Yahoo Finance The Hanover Insurance Group Inc (THG) Q1 2024 Earnings Call Transcript Highlights: Strategic ...
After-tax Operating Income: $112 million
Earnings Per Share (EPS): $3.08 per diluted share
Operating Return on Equity: 15%
Ex-CAT Combined Ratio: Improved by more than 2 points
Overall Growth: Subdued at 2.3%
Net Written Premium Growth: Expected in the mid-single-digit range for the full year
Specialty Combined Ratio: 87.6%
Specialty Net Written Premium Growth: Expected in the upper single digits for the full year
Small Commercial Growth: Approximately 8%
Personal Lines Renewal Price Change: 22.8%
Net Written Premium Growth in Personal Lines: Flat year-over-year
First Quarter Combined Ratio: 95.5%
Combined Ratio Excluding Catastrophes: 89.5%
Current Accident Year Loss Ratio Excluding Catastrophes: 59.3%
Expense Ratio: 30.9%
Net Investment Income: Increased by $11 million to $89.7 million
GAAP Book Value Per Share: $70.22
Statutory Surplus: Increased by about 5% to $2.8 billion
Release Date: May 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
The Hanover Insurance Group Inc (NYSE:THG) reported a strong start to 2024 with a first quarter after-tax operating income of $112 million, or $3.08 per diluted share, and an operating return on equity of 15%.
THG improved its ex-CAT combined ratio by more than 2 points in the quarter, demonstrating the effectiveness of its margin recapture initiatives.
Specialty Lines delivered exceptional profitability with a combined ratio of 87.6%, and net written premium growth in Specialty is expected in the upper single digits for the full year of 2024.
Core Commercial segment performed strongly, particularly in Small Commercial which grew by approximately 8% in the quarter, driven by the success of the TAP sales platform.
Personal Lines showed improved profitability with a robust renewal price change of 22.8% in the quarter, and targeted new business adjustments are being implemented to enhance profitability.
Negative Points
Overall growth was subdued at 2.3% in the quarter as THG continues to prioritize profitability over rapid expansion.
The Specialty top line results were impacted by underwriting actions on specific underperforming programs within the Specialty P&C subsegment.
Middle Market in the Core Commercial segment required aggressive nonrenewing of bottom decile property business to achieve better earnings performance.
In Personal Lines, net written premium growth was flat year-over-year in the first quarter, with a deliberate reduction of exposure in the Midwest leading to a 4% decline in premiums in this region.
THG's first quarter expense ratio of 30.9% was slightly above the full year target of 30.7%, primarily due to timing of certain expenses and increased investments in the Specialty business.
Q & A Highlights
Q: Jeff, on your comments there on Core Commercial, specifically GL, frequency is still down. Can you provide a brief description of why you think that's still the case and how long that could continue? Also, part of that, too, is you said more complex claims. Can you talk about what you're seeing to describe those complex claims? A: Jeffrey Mark Farber - The Hanover Insurance Group, Inc. - Executive VP & CFO: In terms of the frequency, we're seeing some of our insureds there's less physical activity going into the premises. And in some cases, people aren't going into malls, people aren't going into restaurants quite as often, and that's creating a reduced frequency. That's been pretty dramatic. In terms of the complex claims, you're seeing less minor claims, so the overall proportion of claims is growing with respect to the complex claims or more severity that's having lawyer involvement and the like.
Q: You touched on this in the prepared remarks, but just curious if you could offer more color on the deconcentration strategy and progress in Personal Lines. Specifically in Michigan and perhaps in the Northeast as well? Are you reducing concentration in those geographies meaningfully? Or are you losing fewer customers and expect as you successfully push improved terms and conditions, including higher deductibles? A: John Conner Roche - The Hanover Insurance Group, Inc. - President, CEO & Director: Yes. This is Jack again. I frankly couldn't be any more pleased with the execution that we're seeing within Personal Lines and frankly, the rest of the enterprise, because as we think about property aggregations and we think about spreading our risk and implementing terms and conditions, that requires the entire enterprise to kind of contribute. But specific to Personal Lines, we are right on target with the thresholds and the milestones that we set for ourselves so much so that with the implementation, particularly on the renewal terms and conditions, if that continues to go as well as we project that we can continue to change the dials on our new business appetite. We've already done that in 5 of our states. We're looking at the next 5. So I think of this as a big picture is we are making meaningful progress on our margin recapture and simultaneously advancing our diversification efforts at a really good clip. So I couldn't be more pleased with the way that's playing out in Personal Lines.
Q: On reserve development, which was healthy again this quarter. I was wondering if there's any change in your high-level view on loss expense trends? You talked about frequency trends normalizing for some Casualty Lines. But wondering if you're seeing any changes in severity. I'm just asking given that some other insurers have increased their loss inflation forecast recently? A: Jeffrey Mark Farber - The Hanover Insurance Group, Inc. - Executive VP & CFO: Yes. So overall, we're very comfortable with our balance sheet and very prudent in how we set reserves. In Core Commercial, we -- every major line was favorable. So feeling really good about that. Overall, our Property Casualty mix, while a little bit challenging during the inflation in that period, serves us reasonably well as casualty trends spike up. And Specialty is also largely a claims-made policy construction, which will help us, Jack talked about the limit structure in his prepared remarks, where 93% is less than or equal to $1 million overall and 77% in Core.
Q: The data on limits that you gave for the Liability exposures in Core Commercial is really helpful. Just kind of looking at continued growth in the Small Commercial book versus the underwriting and Middle Market over the past few quarters? Even though that's kind of geared towards the property side. I was wondering if you expect any sort of perceptible impact on the limits going forward in the liability book just kind of given maybe a greater emphasis on smaller accounts? A: John Conner Roche - The Hanover Insurance Group, Inc. - President, CEO & Director: Yes, Grace, this is Jack. Given our current trajectory of growth patterns, I think those -- that limits profile will be either equally as impressive or maybe even a little bit better because we are growing our smaller business, both in the Core Lines and in Specialty at a faster clip. And we believe we have a real competitive advantage in both of those areas. That said, I think as we move through this liability environment. Longer term, our hope and expectation is, is that we can put ourselves in a position so we can participate in the mid-range Specialty business and eventually middle market in a more robust way. But this is an environment where I think caution and prudence is appropriate. But I don't want you to miss the point that our relevance with agents and our ability to take the company to the next level, has some bearing on whether we can navigate these trends that we're all going through and grow all of our businesses into the future. So that's how we're approaching it.
Q: Just your last couple of questions there. On Small Commercial kind of prodded me on this one. Small Commercial has been kind of a sweet spot for the industry for a while. You guys are killing it there. But I guess because it's been such a sweet spot, it seems like -- it feels like at least going back a couple of years, that's a place where many people said they would want to go. And not sure you've seen them come into that space and maybe the competitive landscape has changed? And if not, here's why not? Maybe what's the moat to get into that space and be as successful as you guys are? A: John Conner Roche - The Hanover Insurance Group, Inc. - President, CEO & Director: Yes, Mike, I think that's very perceptive, and I'll let Dick speak to that. But I do believe that Small Commercial a business that takes significant investment and frankly, insight in terms of where the profit pools are? What pricing sophistication needs to look like? And so it is not something that you can just turn the switch and get into, and there have been carriers that have highlighted that and either not made the progress that they intended to make or in some cases, regressed. So Dick, maybe you can build on that.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
This article first appeared on GuruFocus.
