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

Good morning. I would like to turn it over to Ms. Egan to commence the meeting. Please go ahead.

Good morning, ladies and gentlemen, and welcome to the 2023 Annual Meeting of Shareholders of The Hanover Insurance Group, Inc. My name is Cynthia Egan, and I'm Chair of the company's Board of Directors. Thank you for your participation in the meeting this morning. With me is Jack Roche, President and Chief Executive Officer and a Director of the company. As Chair, I will serve as 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 questions and comments. This year, we are holding our meeting in person. For the benefit of interested listeners, we are transmitting the audio portion of the meeting and accompanying slide presentation through a live webcast posted on our website. At this time, I call the meeting to order. In addition to Jack and me, the other directors in attendance are: Aristeguieta Francisco; Kevin Bradicich; Theo Bunting; Jane Carlin, Paul Condrin; Marty Hughes; Wendell Knox; Kathy Lane; Joe Ramrath; Tee Taggart; and Betsy Ward. I ask that the Board members stand together to be recognized as a group. The company's tabulation agent, Mediant Communications, has delivered an affidavit of mailing, establishing that notice of this meeting was duly given. The notice, along with the proxy statement for the meeting, were made available to shareholders on March 24, 2023. A copy of the notice of 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 17, 2023, are entitled to vote at this meeting. A representative for Mediant is here today and has been appointed Inspector of Elections. The inspector has informed me that the company has received valid proxies representing a majority of the outstanding shares. Accordingly, a quorum is present. The Board has proposed 5 items for consideration, discussion and voting, all of which are set forth in the company's proxy statement. They are as follows: The election of directors, Francisco Aristeguieta; Jane Carlin; and Betsy Ward have each been nominated to serve for a 3-year term; number two, approval of the 2023 employee stock purchase plan; number three, consideration of an advisory vote on executive compensation, the so-called say-on-pay vote; number four, consideration of an advisory vote on the frequency of holding an advisory vote on executive compensation; and number five, the ratification of the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm of the company for 2023. At this time, I would like to ask for a motion with respect to each of the proposals. Representatives of PricewaterhouseCoopers are also attending today's meeting and will be available for questions during the discussion period. I would now like to open the floor for discussion by shareholders of these specific proposals before the meeting. Following this discussion, we will distribute ballots to any shareholders who wish to vote in person. If you are a shareholder of record as of March 17, 2023, and have a question regarding these proposals, please raise your hand to be recognized, then please state your name and indicate whether you are a shareholder or hold a valid proxy before asking your questions. If you have questions or comments other than these proposals or wish to propose other matters, time will be allowed for that in just a few minutes. It appears there's no further discussion or questions regarding these proposals, which were set forth in the company's proxy statement, then I declare that the polls are now open for receipt of votes by ballot. If you are either a shareholder of record or hold a valid proxy and you want to change your vote or vote for the first time, then please raise your hand and one of the ushers will provide you with a ballot. [Voting]

I declare that the polls are now closed for voting. Please allow us a moment to determine the voting results. I have been informed by the inspector that each of the nominees for election to the Board of Directors has been duly elected, the 2023 employee stock purchase plan, the advisory proposal on say-on-pay and the proposal regarding our independent auditors have each been approved in each case by more than 96% of shares voting. The advisory vote on the frequency of the say-on-pay advisory proposal has been approved for every 1 year. Now before we close the formal part of the meeting and move to management's presentation and session for questions, is there any other business to properly come before the meeting? Again, there will be time for questions in a few moments. Seeing that there are no questions, before closing out the formal part of the meeting, I would like to take a moment to note the retirement of 2 long-standing and dedicated board members Wendell J. Knox and Tee Taggart. Wendell has been a member of our Board since 1999 and most recently served as Chair of the Compensation and Human Capital Committee until 2021. He also previously served as the Chair of the Nominating and Corporate Governance Committee. Tee has been a member of our Board since 2009 and went served as Chair of the Audit Committee and also the Nominating and Corporate Governance Committee. Both enjoyed tremendous success in their respective fields, and they then leverage their business experiences to provide unique and valuable insights to the Hanover as it grew and transformed into one of the premier property casualty insurance companies in the country. On a personal level, I know I speak for the entire Board and management when I say that their guidance and wisdom will be deeply missed along with their collegiality and candor. Tee and Wendell, thank you very much. Since there is no further business on the agenda, the formal portion of the meeting is adjourned, and we will now turn to management's presentation, followed by questions or comments. It's my pleasure to introduce our Chief Executive Officer, Jack Roche.

