and I'm the chair of the company's Board of Directors. Thank you for your participation in the meeting this morning. Also present at the meeting are the other independent directors of the Board; and Jack Roche, President and Chief Executive Officer and a Director of the company. As Chair, I will serve as the presiding officer and lead the formal part of our meeting this morning. After we have concluded the formal part of the meeting, Jack will provide a brief presentation, and we will have an opportunity for you to submit questions and comments. This year, due to the unprecedented public health situation caused by COVID-19 outbreak, we are holding our Annual Meeting in an online virtual format to ensure the health and safety of all of our participants. We adopted a digital format for the meeting to provide a consistent and convenient experience to all shareholders regardless of location. Even though we are holding this year's meeting virtually, as a shareholder, you are still able to vote your shares and participate in the meeting. We are also transmitting the audio portion of our meeting and slides through a webcast posted on our website for the benefit of interested listeners. At this time, I call the meeting to order. In addition to Jack and me, the other individuals in the virtual meeting are: Kevin Bradicich; Jane Carlin; our Vice Chair, Cynthia Egan; Dan Henry; Marty Hughes; Wendell Knox [Technical Difficulty] Joe Ramrath and Tee Taggart. As we announced, in February, Michael Price will be resigning from the company's Board effective at this meeting. On behalf of the Board, I'd like to thank Michael for his very capable service to the company, for his wisdom, his guidance and particularly for his leadership [Technical Difficulty] also open for the meeting from the company [Technical Difficulty]

Mr. Condron, I'm sorry to interrupt you, but your reception is poor, and we're having a hard time hearing you. May I ask you to start again at the portion where you say the company's tabulation agent, median communications and read from there. And if we continue to have difficulties, I would be happy to step in and read for you.

The company's tabulation [Technical Difficulty] proxy statement for the [Technical Difficulty]

Mr. Condron, we continue to have audio difficulties with your line. Can you hear me?

Yes.

I'm happy to read the portion of the script for everyone so that we can hear -- or Jack, you're welcome to do that, but I'll step in and read. This is Chuck Cronin, I am the Corporate Secretary.

Yes, Chuck, I think that makes sense. Kevin, it looks like your line is compromised for some reason. So let's proceed as Chuck suggests.

Thank you.

The company's tabulation agent, Mediant Communications has delivered an affidavit of mailing establishing that the notice of this meeting was duly given. The notice, along with the proxy statement for the meeting were first mailed to shareholders on March 27, 2020. A copy of the notice of the meeting and the affidavit of mailing will be filed with the minutes of this meeting. All shareholders of record at the close of business on March 16, 2020, are entitled to vote at the meeting. A representative from Mediant is participating in the meeting and has been appointed inspector of elections. The inspector has informed us that the company has received valid proxies representing a majority of the outstanding shares. Accordingly, a quorum is present. The Board has proposed 3 items for consideration, discussion and voting, all of which are set forth in the company's proxy statement. They are as follows: one, the election of directors, Jane Carlin, Dan Henry, Wendell Knox and Kathy Lane, have each been nominated to serve for a 3-year term. Number two, consideration of an advisory vote on executive compensation, the so-called say-on-pay vote. And three, the ratification of the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm for the company for 2020. At this time, I would like to ask for a motion with respect to each of these proposals.

So moved.

Thank you, Mr. Roche. Representatives of PricewaterhouseCoopers are also attending today's virtual meeting and will be available for questions during the discussion period. I would now like to open the floor for shareholders to submit any questions on these specific proposals now before the meeting by typing your questions and clicking submit in the Q&A submission box for the meeting. A member of management, that would be me, will read any proper questions relating to the specific proposals to the meeting. Following a submission of any questions and discussion, we will invite any shareholders who wish to vote in person to use the voting portal via the link that was included with the information for the meeting. If you're a shareholder of record as of March 16, 2020, and have a question regarding these proposals, please submit them now. Please also include your name and indicate whether you are a shareholder or hold a valid proxy as part of your submission. If you have questions or comments about matters other than these proposals or wish to propose other matters, there will be time allowed in just a few minutes. There are no questions pertaining directly to these proposals. So at the moment, I will proceed. If there is -- as there are no questions, we'll proceed with the proposals on what we set forth in the proxy statement. And on behalf of Mr. Condron, I declare that the polls are now open for receipt of votes by electronic ballots. If you're either a shareholder of record or hold a valid proxy and you want to change your vote or vote for the first time, then you may do so now. If you have already submitted your proxy in advance of the meeting and do not desire to change your vote, there's no need to cast a ballot. Proxies will vote your shares in the manner that you have directed. To submit a vote, please use the link that was provided in your e-mail that you received this morning and contained the details for accessing and voting at the meeting. If you registered multiple positions and wish to vote, you will need to vote each position individually by using the link provided in each e-mail that you received. In order to allow appropriate time for voting. If you do wish to vote at this time, please let us know by typing, "I wish to vote" in the Q&A box, then clicking submit. I see there are no requests to vote, so we will proceed. On behalf of Mr. Condron and the Board, I declare the polls now closed for voting. Please allow us a moment to determine the voting results.

