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

[Audio Gap] financial services conference. This is sort of the insurance sleeve of things. And we're really pleased to have Hanover Insurance company here. We have CEO, Jack Roche; and CFO, Jeff Farber. We will go through whatever, I don't know if you can preliminary remarks before you want to get started, but we can go right into it.

I'll just say a couple of things for those that are less familiar with us that we're about $6.5 billion property and casualty underwriter who really distinguishes itself in the marketplace based on our unique agency partnership model, along with a diverse set of specialized products. Highly motivated workforce of roughly 5,000 people, a national footprint for Commercial Lines, a super regional footprint for Personal Lines. And we're coming off of a record year in terms of earnings and super excited, frankly, to come into 2026 with kind of the best earnings, diverse earnings power that we've ever had and to take on both the challenges and the opportunities that are going to present themselves in this very dynamic marketplace.

There's a lot going on. I mean yesterday was kind of a wild ride. We'll probably get into that. But -- so let's talk about just the near-term prospects for a business like Hanover. If I look at a lot of companies, as they close out their 2025 year, growth seems to be decelerating, the #1 top soft market cyclicality. I think that people use the word soft and they're not even sure what they mean by they just like the word. But you guys have an ambition to grow and maybe accelerate from here. And so what is the impulse that suggests to you that there's an opportunity to take lemons and make lemonade, if that's really what's going on?

Yes, there's no doubt that the environment is putting some growth pressure on both carriers and agents and brokers. But at the same time, we believe on the underwriting side of the business, those companies that really have substantial profitability and are generating those profits in a very distributed way have an opportunity to navigate a pretty complex market that really is a series of mini cycles versus one big cycle. And so I'm anxious to talk to you about some of those in more detail. But on a high level, what I would say is that we're going to try to translate our additional profitability into growth opportunities, particularly in specialty and Small Commercial. We think as the liability trends further flush themselves out, they're going to be companies like ours that can lean into the growth opportunities that come from a reaffirming of the market, at least on the liability side. And then last but not least, we're in the best place we've ever been in Personal Lines with a unique account strategy that frankly competes nicely against regionals and mutuals across the land, which is a good majority of the competitor set that we face off against.

In my mind, I think if there's probably 4 levers. There's probably more, but there's price, there's number of agents distributing your product. There's a breadth of distributions, you can expand to adjacencies. Or there's the ability to take a higher proportion of the share from the agents that you already do business with. When you're thinking about those options, maybe those aren't the only options, those are the ones that come to mind for me, what are the toggles that really drive your view?

Yes. First and foremost, it's the last one. We have plenty of headroom across our diverse set of products with the agents that we have. And we have a very good standing with the consolidating agents who are bringing more and more agents into the fold, some of which we're very connected to. Others that were getting connected to through their increased centralization or regionalization of their models. So for us, growth is really about are you healthy enough to make growth appropriate. And you've seen us be relatively disciplined over the last several years to make sure that we could bounce back from some of the headwinds we faced in the back half of '22 and '23. So we're not going to make light of the landscape that pushes against some of the growth opportunities. But I think we're more diverse, and more capable, and more profitable and ready to lean into the right growth opportunities versus some competitors who frankly have peaked, and they're in market cycles in their product line that present much stiffer headwinds than I think we face overall.

I guess I started on the sell side in '02, but I've been covering insurance since '97. And I think I've been saying without really thinking about it forever, that there are 20,000 to 30,000 insurance agents across the United States of America. And you have the number of agents you do business with and you have this consolidation. Can we talk about like just understanding like how independent, whether it's 20 or whether it's 30, what does it look like out there? How many mom-pop agencies are there out there? How many agencies are part of a network? As you try and say like, here's our opportunities, here's what we're working with, here's where we can go. Can you sort of give us an understanding of what the demographic of the agency market looks like?

Yes. I mean in macro, if you look at all the individual agencies that I think transact with P&C carriers, it's roughly around still 35,000 agents. Now that includes some of the spin-offs from the likes of the nationwide movement into the channel, same regenification of some agents that were part of the consolidation that have decided to go off on their own. But that number hasn't changed dramatically over the last decade. Plus you have some consolidation that's bringing some agents together, but you have some...

