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

So we'll continue to flex our appetite. And I would say that in small commercial, we are very diverse in terms of the industry sectors. I don't think there's a lot of areas where agents said, "Hey, we need you to -- maybe habitational is an area where we're particularly conservative." But beyond that, I think we're seeing as a pretty broad-based appetite in small. In middle, we've been more discriminating for good reason. But I would say most of our appetite is more of percentage of penetration or percentage of your portfolio. So for example, we're -- we have a moderate level of concentration in construction. There are times when the construction business is more palatable. And there's other areas where you have to contract. Human service agencies right now is a particularly challenging sector. But our expectation is as the market contracts and pricing really comes through in terms of conditions change, that will flex back in and be a little bit more robust at the right time for those sectors. So I don't think there's any particular area sectorally that we're missing out on or that we think is a big part of our next steps. But it's the ability to kind of be more agile around what levels of growth you're going to have in each of the subsegments and geographies. We have a model where our local RVP understands what we bring to the table, but it's their job to help us understand what is our portfolio going to look like in that particular state. And that is super important because what we look like in Texas is a lot different than what we look like in Maine and it needs to be. And it's not just about what economy lives there, it's about what are the legal and CAT and other exposures that make our portfolio kind of different by geography. It's a big part of our secret sauce.

So when we think about that, just as a follow-up, the geographic growth ambitions, how does this enhance or constrain your growth appetite?

It does both. We'll have all of our field leaders into our home office next week, and they will present as they do twice a year, what their proposition is, why should they get stronger capital allocation. Are they in a position for growth? Or do we need to be patient and see them continue to make some modifications in their underwriting and their portfolio management. Again, that's a big part of how we run the company. But as you would imagine, whether it be personal lines or commercial lines, we have more and more geographies that are ready for some elevated growth. We're never going to be one of those companies that's going to be growth for growth's sake. It's just not how we're born. But we are more diversified in our earnings stream and we have more geographies and businesses that are hitting our hurdle rates, and that allows us to kind of elevate the growth of the overall firm, but it still comes back to one geography at a time. Where are we? What steps do we need to take? But if you have a dozen plus states that are hitting on all cylinders, our expectation is that we're ramping growth and growing our business disproportionately there.

Okay. Fantastic. I do want to take a second just to look through the room to see if there are questions. Go ahead. Clayton, they just bring you the mic.

Just on a high level, when you think about the business cumulatively across the board and you think about the general pricing trend and loss cost trend and you think about your forward-looking accident year loss picks. Could you just talk about that trend and how you think about the margin from here? And if it can actually get better or it's just too difficult of a macro backdrop and too much competition?

Yes. I'll make a couple of comments, and then Jeff you jump in. I've done this -- I've been in this business a while and realized that pricing versus loss trend is super important, but it's anything but a static measure. So we think about it as right now, we feel like we're pricing our product overall at or above loss trend in all of our major sectors. But we also think out into the future, if I use middle market as an example. Right now, you're seeing some compression on the property side because a lot of people have priced their product more aggressively, have changed some terms and conditions. And so in some ways, the pricing should decelerate. On the other side, I think we're a little slow as an industry to recognize the liability pricing that's required given the way those trends have gone about it. As an account writer for the most part, we balance that, so we're not too schizophrenic. But I believe as we go through the rest of this year and into next year, you're going to see a significant hardening on the liability side. So that's -- that forward-looking approach is what allows us to kind of think about, right, today, we're certainly hitting the pricing targets that we want. But we are starting to position ourselves for when some of the less capable or more disadvantaged folks on the liability side start to reduce their appetite or accelerate their pricing where can we take advantage of that or where can we actually turn that into some accelerated offense. But overall, I think the answer to your question is I think this is a pretty rational market. I think people -- there are some areas where there is some pricing pressure. Well, you've got some sectors that are performing in the low 80s in terms of the combined ratio. That's not -- there should be some competition there. But I go back to the diversification of our earnings stream. What makes us really excited about our proposition going forward is we're not overly dependent on any one sector, right? We have 4 major businesses. We have almost 20 businesses sectors below that. And we have optionality in terms of if we see some compression in certain parts of our specialty business or if there's some accelerated competition in certain small commercial states, we have our personal lines business that's come back into its own. We have a middle market business that will likely take advantage of some hardening on the liability lines. And that really gives us some real power going forward.