Thank you, Mr. Cronin, I will review the voting results and be back momentarily. Mr. Cronin, the final results are consistent with the preliminary built-in results that I shared with you in advance of the meeting.

Thank you. I've been informed by the inspector that the nominees for election to the Board of Directors have been duly elected. The advisory proposal on say-on-pay has been approved as has the proposal regarding our independent auditors, in each case by more than 96% of the shares voting. Now before we close the formal part of the meeting and move to management's presentation and session for questions, other than that, is there any other business to properly come before the meeting? Again, there will be time for questions in just a few minutes. As a reminder, to bring any proper business before the meeting, please type your submission and click submit in the button in the Q&A box for the meeting. I will then read any submission of proper business in the meeting. There's a question that has been submitted for the latter part of the meeting, so we will read that at that time. Well, we are able to proceed. And there are no proposals, so we will proceed to conclude the meeting. Since there are no further business matters on the agenda, the formal portion of the meeting is adjourned. We will now turn to management's presentation, followed by questions or comments. I'd like to introduce Mr. Roche, and Mr. Roche will be available to answer questions submitted from shareholders following his comments.

Good morning, and welcome. Before I provide an update on our company, on behalf of all of us at the Hanover, I want you to know our thoughts are with you, our shareholders, our partner agents, our customers and local communities and all those who have suffered in some way as a result of the ongoing COVID-19 pandemic. We deeply appreciate the heroism of our dedicated health care workers, first responders, essential workers and many others whose selfless efforts lead our determined fight against this devastating virus. As President and CEO of the Hanover, I am humbled and incredibly proud of our outstanding team, which has risen to the occasion and demonstrated tremendous commitment in caring and versatility during this uncertain time. As COVID-19 made its way into the U.S. and spread throughout the country, we quickly and effectively transition to a remote work environment, safeguarding our colleagues and providing the high-quality products and services our customers expect and deserve. I am proud as well of the steps we have taken to support our agent partners, to provide financial relief, expanded coverages and flexibility for our customers and to help individuals and families in need of assistance in our local communities. In these trying times, we are doing our part to make a difference. I am very pleased this morning to provide some perspective on our company's competitive position, strategic focus and prospects. I also put our recent performance in context and update you on our mission to be a premier property and casualty company. More and more, our world is characterized by change, bringing both challenges and opportunities, and the pace of change continues to accelerate. The world we insure is becoming ever more complex with increasing automation of vehicles we drive, smart homes, growing in cyber connectivity, expanding liability exposures and social inflation among the countless factors creating demand for new products and services. New and robust sources of customer data, artificial intelligence, telematics and greater computing power are adding complexity and precision to the underwriting and pricing processes. Advances in self-service technology, cloud- and web-based solutions and mobile applications are prompting changes in consumer behavior and expectations, which, in turn, are creating demand for on-demand, personalized and self-directed services. Claims processes are changing as well, with more technology-enabled inspection and fraud-detection capabilities, self-service claims reporting and faster payment options. In the face of this unprecedented change, I have every confidence we have built a distinctive, diversified and responsive business, powered by a highly experienced and committed team and capable of delivering sustainable broad-based profitability. As the world we insure and our industry have evolved, we've adjusted our operating model, building a versatile and diverse team with the requisite skills and also an inclination and an ability to look critically at our markets, to gather and interpret data, to anticipate emerging market trends, to consider consumer preferences and to leverage advanced technology, data analytics to serve our customers and agents. Now as we work to take our organization to the next level, we are confident we are prepared and well positioned to succeed. Today, our company is in excellent financial condition, able to withstand significant economic pressure, has a proven and unique business strategy, broaden deep partnerships with the best agents in our industry and the talent and drive needed to deliver superior value for our shareholders and other stakeholders. We are confident we have what it takes in a dynamic, highly competitive business to adjust and adapt to manage change to our advantage and to set our company apart from our competition. We made important progress in 2019, building on the positive momentum we have established and setting the stage for a bright future. Our financial performance once again reflected the inherent strength of our company and the effectiveness of our strategy. On the year, we delivered after-tax operating income per share of $8.16, up approximately 20% from $6.79 per share in 2018; an adjusted ROE of 12.8%, up from 12.6% in '18, placing our company again in the top quartile of our industry. Strong growth in net premiums written of 4.5% and nearly 6% excluding our targeted underwriting actions. A 50 basis point improvement in our expense ratio, a strong underwriting performance with a combined ratio of 95.6% improved from 96.1% in 2018, and value for our shareholders due to prompt appointment of approximately $850 million in equity generated by the sale of our International specialty business, Chaucer, in the final days of 2018. At the same time, we made important strategic progress, expanding our distribution capability with a selective addition of approximately 175 new agent partners, investing in our successful personal, commercial and specialty lines business models and platforms, offering more relevant and responsive insurance solutions, driving innovation across our business, helping our partners meet evolving customer needs