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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 by discussing our second quarter financial highlights in the context of the current business and economic environment.
I'll then provide a strategic review of each of the segments during the quarter.
Jeff will review our financial results in more detail and provide some thoughts on the quarters ahead.
We are very pleased to report outstanding second quarter results, highlighted by strong growth with net written premium increases of 11.7% or 8.6% on an adjusted basis, excluding the impact of 2020 premium returns, driven by gains across all segments.
Operating income of $104 million or $2.85 per share, operating return on equity of 14.7% and a combined ratio of 94.4%.
Our strong underwriting results are a reflection of our ability to capitalize on evolving market opportunities while navigating the complexities of this dynamic underwriting environment.
From my perspective, there are two key takeaways for the second quarter results.
First, our growth has accelerated and exceeded pre-COVID-19 levels in all segments.
And second, we continue to achieve broad-based profitability with strong underlying underwriting results in each of our businesses.
I would like to briefly discuss each of these points in turn.
With respect to growth, we delivered a meaningful step-up in premium increases in each of our business segments compared to the first quarter of this year.
All of our major segments now are exceeding pre-COVID-19 growth levels as a result of our disciplined and consistent pricing strategy, strong retention and robust new business production metrics.
Strong relationships with our agent partners provide an opportunity for solid growth potential going forward, as we capitalize on our most profitable market sectors and leverage our state-of-the-art technology platforms.
Additionally, we continue to enhance the level of sophistication within our claims data and analytics, including our real-time driving pattern and inflation monitoring tools.
I've never been more confident in our ability to grow profitably.
In Personal Lines, we delivered growth of 11.6% in the quarter or 5% excluding the effect of premium returns in the prior year period.
Our continued strong growth momentum in this business is a reflection of sustained agent and customer interest in our attractive account offerings, targeted pricing actions, the strength of our market position and our ability to successfully adapt and navigate a competitive marketplace.
We grew our Commercial Lines business by 11.7%, driven by the strong performance of our specialty portfolio as well as our small commercial business, which benefited from the economic recovery and is beginning to see the impact of the rollout of our new quote-and-issue platform, TAP sales.
Overall, we are well positioned to continue driving growth in all segments, and we now expect to deliver mid- to high single-digit growth for the remainder of the year.
Regarding loss trends, we are still experiencing some remaining lower auto loss frequency in the quarter, reflecting the fact that a meaningful portion of our customer base likely has the opportunity to utilize more flexible working arrangements.
Additionally, in many areas of the country, our data indicates reduced traffic and less congested rush hours as potentially lingering consequences of the pandemic.
We expect frequency will reach its new normal over the course of 2021, which may provide some persistent lower accident frequency in certain geographies, given our mix and customer profile.
We believe this benefit will be partially offset by near-term increased severity from materials inflation and more severe accidents, including elevated fatalities.
We delivered strong Commercial Lines profitability in the quarter, although we experienced some elevated property losses, including in other commercial, which we do not believe are necessarily recurring or indicative of a trend.
We've been watching the overall property large loss activity for several quarters, and we believe it is consistent with that of the market.
Thus, we think that there is room for additional rate increases in the property lines moving ahead.
And as always, we remain very prudent on our loss selections.
We are mindful about the potential for increased social inflation, medical information and treatment delays and other inflationary trends.
We are watching the economic recovery and the acceleration of business activity closely, as well as the full reopening and catch-up of the court system in many jurisdictions.
While the impact and duration of inflation on our book of business is yet to be determined, we believe our comparatively short reserve duration positions us well to manage through that potential exposure.
With that as background, I would now like to share some recent highlights by business beginning with Personal Lines.
Our efforts to selectively apply rate adjustments where warranted have been very successful, as demonstrated by our sequential PIF growth of 1.8% in auto and 1.7% in home during the quarter.
New business growth came in ahead of expectations, and we are seeing significant sequential improvement and retention.
Our preferred customer focus and our value-based approach represents significant competitive advantages, particularly as agents become even more strategic with their Personal Lines operating models and carrier placement decisions.
Account business represents over 85% of our overall book, leading to a high level of retention and business stability.
Our Personal Lines retention improved by over two points in the second quarter compared to the first quarter, demonstrating the agility of our approach and the success of our business strategy even in this very dynamic environment.
In Personal Auto, we expect our claims auto frequency to gradually approach new normal levels as the year progresses.
Though the pricing environment remains competitive, we are seeing clear indications that the rate deceleration has bottomed out and the industry is looking to increase rates.
This is to be expected given the nature of the Personal Lines pricing cycle, as historically, Personal Auto rates adjust to loss trends rather quickly.