So to talk about a baseline, I'll talk about our year-to-date results because it tends to eliminate the vagaries of individual quarters by segment fluctuations. So as I think about we're -- I think we had an 18% ROE year-to-date. So we're performing at a pretty solid level. If I go segment by segment, the core commercial segment had slightly heavier losses largely driven in the first quarter property. I think there's room for improvement on that basis on that benchmark. Specialty had a very strong 6 months particularly in the second quarter, and I think that should continue at that level, but hard to say. And personal lines has some room for improvement as continuation of price -- of earned price above loss trend should show some improvement as we go forward. And that, coupled with the ongoing increases of NII based on cash flows that have been strong and also buying new bonds at higher interest rates that are rolling forward gives us confidence as we go forward for the rest of the year.

Okay. And then Mark, let me just get the mic to you.

Just as a follow-up on that. You said the market is pretty rational, commercial property, maybe like there's a little bit of over correction going on in certain types of markets, coastal markets or lines that have had some losses or something. What about personal lines? Like do you think there -- are we -- are we moving into a more moderating rate environment that's more consistent with kind of low to mid-single-digit claims inflation long term that everyone believes? Or do you think there's risk as we look out kind of 12 to 18 months that there's a need or a potential risk of overcorrection in personal lines just like there has been in some areas of commercial property this year.

Sure. Yes, I agree with your view on commercial property. And I think you know about us, we really are not an opportunistic property market, right? We don't overindex on E&S property or coastal property. So we see that, but we don't feel terribly affected by. In personal lines, I'll succinctly tell you that I think the personal lines business is further segmenting itself, right? And the reason why I emphasize our account orientation is because while those that focus almost exclusively on auto are headed down a dangerous path of becoming a price war and potentially overcompensating on the back end of the cycle. On the other side, even the folks that had intentions of being a bundler are doing a lot less bundling these days because home is a challenge. People are a little bit worried about whether the weather patterns are going to continue. And so we're seeing inside in the IA channel, it still represents about 38% of the market, some real stabilization. And I'll remind you that there's only a couple of nationals. There's a couple of big super regionals like we are in the personal line space in 20 states and then a whole bunch of smaller mutuals and regionals. And so 2/3 of the personal lines market in the IA channel, which has been pretty stable, is driven by companies that are behind. Either because they haven't gotten their insurance, the values up yet, they haven't reconciled their property aggregations. They don't have the pricing sophistication that the nationals of the midsized companies have. So there's still a fairly challenging market, particularly in the IA channel, for somebody to say, how do I -- I can chase some auto pricing, but then I got to place the home with somebody and there's not a lot of monoline home players, particularly in Middle America. So we feel like we're in a pretty good spot where our margins are in good place. We're still getting relatively good price, and we just can't get greedy. We've got to keep being thoughtful about what the right pricing is for a total account that allows us to hit the returns that we want to do, but provide some relative stability because the consumers are hurting, right? This is a challenging time for many consumers in the personal line space. So we monitor the direct-to-consumer market and what's happening there. We pay attention to the captive channel. What I would tell you, inside the IA channel, we still feel like we're in a really good position and it's reasonably responsible in terms of how the pricing patterns are playing out. Does that hit it?

Okay. Perfect. I want to spend a little time talking about specialty, maybe from 2 different perspectives. First, just a broad overview, how much of your specialty book involves unusual lines where you've got the -- you've got some lines or customers in the core commercial segment.

So the strength of our specialty business is that we have a number of businesses that created an expert-to-expert experience where an agent has expertise and management liability or professional liability or some health care space, surety, where we handle that, I don't want to say a monoline basis, but on a kind of expert to expert experience. We may or may not write the casualty or the other lines, but we're still dealing with an expertise-based model. But because we play on the lower end of the spectrum, kind of small to midsize accounts, we have an added ability to go out to a number of our agents and see where we can cross-market or cross-sell. If you take away from some of the portal business that we have for like Builder's Risk or some of the online stuff that is just literally off the point-of-sale system, it's roughly between 35% to 40% of our specialty business has some connectivity to the core lines. And I quite frankly think that's healthy because what we don't want to do is let cross-sell become obligatory. It's really hard to have appetites across multiple lines or multiple businesses and get it right. So I think what we've been able to do is, and I think that percentage, 35% to 40% is probably industry-leading. Particularly for management liability and professional liability, I think many of the people we compete against either get their business exclusively through wholesalers, which means they're, by definition, getting a monoline proposition or they're dealing with the brokers or the bigger accounts where it is -- they're really not even attempting to do any cross-sell. So I quite like the way that mosaic plays out for us. And we have different strategies to kind of bring that forward. And our core lines underwriters, both small commercial and middle market, they have incentives to go out and find the desirable specialty lines that are associated with our core lines. And that is when you hear Bryan Salvatore talk, that's what excites him is that he's part of a company that thinks like that and can help extend his specialty business into the core line area.