and preferences. Actively managing our business mix, focusing on growth in our most profitable businesses, taking rate and pricing actions as needed and addressing vulnerabilities in more challenging lines and sectors. And finally, prudently managing our retained capital, redeploying it into strategic business initiatives and other areas as needed. During the first quarter of this year, we sustained our strong business momentum. We delivered strong results in the quarter, in line with expectations, with an operating EPS of $2.23, up approximately 14% from $1.96 in the first quarter of last year. A top-quartile operating ROE of 13.1%, a combined ratio of 95.2% improved from 95.8%, growth in the quarter of 3.5%, with continued growth in our most profitable businesses. And the completion of $150 million accelerated share repurchase program initiated in December and the purchase of approximately 350,000 shares of our common stock through open market transactions. COVID-19 did not have a material impact on our first quarter results. While we expect it may have a greater impact in the second and subsequent quarters, we believe based on the comprehensive financial modeling we have done, that our 2020 operating performance should be solid, even under the most stressed financial scenarios. As we continue to fight against the coronavirus and challenging economic conditions, we are optimistic about our prospects. We have a solid balance sheet, ample liquidity and a high-quality investment portfolio. Our book of business has been carefully constructed with risks deliberately spread by geography, product line and market segments, and we are generating broad-based profitability. We have limited underwriting exposure to COVID-19, and we expect the impact on our 2020 underwriting results to be very manageable. With a solid financial foundation, strong competitive position, positive momentum in our business and our focus on the future, our company is on the move, shaping the future in ways that will benefit our many stakeholders. We are intently focused on our goal to be the premier property and casualty franchise in the independent agency channel. A company that delivers value for its agent partners, customers, shareholders, employees and the communities where our employees live and work. With that goal in mind, we made significant investments during 2019, advancing the 3 key tenets of our strategy, enhancing our strong market position and brand and setting the stage for continued sustainable profitable growth. First, we continue to capitalize on the strength of our unique agent-centered distribution strategy to position our company as an agency carrier of choice. We built on the mutually beneficial relationships we have formed with our agent partners, helping them identify emerging trends and customer needs and providing effective and reliable insurance solutions. We also strengthened our distribution reach and penetration during the year, selectively adding new agent partners and expanding existing relationships. Second, we continued to strengthen our specialized capabilities, providing our agent partners and customers with differentiated product offerings in each of our business segments. In Personal Lines, we maintained our focus on the whole account market, enhancing our high-value home, auto and condominium coverages for customers with more complex insurance needs. In Core Commercial Lines, we continue to focus on small and midsized accounts, leveraging our market-leading small commercial platform as well as our expertise in specialized middle-market industry segments. And in Specialty Lines, we expanded our product capabilities, including new excess and surplus lines, cyber and financial institutions coverages and leverage these capabilities across our Commercial Lines customer base. Third, we continue to drive innovation across our business in 2019, helping our agent partners acquire and service more digitally inclined customers. With our industry facing an innovation imperative, we are focused on leveraging data analytics and emerging technology to create insurance solutions across the value chain that meet our agent partners and customers' needs. As we continue to build our business, we are committed to being an employer of choice and a responsible corporate citizen. We recognize our talent is our most critical asset, and we continue to evolve our collaborative and increasingly agile culture, fostering more inclusion and diversity and promoting personal growth and development. In 2019, I joined more than 750 CEOs across the country in signing the CEO Action for Diversity & Inclusion pledge, reinforcing our commitment to promote inclusion and diversity in the workplace and to foster a culture based on trust and respect. Our efforts to create a best-in-class work environment was recognized once again in 2019, with Forbes magazine, including our company and its ranking of America's Best Place to Work; and with the Human Rights Campaign Foundation, recognizing our ability as the best place to work for LGBTQ Equality. While working hard to build a healthy and positive work environment, we also continue to deliver on our promise to be socially responsible and to govern our actions with integrity. Our company continued to deliver on our long-standing commitment to make a difference in our local communities to protect the environment and to encourage volunteerism. At the same time, we adhere to our strict code of professional conduct and ethical business practices, maintaining the highest standards for employees throughout the company. To learn more about these commitments, I encourage you to visit our website at hanover.com and review our inaugural global reporting initiative index and our responsible investment policy. As we look ahead, we recognize our business will continue to be defined by change and that we will continue to be challenged on many fronts by the COVID-19 pandemic, economic pressure, changing market conditions, dynamic competitive forces, evolving consumer preferences and more. These changes and challenges will create uncertainty and new risks for the industry and for our company. I can assure you our team is ready. While some look ahead with trepidation, we are moving forward with confidence and enthusiasm. We are well positioned to manage change, to meet challenges head-on and to capitalize on the opportunities ahead delivering high-quality products and services, sustained profitable growth and superior returns. Thank you for the trust you have placed in us. As we take our company to the next level, we are committed to deliver value for you, our shareholders, and for all of our stakeholders. Thank you.

