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Text: Today's discussion will also reference certain non-GAAP financial measures such as operating income and accident share loss and combined ratios, excluding catastrophes, among others.
I will begin with some commentary on our full year financial highlights in the context of the business and economic environment.
I will then provide a strategic view of our segments and our 2020 accomplishments.
We reported outstanding results in the quarter and for the year, delivering strong operating earnings and significant value for our shareholders.
In the face of unprecedented challenges, our 4,300 employees and our company rose to the occasion in 2020.
We quickly and effectively adapted to the rapidly changing market conditions and customer expectations, while flexing our agile operating model and driving innovation across our organization and the insurance value chain.
In a year defined by the coronavirus pandemic, social unrest, economic disruption and challenging weather, we relied on and even further strengthened our unique, collaborative and nimble culture.
And made good on our promises to our agents, customers and communities.
And we continue to create value for our shareholders, generating exceptional profitability and high-quality premium growth despite the prevailing economic conditions.
Ultimately, thriving in ways we believe position our company for even greater success in 2021 and the years ahead.
For the year, we reported operating earnings per share of $9.32, up 14% from 2019 and a strong operating return on equity of 13.1%, in line with our long-term target.
Our performance on the year highlighted the overall effectiveness of our strategy, the resiliency of our business and our ability to drive sustainable, broad-based profitability.
In particular, I want to share the following financial observations: First, we managed well in spite of the changing market conditions, continuing to enhance our operating model and invest in our capabilities, positioning the company to deliver strong profitable growth going forward.
Despite the many economic challenges related to widespread business limitations and restrictions, we delivered net written premiums of $4.6 billion for the year, up from 2019.
After hitting a low mark in the second quarter, we delivered improved growth through the remainder of the year.
We expect exposure declines in 2020 will bounce back in 2021, as the economy continues to recover and distribution of the COVID-19 vaccines continues to ramp up.
Our resiliency in 2020 highlights the efficacy of our unique distribution strategy, the strength and commitment of our agent partnerships and our ability to provide a diversified portfolio of products and services to our customers and agents.
We are also very encouraged by improvements in the leading growth indicators, ranging from Commercial Lines PIF growth to increased consolidation activity with our top agents, and a gradual pickup in Personal Lines retention.
The momentum we have reestablished in our business position us well to accelerate growth as the economy continues to strengthen throughout 2021.
Second, we delivered strong underwriting results with an all-in combined ratio of 94.4% for the year and 88.1%, excluding catastrophes.
Our robust underwriting performance in 2020 went beyond the temporary frequency benefits we realized in personal auto.
In fact, we delivered returns at or above target in all three major business units while continuing to build our earnings consistency.
Though 2020 was an active catastrophe year for the P&C industry overall, the impact of cat on our business was considerably more modest.
Our strong performance relative to the industry is a reflection of the many prudent underwriting actions we have taken over several years as well as our continuing discipline with respect to property aggregation.
Our ability to outgrow the market, going forward, requires we consistently generate top quartile returns.
To that end, once again, we generated excellent returns in 2020, enabling us to take a more aggressive and opportunistic approach to growth in 2021 and beyond as the market provides opportunities.
Third, we continue to be prudent and responsible stewards of our shareholders' capital.
2020 marked the 15th consecutive year, in which the Hanover increased its ordinary dividend.
In addition, during the year, we repurchased approximately 2.2 million shares of our company's common stock, deploying $212 million in underscoring the confidence we have in our company's financial earnings and growth prospects.
2020 was a very strong year for us, and we begin 2021 feeling optimistic and confident.
We are well capitalized with a very strong balance sheet, a proven business strategy, unique and targeted distribution approach and responsive and innovative products and services.
We are intently focused on delivering value and outperforming the industry over the long term.
Turning now to our key strategic accomplishments for the year.
We successfully advanced our strategic imperatives and made important progress toward our vision to be the premier P&C franchise in the independent agency channel.
A franchise that delivers relevant and innovative risk management solutions while helping our agents transform the way customers experience and value insurance.
Our Personal Lines team delivered exceptionally strong earnings during the year, continuing to effectively manage its book of business, finding the right balance between rate and retention on our renewal book and maintaining our commitment to sustainable profitable growth.