Is Gallagher 1 or is Gallagher 2000?

So for us, right, in that product set that I talked about, it's one. In our -- the way we count is by agency locations by which we plan. So if you look at Gallagher, who we're -- is now our largest distributor after they take on Assured Partners, we have roughly 50 agency relationships within their 1,000 options. So we're selective even within the large consolidators. And frankly, that's to best -- to our both best interest in that. We don't want to create a bunch of activity with agency locations that either don't have a book of business that match our risk appetite, or relationship-wise don't follow our kind of partnering model. So when we look at the 2,200 agents that we have roughly, right, it's -- it includes hundreds of agents that are in the top 20 that have been consolidated, but still a lot of midsize and smaller agents that are either Personal Lines, or Small Commercial and Personal Line centric, or boutiques that haven't consolidated have decided to stay outside of that. To one of your points, Josh, the networking, people used to call aggregators has grown, as you know. There's a lot of independent agents that decided to go that route as opposed to giving up their independents. And frankly, we've been somewhat apprehensive to engage with them in the past. But the last 5 years or so, we've seen a much more strategic orientation to those networks that have opened up some options for us to engage with them. So we have real legitimate strong agency relationships with the largest all the way down to some of the smallest. As long as they sell value and they have a good fit with our product set, we consider them a candidate for our distribution approach.

And in your prospecting, how many agents are out there that you're in conversation with that could become a Hanover agency in the future? And how many will you add in 2026?

So we -- on average, we are courting the next 200 across small and Personal Lines, in particular, maybe some boutiques for specialty. We've got all we need in the middle market space that's usually coming from the top and the middle. We can bring on anywhere from 100 to 150 new smaller agents a year, particularly to spread our diversification in Personal Lines and Small Commercial. And that somewhat offset some of the folks that get purchased and kind of fold in to some of the large consolidators. So the aggregate hasn't moved that much over the last several years, but there's some incoming and outgoing based on the way the distribution system is evolving. And it's quite, quite healthy, I think. Because these smaller agents that are choosing to stay independent value our proposition as much as some of the large and strategic agents do. And they'll offer up a lot more information in the courting process. Many times -- most of the time when we bring on a new agent, we've already done an agency insights, profile and have an idea of exactly what their business looks like.

Given yesterday's stock volatility around, really just a new story about something that -- the fact that was written about COVID, I think you could comment any attack, the idea that genetic AI is not something that's out there looming in the distance, and I'm sure your opinions aren't any different today than were yesterday, or the day before. You've been thinking about it. Where -- what do you think about it? And what are the risks? What are the opportunities?

I think this is a transformative time. I really do, and I believe that on the agency side of the business, there is a massive opportunity to leverage large language models and new tools that are emerging to more efficiently and more effectively service their clients. I think when you look at even simple things like coverage verification and validating that they've -- the policies came through the way they were supposed to, when they're being processed, the outsourcing of that now is going to be somewhat cannibalized by technology, like happened in the outsourcing of labor arbitrage for a lot of the carriers that leveraged people to do work that now can be repetitively put into a technology model. So I think there's going to be plenty of opportunities for agents to find out how to work more effectively, better serve customers, but also recognize that one of the major problems that agents have across the land is they can't find talent to build the openings that they have and to serve their customers. So in a lot of ways, this is kind of just in time opportunity for them to match that up in the short term. But I think what people misunderstand about our business, not just in Commercial Lines, but for a lot of Personal Lines is that the infrastructure that allows carriers and agents to interface is very complex. And there's a lot of bespoke operating models, bespoke technology interfaces, the agency management systems all go into different point-of-sale operations. So it's really much harder than people think to replace that infrastructure with one sweeping, a method of doing business because everybody has got their own mousetrap. It doesn't mean it's right, by the way. And I think there's a much more complexity to how this technology is going to transform the agency side of the business over time. So I don't think they should feel immediately threatened. But if you're not investing in the right ways to streamline, you easily could be left behind.

Well, I don't mean to bad mouth your distribution but I think that you've been doing all the work. You can figure out the prices are, you've putting up the balance sheet and taking the risk, and they've been making a lot of money. And to the extent to which the goal should ultimately be to deliver value. Are insurance customers today getting good value? And will these technologies help you deliver value to customers, maybe at the expense of your distribution?

