The Hanover Insurance (THG) - 2022 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - For Q3 2022, after-tax operating income was $35.7 million or$ 0.99 per share, with a combined ratio of 101% reflecting higher than expected inflation and supply chain pressures [22][40] - The combined ratio excluding catastrophes was 94.2%, with catastrophe losses of $90 million impacting net earned premium [22][40] - The company achieved a return on equity (ROE) of 10.5% year-to-date, with net written premium growth of 9.5% in the quarter [14][22] Business Line Data and Key Metrics Changes - Core commercial business grew by 5.9%, driven by renewable price increases of 11.2% [14][25] - Specialty segment achieved growth of 12.6%, with robust rate increases of 8% across its portfolio [15][29] - Personal Lines grew net written premiums by 11.3%, with an average renewal pricing increase of 7.3% [16][30] Market Data and Key Metrics Changes - The company noted that inflation and supply chain issues were pervasive, impacting all primary insurers [20][22] - The market for Personal Lines is experiencing one of the hardest conditions in history, with expectations for continued firming [20][22] Company Strategy and Development Direction - The company is focused on restoring underwriting margins to target levels and achieving long-term financial targets [41][40] - Strategic actions include aggressive pricing increases, insurance to value adjustments, and targeted underwriting measures to address current market challenges [18][19][20] - The company aims to leverage its strong agent partnerships and diversified portfolio to enhance profitability [15][20] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the impact of Hurricane Ian and ongoing macroeconomic challenges, including inflation and supply chain disruptions [11][12] - The company remains confident in its ability to manage risks and achieve long-term profitability despite short-term challenges [13][21] - Future expectations include a combined ratio excluding catastrophes in the range of 92% to 92.5% for the full year 2022 [40] Other Important Information - The company reported net investment income of$ 73 million for the quarter, benefiting from higher new money yields [36][39] - Statutory capital remained relatively unchanged at $2.7 billion, with a disciplined approach to capital management [39] Q&A Session Summary Question: Can you expand on the improvement in the expense ratio? - The improvement was driven by earned premium growth and reduced incentives, with some elements being sustainable and others potentially one-time [46][48] Question: Update on the Specialty business and cross-selling opportunities? - Success in Specialty comes from both existing and new customers, with significant cross-selling opportunities being realized [49][51] Question: Clarification on inflationary pressures and their impact? - Inflation assumptions were revised, particularly in auto and home segments, leading to higher loss ratios [54][55] Question: Expectations for claims inflation moderation? - The company is cautious but optimistic about managing claims inflation through pricing and underwriting actions [57][60] Question: Risks in the Specialty segment due to inflation? - The diversified nature of the Specialty portfolio helps mitigate risks associated with inflationary pressures [68][69] Question: Core commercial lines pricing acceleration? - The company is seeing good pricing across property coverages, with a focus on maintaining strong rates [76][78] Question: Specialty retention trends? - Retention remains robust, though there may be slight quarter-over-quarter variances due to the nature of the products [86][87] Question: Barriers to taking rate in difficult states? - The company feels confident in its ability to take rate in various states without significant barriers [88][89]