Thank you, Jack. As we pause for questions, please note that remarks today include forward-looking statements regarding, among other things, our outlook for 2020 and the ongoing impact of the COVID-19 pandemic 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 in this respect, refer you to the Forward-looking Statements section in today's slide presentation and our most recent filings with the Securities and Exchange Commission as well as to the risk factors described in those filings.

Turning to questions. We have received 1 question from [ Mr. David Manision ] on behalf of the Carpenters Union Pension Funds, [ Mr. Manision ] writes, the Carpenters Union Pension Funds have a collective ownership position of 41,540 shares of the company's common stock. As long-term investors, we appreciate the company's actions to address employee safety and the difficulties being experienced by customers and other important corporate stakeholders related to the COVID-19 pandemic through its Hanover cares refund and contributing to local nonprofits in the recent quarter. In the recent quarter, the company spent approximately $35 million to repurchase shares of company stock. Given the unsettled market conditions and the importance of liquidity, has the share repurchase plan been frozen? And if so, what would be the factors considered by the Board in determining when to resume the plan?

Yes. This is Jack Roche, and I'll be happy to address your question. Appreciate you forwarding. As we said in our earnings call, we expect to generate sufficient positive operating cash to meet all of our short-term and long-term cash requirements, and our liquidity position remains very strong. We stopped repurchasing Hanover stock in mid-March, and we will continue to follow prudent and disciplined capital allocation strategies as we move forward. It is our goal to serve all of our stakeholders, especially during these really challenging times, and we think we're well positioned, frankly, to achieve that objective. As you noted, we have made important contributions to our customers and agents and communities in these difficult times. We believe we are also in a good position to continue to deliver for our shareholders. We have a strong capital and liquidity position, high-quality and well-laddered investment portfolio. And therefore, we believe we can successfully manage through this uncertain and dynamic environment. We consider many factors when making capital management decisions, including the business and financial uncertainties associated with this highly unpredictable economic environment, our growth needs, the regulatory environment, shareholder expectations and other matters. And we'll continue to monitor market conditions, our capital position and capital needs among other things in determining future market repurchase activity. And we evaluate all these factors on a constant and continuous basis and will make the best decision for the long-term for our shareholders and all other stakeholders as we focus on our return on equity and other financial measures.

There are no other questions, Jack. So we can conclude the meeting unless you have any closing comments.

No, I just want to thank everybody for your attendance and your support, and best wishes during these difficult times.

This concludes our meeting.

This now concludes the Hanover Insurance Group's 2020 Annual Meeting of Shareholders, and you may disconnect from the meeting. Thank you, and have a nice day.