Yes. I would answer the question that there's quite a variety of service propositions and execution on the distribution side. I think our selective approach to who we partner with, and how we engage with those agents, actually allows us to honestly look ourselves in the mirror and say that we're working with the value-added part of the distribution system. And I would tell you that trusted advice has never been more critical to clients. I think clients are anxious about what's going on both in the Personal Lines and the Commercial Lines side of the business. And even if they're going to do some homework on their own, they need somebody to validate the choices that they're making, if not give them options that they can't get on their own. So -- but the answer to your question is we've already found ways to better serve, particularly small face customers, with self-help tools and new ways to understand and demystify insurance. And so I think the better agents are following that path to say, let's use today. And there is a period of time when you're buying a bunch of agencies that maybe you take your eye off the ball on how you're servicing the customer, and we see some of that when we do market consolidations. But I think going forward, the better agents now understand that customers are expecting something for the money they're paying. And there's new digital ways to do that, that don't have to be a direct model. They should be -- include the trusted adviser not exclude the trusted adviser.

Well, changing gears a little bit. I want to get Jeff involved. The earnings power of the company has changed a lot over the last couple of years, particularly as float has generated a much better return. It's part interest rate driven, part you've made some changes in how you're investing and whatnot. Can you talk a little bit about, A, what the changes are, and B, what it means for your ability to underwrite if you're earning more on the investments?

Sure. Josh, thanks for that. NII has become a very powerful driver of earnings for our firm. It took a while to get there in that we had low interest rates for so long that there was a low embedded yield in the portfolio. But with higher interest rates for a while and the stronger cash flows, particularly if you take a look at 2025, we had such strong earnings with a slightly greater than 20% ROE, that the cash just keeps coming in from earnings and from growth, of course, reinvesting at a higher yield, the stability of interest rates. And we did some portfolio sculpting along the way where we took some lower coupon bonds and sold them, and were able to carry back for 3 years to get some gains and get some cash from the IRS back that we would have lost as they were expiring from 3 years. So I talked from time to time about this flywheel, and it takes a long time to get it to run. But now that it's running, it takes a very long time just hard to slow it down. So it's really driving a tremendous amount of value, and we've guided to mid to upper single digits growth of NII. And I'm really hopeful that we don't compete it away, but it certainly gives a balance to our income statement that really can't change. So it allows you to where you need to be a little bit more competitive to keep that business.

Talking about competing away. So there's a lot of spare skeptics in the Personal Lines market who say that Personal Lines carriers are making too much money. A couple of governors have said that also, particularly maybe looking at homeowners insurance, but also I can tell you that the auto insurance markets are clearly at the peak of their profit cycle. We can look -- I mean, plenty of history and they won't over forever. It's a cyclical business. But if I go look at Commercial Lines margins, I don't think they've been this good for 50 years, or maybe even longer since the 1950s. And so it feels like it's out of the cyclical market. Sometimes we're finding a new reality. And interest rates are pretty healthy right now. You used the words competing away this benefit we have. It's a great discipline to have healthy investment income and also be arguably at the most profitable for Commercial Lines ever been. Is that sustainable?

Well, nothing is sustainable at peaks forever, of course, but I think it's important to take a multiyear view on profit. Certainly, 2025 seems like a really, really strong period for the industry, and I haven't really studied because all the results aren't out, how nonpublic and some of the later reporters have done. But clearly, it's a strong period. But 2023 wasn't really that long ago. 2022, not that long ago. So depending on what period you take, many in the industry with very, very high cats and severe convective storms didn't make a whole heck a lot of money in 2023. So if we want to take a 1-year view, where if you have excess profits, you have to send it back, that's obviously not a sustainable situation. And I think, look, when ROEs get to 20%, they're going to work their way down and the better companies are going to have to fight to keep them there. And when ROEs are low, they're going to naturally -- equilibrium will work their way up from there.