As an account writer, we take a disciplined and long-term approach to renewal price across our home and auto policies, so as not to cause excessive disruption for customers and agents.
That said, we took pricing actions in the second half of 2020 to protect our profitable renewal book, and we'll continue to do so as market conditions warrant.
Those actions started to have a positive impact in the fourth quarter and in January.
And we should see retention improving throughout the year, eventually getting back to historical levels.
With respect to aggressive new business price competition, we believe some competitors in the Personal Lines auto sector are being shortsighted.
Pandemic related frequency benefits are temporary in nature, and we want to be responsive in our pricing without setting the stage for significant increases in the not-too-distant future.
As auto frequency returns to near-normal levels, we want to be positioned for growth and not have to drive outsized increases in recently acquired customers.
Additionally, we remain mindful of increased severity in the current environment due to higher intensity incidents and the reemergence of social inflation as the nation transitions out of the pandemic.
Our recent new business indicators are beginning to suggest a return to positive growth momentum.
We signed a record number of consolidation agreements with our partners in 2020, which we expect will provide a new business tailwind in 2021.
During 2020, we expanded our first lines product offerings with the introduction of Home Business Solutions, a suite of business insurance products for homeowners who manage home-based businesses.
In addition, we gained further momentum with our Hanover Prestige offering, which caters to customers with more complex insurance needs.
We added more than 7,000 new Hanover Prestige customer accounts during the year and exceeded our full year 2020 new business target, with new business growth nearly 30% higher than in the prior year.
We also expanded our Personal Lines footprint to 20 states in 2020, beginning to write business in Maryland on the heels of adding Vermont and Pennsylvania over the last couple of years.
We start 2021 with enormous optimism and believe that our agency relationships, consolidation commitments, customer centricity and expanded footprint will enable us to reestablish our prepandemic growth momentum in Personal lines.
We are also very pleased with the performance of our commercial businesses in 2020.
Our Commercial Lines team successfully navigated an especially difficult economic environment, while continuing to focus on growth in our most profitable segments.
Our diversified industry mix in Core Commercial enabled us to deliver solid growth in the most vibrant and growing industries, such as technology, life sciences, light manufacturing, financial services and educational institutions, while also enabling us to continue to manage profitability in select Property Lines.
In Specialty, we are achieving double-digit growth in management liability and Hanover Specialty property, which are among our most profitable businesses.
We continue to expand our products and capabilities, strengthening our offerings for financial institutions, retail E&S and cyber customers.
We also advanced our total Hanover strategy, leveraging our specialized capabilities across our Commercial Lines customer base.
Commercial Lines net written premiums were up both for the year and the quarter, as we capitalize on the hardening market to obtain rate, with fourth quarter Core Commercial rate increases of 6.4% and Specialty increases of 8.9%, up sequentially from 5.7% and 7.2% in the third quarter, respectively.
At the same time, we are seeing a tightening of new business versus renewal pricing, which indicates further market discipline and solid execution.
We believe there is more opportunity ahead to achieve additional rate increases with the continuation of many market catalysts, including low interest rates, ongoing pressure in larger liability account size segments and social inflation.
Across our commercial book, we are seeing rate meaningfully exceed loss trends.
Policy exposures and endorsements coming back and our policy counts continuing to grow.
These and other factors support our belief that our growth will accelerate throughout the year as the economy continues to recover and through continued market share gains with our agent partners.
Our broad industry offering and specialty expertise, combined with deep business insights and agency partnerships, positions us to drive growth in an improving economic climate and in a firm commercial rate environment in 2021.
One of the most profound takeaways for us coming out of 2020 was how quickly things can change.
More than ever before, our company flexed its agility and its innovative spirit, giving us even more confidence in our ability to continue to do so going forward.
We recognized, as never before, the opportunity that exists in becoming even more customer-centric.
Identifying ways to be more efficient and easier to work with in all aspects of customer and agency interaction, including policy acquisition, quoting and underwriting, customer service and claims settlement.
As an organization, we were well prepared to meet the demands of 2020, having invested significantly over the past several years to enhance our major underwriting and quoting platforms.
In fact, almost every area of our technology stack had been upgraded or replaced over the last five years to enable our business solutions with a more open environment.