Okay. That's fantastic. And then another specialty line that can mean a lot of things is marine. I was hoping just to drill down in terms of what you currently focus on in Marine and maybe what the growth prospects are expanding that definition.

Yes, I would say marine is probably our strongest specialty business, frankly, both in terms of consistent high profitability but also our growth prospects going forward. It's approaching $0.5 billion. It is a -- we have some of the best talent in the industry. When you go out to the core independent agents, there's only 2 or 3 markets that they depend on a regular basis for builders risk, contractor's equipment, motor truck cargo, things like instrument floaters and musical -- there's all these non-fixed property exposures that are best underwritten and placed over time by marine underwriters. We do a small portion of our -- in the ocean marine, but that's really not our specialty. We're more in the inland marine. But it's that breadth of product line. In fact, from a strategy standpoint, we try not to get any subsector of the marine business to be more than 20% of the portfolio. Because over time, things ebb and flow, and it's that diversification in the Marine business, that has allowed us to consistently produce sub-90 combined ratios and continue to grow the business. So I couldn't be more excited about it. The leadership that we have in that business is second to none and we have huge headroom ahead for us in the marine business.

Okay. And then as a follow-up on specialty, and I always defined specialty is relying more on underwriting skills and maybe simply analytics. I know that's a little bit of a generalization. But what does Hanover do to attract, to retain and to train underwriting and claims talent?

On the claims side?

And on the underwriting side.

And on the underwriting side. Yes. I mean one of your premises is that you go all the way from personal lines on one side of the spectrum to maybe some of the most bespoke specialty businesses. Highly analytical, highly actuarial to much more of an art than a science. The data is important across all of our businesses, but data analytics and data science and the ability to put various products together are most important in personal lines and small commercial and frankly, intuitiveness and experience and then figuring out how to get some efficiencies on the specialty business is kind of the continuum that we work with. I think one of the strengths and the reason why I think we're winning the talent war is because people look at, if you just stay on the specialty side of the business, they can be part of building something and helping us redefine operating models on the small to midsize business. This is an exciting time that if you are investing in technology and data and analytics, and you have people that like working on that small face value business. The game is changing, whether it be building portals, working more directly with agents giving them some opportunity to do some pre-underwriting in a box environment or just leveraging the service center environment that we've created. We've got more and more specialty business where they're saying, "Hey, can you just service this business for me because it's some of the lowest EBITDA margins we have." On the claims side, I think there's a parallel to that. The companies that are leaning into the operating model change and figuring out what they have to touch, what they don't have to touch. I'll give you a small example. Six years ago, we had 18 appraisers that would have to go out and see probably 80% of the auto accidents that we had. It was a very archaic way, but the COVID changed that overnight. And now what we have is a set of digital tools and inside appraisal folks that can do part 4 or 5x in terms of workload. The efficiency and the effectiveness of the appraisals is improved and the customer experience is through the roof. Our NPS scores in claims are the highest they've been in some time. So it's so ironic that we're at a -- if you're focused on this and you know what part of the value chain has an opportunity to improve. The adoption rates are way up. People are just -- they want to do things digitally. They want to get things done, and we're leaning into that environment and improving expenses, customer experience and, frankly, creating new roles for talent to be able to come in and say, "Hey, that job is more enticing to me than being heckled inspector or driving out and looking at cars for a living." That's just, frankly, not that exciting of a job anymore.

It's not that rewarding. We've got 30 seconds. I'm going to throw in a quick question on the personal line side. You're in 20 states now in x years, what number will that be?

I don't know is the right answer. I think some of that will be how the personal line plays out. We always have a set of next states that we would consider. We also have a list of states that probably never good. And those states we've been pretty disciplined on. I think it's going to be a function, frankly, of how the game plays out in terms of independent agency persistency in the channel, whether our account orientation continues to evolve as something that's truly distinctive in the marketplace. If it is, I could see us being in another half a dozen states, I don't see it ever being 40 plus. Some of the states are just undesirable from either a legal or a weather perspective. And frankly, we can be a super regional in personal lines and fit our agents' desires for that business. In commercial, we think of ourselves as really a full national player.

Right. Perfect. With that, we've come to the end of our session. Please join me in thanking Jack and Jeff for the session.

Thank you so much.