In terms of where you expect returns are more sustainable, there's an argument right now about admitted lines versus excess and surplus lines historically. In the softer market, admitted has grown much faster than excess and surplus because it has taken back some of the risk. Some say, well, actually, that's not actually how things happened this time around. There are different risks now, and they're never coming back. A lot of really high-margin property within the E&S business now that the prices are coming down. When you see this sort of pathway towards accelerating growth, is the path in higher margins than admitted lines? Or is it in E&S lines? And how do you plans to like...

I think built into what you were saying in the premise, I do think it's a different landscape today. People are -- E&S has -- is an amalgamation of various sectors and lines of business. It includes some coastal property and some distressed business, some really good business that requires different pricing flexibility, freedom of form and rate. So there's a lot of reasons why the E&S business has grown so much. Even when you look into a lot of the specialty businesses, including ours, E&S is a product as opposed to a sector, right? We write some of our health care business, our Hanover Specialty Industrial business, our professional liability and management liability. We are able to use a non-admitted product to expand our appetite, or create some sustainable performance, whereas before, it was more of a admitted or not admitted kind of approach, and E&S was really kind of all running through the wholesale channel to solve a non-admitted problem. So I think it's a different mosaic. And to your question, I think there's profit to be made in many segments of the business, if you have something distinctive that you're offering, and you have some agility. Because the business has a way of finding the profit pools. And not necessarily destroying them, but if you've over-earned in workers' comp or you've been part of the last 6 years of a great E&S run, what's the other side of that hill look like? I'm really glad we're not a monoline E&S property writer, for example, right now. That is a very competitive market , likely destroying the very margins that created over the last several years in pretty short order, particularly with three major wholesalers controlling well over half of that business. So I like our kind of approach and that is what's a diversified set of products that are relevant to the agents that we do business with, but allow us to not be cornered into one subsegment of the business. And then for each of our businesses, we require our business leaders to say, why Hanover? What is it that we do that's so unique and different that we can be in the leadership group. We don't have to be a monopoly, but we have to say, for example, in Small Commercial, we can honestly say we have one of the best Small Commercial capabilities. And we don't have to be $3 billion or $4 billion. We're $1.5 billion of point of sale, non-point-of-sale world-class service center, great consolidation opportunities, leveraging our data and analytics to help agents do what they're trying to do on their side of the firm. We have an amazing Small Commercial business that puts us in a top 3 position with any agent in the country that's trying to consolidate markets. So that's what we mean by that is be authentic about your strategy, one business at a time. We're the best total account writer in the IA channel and Personal Lines. There's nobody that has that level of penetration, albeit in 20 states, but -- and that's not our propaganda, that's our agents' experience. So that's how we combat it is, don't put all your eggs in one basket. And when you do see that your discipline or your distinctiveness in any sector is waning either address it, or have the guts to move away and say, that's not where your future penetration should come from.

One question I've asked everybody and actually got a mixed answer. I don't have a conclusion from it. I think it's like 29, 30 degrees in New York City right now. I'm looking forward to going back after having not been above 20 for about 3 consecutive weeks. I know a lot of people have an insurance claim this winter. And because I only know like 43 people, like for me, they have multiple things, it seems like it's going to be a big claim winter. Do you have any indication in your books, whether you think there's anything usual about this winter or I mean, of course, that's you're in the business paying claims.

I think 40-something states, all being subfreezing if not sub zero, in some cases, is a unique year. But maybe you start with what we've talked about in the quarter, and then I'll add a few thoughts.

Yes. So middle of last week, we had our earnings call for the fourth quarter. And we got asked the question and what we shared is, number one, our cat load is 6.1% for the first quarter. That compares to 6.5% for the full year. And based on what we see through January, which is that large freezing snow, wind cat across almost every state in the country, we don't see any reason at all to change our cat load for the first quarter based on what we're seeing so far.

Interesting.

But to your point, the cold weather continues. So the question on people's mind should be, are there frozen pipes out there that when we thaw we're going to have the next round of pipe burst or experiences. That generally happens when an event is extreme and quick, where it comes and gets you and then the warmth -- when people have this level of time to deal with freezing temperatures, it would -- it's very unusual that they don't address, or find that they have frozen pipes in some manner, shape or form. So it doesn't mean it can't happen. It doesn't mean it won't happen. But what you saw, I remember with the Texas freeze, was man did it get cold. Forget about the grid, just in general, people weren't able to react to it. And by the time they got back to their facilities, things were bursting and off we were going. So the other thing is, remember, on the Personal Lines side, the work we did to deal with some of the severe convective storm trends and broader frequency issues is we now have a $2,500 all peril deductible on the vast majority of the homes in most states. So if you're thinking about it from a Personal Lines perspective, you're going to have a pretty material event to create a claim that's going to get reimbursement for us. And that's both good and bad. But from an economic standpoint, we made a lot of progress by advancing that strategy.