Our Personal Lines TAP Sales platform now has been deployed in all of our Personal Lines markets, and we have started the rollout of our new small commercial underwriting and agent interface platform.
This new Commercial Lines TAP Sales platform will be deployed across the country by the end of 2021.
Additionally, prior upgrades to our major claims and billing systems allowed us to move to a virtual environment overnight, providing our agent partners and customers with a high level of service.
We are also bringing our customer and agent connectivity to the forefront of our digital road map.
Through multiple agency management systems and InsureTech solutions, we have and are committed to further enhance the overall effectiveness of data sharing between agents, customers and underwriters.
In 2020, we expanded customer online inquiry and self-service to commercial lines, while also driving efficiencies with e-billing and e-delivery in Personal Lines.
Innovation also is playing a key role in claims, as we increasingly use digitization and technology platforms to virtually complete auto estimates and reinspections using Hanover staff.
The same is true on the property side of the business.
Global 360, our downloadable self-service application with virtual interactive inspection capabilities, now processes more than half of the losses that previously would have been adjusted in person.
The ability to innovate in an agile and thoughtful way is becoming one of the most crucial competitive advantages for insurance companies, and we believe we have what it takes to continue to innovate efficiently.
We're proud of the accomplishments we've made to date, but it's our growth mindset and innovative culture that will enable us to embrace the opportunities ahead.
In a year defined by rapid change, economic and social strain and new customer expectations, we elevated our focus in inclusion and diversity and are committed to making ours an even more inclusive and diverse organization.
During the year, we made important strides, including the further development of our employee-led business resource groups, continued unconscious bias and inclusive leadership training in the publication of our inaugural inclusion and diversity report, which is available on our website.
These important initiatives have been central to our business success over the last few years and will enable us to prosper well into the future.
In parallel, we are advancing our sustainability goals by further incorporating environmental, social and governance factors as we manage our company's investment portfolio, addressing environmental risks and implementing practices that promote and encourage environmentally responsible behavior.
These steps are essential in helping us continue to attract and retain outstanding talent, sustain our competitive advantage and maintain top quartile performance in our rapidly changing world.
I am extremely proud of our 2020 performance, which reflects the inherent strength of our company, the effectiveness of our strategy and the versatility of our business model.
We begin 2021 in a position of strength, both operationally and financially and look to the year ahead with great optimism.
We have a proven and unique business strategy, deep partnerships with the best independent agents in our industry and the talent and drive needed to deliver superior value for all of our stakeholders.
For the quarter, we reported net income of $164.6 million or $4.43 per diluted share compared with $109.8 million or $2.76 per diluted share in 2019.
After-tax operating income for the quarter was $112 million, or $3.02 per diluted share compared with $80.2 million or $2.01 per diluted share in the prior year quarter.
For the year, net income was $358.7 million or $9.42 per diluted share compared with $425.1 million or $10.46 per diluted share in 2019.
Operating income for the year was $355 million or $9.32 per diluted share compared with $331.6 million or $8.16 per diluted share in 2019.
Our fourth quarter earnings reflected a combined ratio of 92.4%, an improvement from 96.2% in the fourth quarter of 2019 due to prior underwriting and rate actions, favorable loss frequency and favorable prior year development.
Our combined ratio for the full year improved to 94.4% from 95.6% in 2019, again, reflecting mix improvements and favorable loss frequency, partially offset by higher cats.
Fourth quarter 2020 catastrophes totaled $35.1 million or 3% of earned premium, which was below our catastrophe load assumption of 3.6%.
Full year catastrophes totaled $286.7 million or 6.3% of earned premium.
While full year cat losses were above our expectations due to a particularly active Q2 and Q3, our overall cat loss experience compared favorably with the industry as a whole.
In fact, more than half of our cats above our expectations stem from losses associated with social unrest.
This underscores the effectiveness of our prior aggregation management initiatives.
Our diversified business mix and prudent risk management practices should continue to serve us well over the long term.
That being said and considering changes in weather patterns in certain geographies in the U.S., we believe it is prudent to increase our catastrophe load for 2021 from 4.6% to 4.9%.
Even though our PMLs and 10-year averages remain relatively stable.
We believe it is thoughtful to assume higher weather-related catastrophe losses going forward, which should appropriately impact our pricing targets and return expectations in cat prone lines.
