The Hanover Insurance (THG) - 2022 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported operating income per share of $5.53 and an operating return on equity of 6.7% for the full year, reflecting the inflationary economic environment and significant catastrophe activity in Q4 [13][35] - The full year combined ratio, excluding catastrophes, was 92.1%, towards the lower end of the guidance provided in the previous quarter [14][35] - The expense ratio improved to 30.8% for the full year, a 50 basis point improvement from 2021, driven by fixed cost leverage from growth and lower-than-expected variable compensation [36][35] Business Line Data and Key Metrics Changes - Personal Lines achieved a pricing increase of 10% in Q4, with retention solidly above 86% [21][22] - Core Commercial pricing increased by 11% in Q4, with expectations for even higher increases in 2023 [23][49] - Specialty Lines delivered a combined ratio of 89.3% for the full year, with an 11% increase in annual premiums [29][52] Market Data and Key Metrics Changes - The company experienced catastrophe losses of$ 190 million in Q4, with winter storm Elliott accounting for approximately $165 million [43] - The underlying loss ratio increased to 63.3% in Q4, reflecting higher loss costs due to inflation and property large losses [45] - The company expects net written premium growth in the mid-single digits for 2023, driven by growth in profitable businesses [68] Company Strategy and Development Direction - The company is focused on regaining top-tier margins in Personal and Core Commercial property lines through enhanced pricing, insurance-to-value adjustments, and targeted underwriting measures [20][27] - The strategic priorities for 2022 included expanding the specialty business, investing in technology, and deepening agency partnerships [28] - The company aims to leverage innovative technology for risk solutions and mitigation, enhancing underwriting decisions and preventing claims [17][19] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenges posed by inflation, supply chain disruptions, and changing weather patterns, emphasizing the need for disciplined underwriting and pricing strategies [12][16] - The outlook for 2023 includes expectations for solid operating performance and meaningful improvement from 2022, with a focus on margin growth [72] - Management expressed confidence in the company's ability to navigate the dynamic environment and deliver long-term value for stakeholders [33][72] Other Important Information - The company completed its multi-line casualty reinsurance renewals with limited changes and at acceptable prices [61][129] - The Board of Directors approved an 8% increase in the company's quarterly dividend, reinforcing commitment to shareholder value [67] Q&A Session Summary Question: Update on loss cost inflation - Management noted no material lift in medical inflation but is monitoring liability trends closely, incorporating increased lawyer involvement and medical procedure costs into their expectations for 2023 [75][77] Question: Changes in property inflation - Management indicated that there has not been a material step down in property inflation and is watching for any potential changes [78] Question: Guidance on catastrophe loss ratio - The company is comfortable with the 5.1% catastrophe load for 2023, attributing it to actions taken to reduce volatility [97] Question: Premium growth expectations - Management expects slower growth in Personal Lines due to pricing changes but remains optimistic about Specialty Lines and Small Commercial [99][101] Question: Retention metrics in Personal Lines - Management emphasized the importance of monitoring retention metrics closely and adjusting pricing as necessary to maintain stability [105][106] Question: New money rates - Management estimated new money rates to be in the range of 4.75% to 5% [107] Question: Outlook for umbrella loss cost trends - Management has not observed significant changes in umbrella loss costs but is monitoring the implications of social inflation [131]