Thank you, Cynthia, and good morning to everybody. Thank you for being here. I will speak to a few prepared remarks, and we have some lovely slides in background to accompany my comments. Today, I am very pleased to share an update on our company's continued progress, growth momentum, unique culture and competitive position to reflect on our recent financial performance and highlight the steps we are taking to execute on our winning strategy. I am proud of all that our team has accomplished, and I am more confident than ever we have what it takes to be successful well into the future. 2002 (sic) [ 2022 ] was a year marked by great change and challenge. Turbulent financial markets, supply chain challenges and inflation continued to be problematic. Geopolitical instability and a changing competitive employment market were even more prevalent. And changing weather patterns and persistent extreme weather were increasingly challenging for our company and for our industry overall. We persevered through these significant macro and industry challenges, adapting to evolving market conditions, maintaining our focus, leveraging our rigorous financial discipline and making meaningful progress on our journey to be the premier property and casualty company in the independent agency channel. Our financial performance in 2022 is a reflection of unusually high catastrophe losses and lingering economic challenges, but also of our disciplined approach to underwriting and exposure management, the strength and commitment of our team and prudent capital management. For the year, we delivered operating income of $5.53 per share, despite significant weather-related losses. An operating return on equity of 6.7%, a 92.1% ex-CAT combined ratio and surpassing $5.5 billion in net written premium with growth of 9.7%. We grew net investment income to $296.3 million, exceeding our expectations for the year and increased pricing across all of our major lines of business. At the same time, we effectively manage our capital, returning $140 million to our shareholders through dividends and share repurchases, underscoring the effectiveness of our differentiated strategy and reaffirming our Board's confidence in the long-term earnings potential of our business. With a rock-solid financial foundation in place, we are well positioned to withstand today's headwinds and continue to deliver strong, sustainable, profitable growth going forward. Our results in the first quarter of this year were mixed, reflecting more weather-related challenges and other persistent market pressures, but also the strength of our underlying business and our ability to effectively respond to dynamic market conditions. Widespread and damaging storms across the U.S. impacted both our commercial and personal lines businesses and turned what would have been a solid quarter into a breakeven one. I would be remiss if I didn't acknowledge the extraordinary efforts of our claims team over the past few months as they responded to the needs of our customers in the wake of these storms. Based on strong feedback from our insureds and agent partners, we know that our claims adjusters rose to the occasion and lived up to the high standards we have established over the years. At the same time, however, we reported strong growth with net premiums written of 8.3%, with solid contributions across all major business segments. Net investment income of $78.7 million, up 2.3% from the prior year quarter, and strong underwriting performance, as evidenced by our 91.7% ex-CAT combined ratio. Changing weather patterns and more frequent extreme weather events, obviously, are substantially impacting our industry. In 2022, the U.S. experienced 18 separate weather or climate disasters that each resulted in at least $1 billion in damages. With 8 named storms resulting in 2 major hurricanes, severe freeze and winter storm activity impacting widespread geographies across the country last year. Weather is having an increasingly significant impact on our industry. We are more committed than ever to navigate these challenges, investing a great deal of time and effort to better understand evolving weather trends to anticipate the impact on our customers and our business and refine our exposure and risk management strategies. We continue to advance our disciplined underwriting and pricing practices while promoting our risk prevention tools and programs. We fully expect the steps we have taken and those that we continue to take will enable us to adjust to effectively manage our catastrophe exposures, as we have done so well over the past decade. We are determined to respond strategically, leveraging our skills and experience to create solutions and opportunities for our agents, customers and our company. Over the last 10 years, we have transformed our company and diversified our portfolio by geographic market, lines of business and product mix. An important part of that transformation has been the expansion of our specialty portfolio. In 2022, we took this business segment to a new level, delivering strong growth, while effectively spreading our risks by product line. Since 2010, we have more than doubled the size of this business to $1.2 billion in net premiums written. This substantial growth is the result of several strategic acquisitions earlier in our journey and the strong organic growth that we drove with our unique strategy. Our specialty business increased net written premiums by 10.2% in 2022, building on its strong market position and delivering above-average returns. With an ex-CAT combined ratio of 86.8% in 2022, this business delivered enhanced profitability, demonstrating the strength of our offering, our agency partnership model and our ability to access high-margin specialty business. We continue to strengthen our distribution channel in 2022 as well, effectively gaining market share with our best agency partners, helping them succeed and improving customer experience in the midst of continuing agency consolidations and a challenging employment market. By leveraging our experienced field teams in their local markets, offering high-quality products and