Excluding catastrophes, we delivered a full year combined ratio of 88.1%, well below our original guidance of 91% to 92%.
Our full year 2020 expense ratio of 31.6% was flat with 2019, short of our original expectations due to higher variable agent and employee compensation costs from better-than-expected profits.
We expect to achieve a 30 basis point expense ratio improvement for full year 2021, which puts us right on track with our long-term expense ratio savings target of 20 basis points per year.
We executed well on our original cost management and efficiency targets for 2020.
We also achieved additional savings to address the lower premiums earned during the year due to lack of growth and premium returns.
For the most part, these savings are permanent in nature, giving us confidence in our expected 31.3% expense ratio in 2021.
For the year, we recorded favorable prior year reserve development of $15.5 million or 0.3 points of the combined ratio.
This was driven primarily by continued favorability in Workers' Comp, partially offset by pressure in auto bodily injury and commercial multi-peril.
Our conservative approach to reserves reinforces our commitment to react quickly to trends in order to mitigate the potential for issues down the road.
From that standpoint, we concluded 2020 with a very strong balance sheet.
This is a direct result of our reserving consistency and discipline.
Several years of prudent underwriting and pricing actions in certain specialty lines and in commercial auto, in addition to other initiatives to enhance profitability.
We continue to prudently hold COVID reserves, although loss activity has been limited.
Our mix of business, specifically not writing travel, trade credit or event cancellations, and our use of ISO based forms has served us well during the pandemic.
Turning to underwriting results in each of our businesses.
With the full year now behind us, I will focus my comments on our full year 2020 results, but will mention quarterly movements where relevant.
Personal Lines reported a full year combined ratio, excluding catastrophes, of 84%, down from 91.6% in 2019.
This improvement was driven primarily by personal auto.
Our personal auto ex-cat accident year loss ratio was 61.3% in 2020, an improvement of 10.3 points from the prior year, as a result of the claims frequency benefit associated with the pandemic.
While frequency has declined across our footprint, we benefited less in the second half of the year than in the second quarter, as stay-at-home orders and business restrictions eased to varying degrees.
Going forward, we expect frequency will gradually return to historical norms and anticipate ending 2021 with fourth quarter frequency relatively in line with levels before the pandemic.
Overall, we expect our Personal Lines loss ratio in 2021 will, of course, increase from 2020, but should remain a little lower than 2019, primarily due to the timing of remaining loss frequency benefits diminishing throughout the year.
In homeowners, our 2020 ex-cat current accident year loss ratio was 49.1%, up 1.2 points from 2019 due to some elevated fire and property losses.
We continue to take strong rate of 5% in homeowners, not including the inflation adjustment in the year, and we expect profitability in 2021 to be relatively in line with ex-cat results in 2020.
Personal Lines net premiums written declined 0.5% for the full year, including the impact of the premium refunds issued in the second quarter.
We believe our customer-centric strategy and high level of engagement with agents will continue to drive growth once the benefit of frequency subsides.
During the year, we appointed 170 new agents and achieved record consolidation signings.
Turning to Commercial Lines.
Our full year combined ratio, excluding catastrophes, improved 1.2 points to 90.9%, primarily reflecting a decrease in our current accident year loss ratio due to meaningful underlying improvement in other Commercial Lines and temporary frequency benefits in commercial auto.
The loss ratio in our commercial auto book improved 5.8 points to 63.8%.
We have generally only reacted to the favorable results in the auto property coverages, while maintaining our prudent approach to liability reserving and pricing.
Our commercial multi-payroll loss ratio increased 1.5 points to 57.7% due to some elevated large property loss activity in the first and third quarters of 2020 and to a lesser extent, in the fourth quarter.
Our review of the portfolio does not suggest any major systemic concerns.
However, we continue to actively monitor our business mix and take rate where appropriate.
Our workers' comp loss ratio remained essentially flat at 60.9%.
While underlying loss trends remain favorable, we are maintaining our conservative approach to reserves, given the current rate environment and uncertainty about future claims.
Other Commercial Lines loss ratio improved 2.9 points to 53.6%, which underscores the success of prior year profit improvement actions in our Specialty property and programs businesses.
Our Specialty portfolio is now delivering above target returns and growing the fastest.