It seems pretty easy to go through $2,500, I would think, but maybe I'm wrong about that?

Yes. But it's -- but you have folks that depends how quickly they find the burst, right? If you're going to replace out the flooring in the bathroom and do some stuff, and you say, well, I'm not sure I'm going to bother with my insurance company over that kind of claim. But if you are gone for 7 days and you come back and your entire first floor is flooded, well, yes, you're going to have an insurance claim, and we have some of those. And by the way, we're -- we get paid to deal with that. So we're not trying to be avoiding claims. It's just it does -- it has this additional benefit beyond where we originally started with severe convective storms to say, claims have to be material. And what we see in our homeowners' claims is that the average claim size is way up because for a variety of different reasons, the smaller claims just don't come through anymore.

So if we go back in time about 2, 3 years ago, we're spending a lot of time talking about 2016 to 2019 accident year casualty development, which I don't know when people first started talking about that, but simultaneously when that was involved, we also were experiencing once in 50-year type inflation in the United States. And now it's 2026, and we've heard a number of you talking about social inflation. In some ways, we're not seeing the development in claims that everyone used to be afraid of. And it seems like that after we've inoculated ourselves against '16 to '19 years, the '21 through '25 years have not been as scary as I was told to be prepared for it. Is that -- am I wrong? Am I right? Are we -- are things -- or -- is it a confluence that some things turned out a lot better and are overshadowing what are -- is paying in other areas?

I think it depends on the firm. It depends on the line of business. It depends on the geography. It depends on the industry that one is focused on. Commercial auto seems to be -- commercial liability seems to be an issue of its own relative to other areas. We were unfortunate in one respect in that in 2016, we took a large charge to put a bunch of issues behind us. But we learned an awful lot at that point in time, and it caused us to really want to avoid certain geographies, major metropolitan cities, avoid certain industries that we thought were going to be ripe for deterioration and higher frequency. And then we grew much more carefully, or slowly than some of our peers in terms of casualty business. So you pull all that together, and while the severity is up a lot, since before COVID time frame, not necessarily the '16 to '19, but let's say from '19 forward, the frequency is down for us dramatically. That's really allowed us, along with some good reserving coming out of 2020, where we've had some benefits of not trucking not happening and different things not happening in 2020 and being conservative reserves, I think, puts us in a really good place. Commercial auto, there isn't really a great place to hide. I think people are seeing it really across the industry. We're fortunate that all year long, we've been adding to '23, '24 and '25, and I think we leave the year in a really good place. And we've wanted to take small bites at these things rather than to let it get behind us to go ahead of us.

Yes. And Josh, to be honest with you, while we feel comfortable with our reserve position and the actions that we took to not be an outlier in any of those areas, I think there's a few more chapters left in this book. I think there is -- I'm on the Executive Committee of the APCIA, the biggest trade for the industry, all the good companies are involved in that. And this is the fourth year in a row where legal system abuse is the #1 advocacy position. Every company is concerned about it. The severity continues to produce some pretty outrageous jury awards. And so I do think it comes down to what's the complexion of your book of business. Did you grow into the problem unknowingly, and how well did you reserve? And that part of it has still got to play out. There are some -- particularly in those most recent years, I think if companies weren't adjusting their picks and being realistic along the way, there's still some pain to be found. And we've tried very hard to be one of the companies that makes the proper adjustments so that we don't have a larger problem down the road.

In addition to making those changes in the reserving, you've also made a lot of changes in terms of your cat exposure over time. And over the last couple of years, and maybe even further, the price of reinsurance is coming down, does that give you any license to take more risk because you can offload it to somebody else? Or are you constrained by a permanent sort of mentality that we want to have a low cat risk exposure in this way we're going to run our business and the price of protection doesn't really factor into whether or not we change how we think about it?