services and bringing proprietary data and analytics to the table, we helped our agency partners manage challenging market conditions and achieve their goals during the year. Our strong agency relationships once again proved to be a tremendous asset as we implemented rate increases throughout 2022 and as we promoted customer acceptance of new risk solutions for our mutual customers. At the same time, we continue to make significant investments in innovation, efficiency and modernization across the enterprise and the insurance value chain, improving our agent and customer experiences. The data and analytical capabilities we have developed in recent years served us extremely well in 2022, allowing enhanced underwriting analysis, superior decision making and rating structure changes for specific states and risks. We also continued to make impactful progress on our customer service and claims platforms, leading to improved customer experience and creating valuable data to help us more proactively manage our portfolio of risk throughout our businesses. Our willingness and ability to embrace innovation has paid significant dividends in the recent years, and we'll continue to do so as we drive our business forward. Among the most important investments we've made are those that enable us to retain and attract the best talent and to build a culture based on trust and respect. These efforts have not gone unnoticed. Over the past year, our company has been recognized by Forbes as one of America's best midsize employers, by Newsweek as one of America's most responsible companies, by the Human Rights campaign as the best place to work for LGBTQ equality, by Fairygodboss as the best company for women and best company for supporting gender diversity and by JUST Capital as one of the top 125 of America's most JUST companies, placing us in the top quartile of public companies. We remain fully committed to our core values of collaboration, accountability, respect and empowerment as well as to our goal to ensure inclusion, diversity and equity across our organization. I am very proud of the significant strides we are making in the area of the inclusion, diversity and equity. During 2022, we continue to weave IDE principles across our business -- our businesses and throughout our culture. These principles are evident in many ways throughout our company, from our recruiting process, to our learning and development programs and in the goals we established for our leadership team. For example, we continue to invest in several employee-led business resource groups throughout the year, enabling these groups to host internal events, bring in guest speakers, provide support to relevant community projects, all three while creating a sense of belonging for our employees. These efforts have brought positive momentum to our organization as we strive to attract and retain the talented team required to drive sustainable profitable growth in a rapidly changing world. At the same time, we are more committed than ever to deliver on our promise to be a responsible organization, governing our actions with integrity and honesty, making a difference in our communities and protecting the environment. Once again, our employees and our company came together in our annual employee giving campaign, benefiting hundreds of local nonprofit organizations and countless individuals and families across the country, contributing approximately $1.5 million through the United Way. We also made numerous contributions through our charitable foundation, providing support for public education, after school and summer programs, shelters and food pantries, family health and safety and disaster relief. Furthermore, we published our inaugural sustainability report, highlighting the progress we have made to develop and support important environmental, social and governance endeavors for our company. In addition, we established a new employee-led green team to help educate and engage our stakeholders about the importance of sustainability, both for our company and for our community. The pace of change continues to accelerate in the world we ensure, and I am confident we have the vision, team, capabilities and determination to compete and emerge a winner. We have a proven business strategy that is evolving to meet the needs and opportunities for tomorrow. We are executing a dual horizon approach to strategic planning that enables us to deliver strong results in the near term, while building our capabilities and vision for the future. This enables us to remain intently focused on the current environment to ensure we are meeting the needs of our key constituents today, while also enabling us to make bold decisions about our future, addressing trends that could impact our company and the industry over the long term. Most importantly, we are working from a position of strength, leveraging our solid foundation, and I have the utmost confidence we will deliver on our promises to our policyholders, our agents, our shareholders and our employees. Thank you very much. And now we will open the floor for any questions.

All right. Do we have any questions from the floor? Yes. Please come up to the mic and if you could state your name.

Good morning, everybody. Madam, Chair. My name is David Manashan and I represent Carpenter Union Pension Funds that collectively hold 99,870 shares of Hanover Insurance Group. We're long-term investors, and we support the company's corporate governance practices and the executive compensation plan. My question today relates to recent Security and Exchange Commission disclosures regarding compensation actually paid in the pay versus performance illustrations. Specifically, I was wondering if the Compensation Committee has been prompted due to these disclosures to make any changes in the equity mix within the mix of equity, within the compensation, financial or qualitative metrics in the plan or the target levels of compensation?

David, thank you. Nice to see you again, and thank you for your thoughtful questions, as always. I'd like to turn that question over to the Chair of our Compensation Committee, Paul Condrin.