Commercial lines net premiums written grew 1% in 2020, driven by solid momentum in our Specialty Lines, where rates remained on a strong upward trajectory with sequential increases each quarter of the year.
New business submissions continued their steady upward trend off of their March lows.
Core Commercial retention remains at historical highs at 86.2%, while cancellation and endorsement activity moderated.
Small commercial submissions and consolidations are trending positively, and we continue to achieve pricing above long-term loss trends.
Premium growth in Core Commercial ticked slightly lower in the fourth quarter compared to the third quarter, in part due to exceptionally robust new business performance in the fourth quarter of 2019.
Looking ahead, we expect our underlying commercial lines loss trends to remain relatively stable.
Similar to personal auto, we anticipate commercial auto frequency will return to historical norms by the end of 2021.
While overall rate will likely exceed loss trend, we remain very prudent with our liability selections, given the continued risk of social inflation and uncertainty around workers' comp profitability, in light of the many years of rate decline in that line.
We expect the overall Commercial Lines loss ratio in 2021 to be fairly consistent with 2020.
We believe growth will continue to accelerate in this business going forward, aided by strong rate trends and continued economic recovery.
Turning to our investment performance.
We generated net investment income of $70.2 million for the fourth quarter and approximately $265 million for the year.
This was ahead of our midyear guidance for 2020 and reflective of better-than-expected investment partnership performance.
Lower yields continue to pressure our portfolio, and we expect that trend to continue into 2021.
Cash and invested assets at year-end were $9 billion, with fixed income securities and cash representing 85% of the total.
Our fixed maturity investment portfolio has a duration of 4.8 years and is 96% investment grade.
We have a high-quality, well-laddered and diversified portfolio with a weighted average rating of A+.
Moving on to equity and capital position.
We thoughtfully managed our capital throughout 2020, even with the broader market uncertainty and economic volatility.
In October, we executed $100 million accelerated share repurchase agreement, which closed last week, underlining our commitment to be responsible and prudent managers of capital.
Combined with activity earlier in the year, we returned approximately $212 million to shareholders in 2020 through share repurchases, including the final delivery of all shares.
Under the ASR agreement, we repurchased 2.2 million shares or 6% of the outstanding shares since the beginning of 2020.
Underscoring the confidence that we have in our strategy and growth prospects, we paid $99.5 million in dividends to our shareholders throughout the year and increased our recurring dividend payment in December 2020 by 7.7%.
With broad-based profitability, expense discipline and an effective capital allocation strategy, we continue to target a return on equity of 13% or higher over the longer term.
Our book value per share of $87.96 increased 4.3% during the quarter, and 15.8% from December 31, 2019, driven by operating income and both realized and unrealized gains in our investment portfolio, partially offset by the payment of our regular quarterly dividends.
Overall, I am very pleased with our full year performance, which reflects the clear execution of our strategic goals, financial discipline and commitment to delivering top quartile returns.
I'm incredibly confident in the trajectory of our company and our ability to continue building on the strong momentum we have established.
We expect overall net written premium growth in the mid-single digits, driven by growth in our most profitable businesses.
We anticipate acceleration in premium growth throughout the year.
However, first quarter 2021 maybe a little lower than full year, impacted by inherent difficulties with a direct comparison to the pre-pandemic first quarter of 2020 and the timing of the economic recovery.
While the second quarter comparison will benefit from customer premium returns in the second quarter of 2020.
We expect net investment income to remain flat compared to 2020, as the impact of lower new money yields will be offset by higher operational cash flows.
Our expense ratio should decrease by approximately 30 basis points in 2021 to 31.3%.
The combined ratio, excluding catastrophes, should be in the range of 90% to 91%.
We've set our cat load for the year at 4.9%, as I mentioned earlier.
And we expect an effective tax rate to approximate the statutory rate, which is 21%.
Our first quarter cat load is expected to be 4.7%, slightly below our full year ratio.

user
compname reports q4 earnings per share $4.43.
compname reports fourth quarter net income and operating income of $4.43 and $3.02 per diluted share, respectively.
full year net income and operating income of $9.42 and $9.32 per diluted share, respectively.
full year combined ratio of 94.4%.
q4 operating earnings per share $3.02.
q4 earnings per share $4.43.

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