So our cat program, cat treaty attaches at $200 million per risk and between a combination of traditional reinsurance and cat bonds goes way up into the top and really covers risk of ruin types of issues. And it's very effective. We do have a property per risk treaty, which is between $3 million and $4 million per risk. But it really isn't designed to deal with volatility of a severe convective storm So there isn't really an available market in an efficient way to do an aggregate at the moment, as you probably know. Or to put something in place that would make a $50 million large severe convective storm only $20 million. It's not that easy to do. So that would be the kind of a particular piece of reinsurance that would cause somebody to want to go a little more aggressively into the Midwest. We're very comfortable with our position, our portfolio. For us, the bigger approach would really be -- was to thin the aggregations in the Midwest and then to put in place the terms and conditions and deductibles that we talked about earlier and also use a lot more technology. So for example, some of the larger risks, we have technology that has temperature sensors and water sensors that have done a tremendous job in giving people the information to make a large potential loss into a tiny loss or to head it off before it becomes a problem.

I think -- listen, we still think of this as an earnings volatility issue. I think we feel very comfortable with our aggregate exposures. So to Jeff's point, this is a discipline that we want to continue to build on. We're really proud of our teams in executing in a hard market to get us to a much better place. And so where is it limiting to us. Personal Lines growth in the Midwest will still be somewhat constrained by our personal desire to further diversify our earnings stream. We're making great margins. So that's not the issue. The question is, do you want to repeat some version of 2023, and we do not. We think our investors deserve better than that. But we're pretty excited about the fact that what goes along with that is there's not a whole lot of folks that are anxious to write homeowners across the country. So being the best account writer, including the home, makes us distinctive. It just requires us to be good at what we do, including managing our micro concentrations. And that seems like a very sustainable business model into the future. And so we compete against a lot of mutuals and regionals who, frankly, still haven't caught up to the margins that the marketplace. People sometimes look at the direct-to-consumer and then maybe the two large nationals in Personal Lines. That is a very small subset of the market that we compete in, right? We compete against a very different competitor set, and we are very much an industry leader at this point.

You mentioned Midwest a couple of times, obviously, you are a major, major player in the state of Michigan. There's no fault reforms that went through a few years ago. I think it's a better state to do business with than it's been in the past. Has that made it harder for you to more competitive? Has it caused new entrants who previously avoided Michigan market to try and compete with some of your significant market share there?

Not in any material way. I mean there's always new players nipping in and looking at that, but I wouldn't say that we have any major competitors that -- whether it be on the Personal Lines side or the Commercial Lines side. There's no doubt that PIP reform has worked. We have customers that are not buying unlimited PIP now. They're buying down the limits. We're getting better paid for that. The reform at the claims cost side is taking effect. So we feel great that we not only influence that issue, but that we're benefiting from it and that it's allowing us to improve our margins without really seeing new entrants that decided to take on. Because Michigan is complicated well beyond just the PIP issues. And I suspect that part of it is that the weather that surrounded the last few years maybe further dampened some people's interest. And all in, we're still one of the top writers in Michigan.

Can you help frame a little bit from -- you're planning on growing. You all sort of buying back stock. What is the ROI on a dollar deployed into the business versus a dollar return to shareholders?

I think the highest and best use for capital is growth, assuming that you can meet our margin requirements for that growth. But there's a limit to how much we can grow and at mid-single digits growth for 2026, which is what we've guided to, we're generating an awful lot of capital. So we have to decide what to do with that capital, and it's a bit of a high-class problem to have extra capital. So I suspect it will be a variety of things. We have dividend opportunities. We've -- 21 years in a row, we've increased the ordinary dividend, and we'll certainly consider other things. We've been more active recently in stock buyback, and I suspect that will continue. And then we have other things that we can certainly look at, whether that be reinsurance opportunities, or investment portfolio choices, but I think we'll be balanced in order to deploy the capital in the best interest of shareholders, Josh.

Well, I appreciate the time spent with you today. I hope you have good meetings. Thank you all in the audience and listening through the webcast. And we shall reconvene later.

All right. Thank you.

Thank you, Josh.