We believe we are more favorably positioned for the future given our prudent pricing strategy throughout the pandemic.
As a result, we have much less of a need to significantly increase rates and create customer disruption in the near future.
We continue to gain momentum with Hanover Prestige, our full account offering for customers with higher value homes and autos and more complex insurance needs.
These customers represent a growing segment of the Personal Lines market, which further positions us as a strategic partner with agents.
The contribution of this offering to our overall growth is increasing every quarter with the second quarter benefiting new business growth by three points.
Turning to Commercial Lines.
We executed extremely well on our strategic priorities, posting growth of 12% in Specialty and 11% in Core Commercial, driven by a pickup in new business, rate increases and exposure growth.
Strong topline growth in our Core Commercial business is expected to continue through the year, driven by the reopening of the economy, continued rate increases and a successful launch of TAP Sales, our small commercial quoting platform, which is proving to be a great addition to our already strong small commercial offering.
In the second quarter, we launched this new platform in an additional nine states, bringing the total to 20 states, and we complete the implementation countrywide for our first product business owners advantage by year-end.
As a reminder, this multiyear significant investment delivers a comprehensive set of capabilities to the marketplace.
It includes a new user front end for our agents, new products and endorsements, new states, new sophisticated pricing algorithms, a new policy administration system and new self-service capabilities.
In those states where TAP sales was deployed in the first quarter of this year, submissions significantly increased and our hit ratio also improved.
The response to this offering has been incredibly positive with agents praising the product's ease of use and simplified quoting process, calling it best in market.
The efficiency gains are substantial, enabling the quoting and an issuance of a single location risk in 50% of the time it required before.
The investments we have made to modernize our infrastructure and enhance our capabilities across our business are being realized at a time when agents are consolidating and buying more agencies that have substantial small commercial books of business.
This is forcing them to become more strategic about the carriers with whom they do business.
Our account focus, easy-to-use tools and product breadth are driving increased efficiencies for our agents and increasing our value proposition to them.
We are confident that our robust offering will provide further growth and agency penetration opportunities for us in the quarters ahead.
In Specialty, we also delivered significant growth.
During the quarter, we achieved double digit growth in our Marine, E&S and management liability lines, which are among our most profitable businesses.
We continue to leverage our expanded products and capabilities in the financial institutions and retail E&S spaces as well.
And we also advanced our total Hanover strategy, deepening the use of our specialty capabilities across our Commercial Lines customer base.
As agents continue to offer specialized products to more customers, we are confident that our Specialty business will continue to generate critical growth for us going forward.
We are pleased with the commercial rate environment and the exposure dynamics in our markets.
We achieved rate increases of 6.5% in Core Commercial and sustained strong retention at 84.9%.
We continued to implement double digit rate increases in Commercial Auto and upper single digits in property with granular pricing segmentation and a strong differentiation in price and retention by risk type.
Exposure growth exceeded historical levels in the quarter, which bodes well for our growth prospects going forward.
We achieved rate increases of 8.5% in Specialty, up from 7.5% in the first quarter.
In general, Specialty rates can fluctuate from quarter-to-quarter as a result of large account renewals and other unique items.
But overall, pricing in our Specialty markets has been very strong with price increases continuing to outpace loss trends.
There continue to be meaningful drivers that support the strength of the rate environment in Commercial Lines, including the potential of an increase in social inflation, property loss pressures from materials costs, increased reinsurance costs and low interest rates.
We believe our focus on smaller accounts and differentiated offerings will help to shield us from meaningful pricing deceleration, which can occur in larger-sized brokered accounts.
In summary, the exceptional growth we delivered during the quarter reflects the significant positive momentum we have established across our business and sets the stage for continued profitable growth.
We are performing exceedingly well in an uncertain environment, leveraging our unique distribution capability, distinctive agency and customer-centric strategies; disciplined approach to underwriting and pricing; and broad and specialized product offerings.
As we begin the second half of the year, we are encouraged by our performance year-to-date and confident in our ability to advance our strategy and capitalize on opportunities for profitable growth going forward.
As I have said many times, we are extraordinarily proud of the work our team has done over the course of this public health crisis, delivering on our promises, maintaining and even enhancing the levels of service we provide to those who depend on us.
As we continue to drive our business forward, positioning our company to deliver sustained profitable growth, we are being very thoughtful and opportunistic determined to emerge from this ordeal as a better insurance company, employer and corporate citizen.
We are closely monitoring the rapidly changing employment trends and practices as well as employee preferences, intent on strengthening a culture that for us has been an important competitive advantage, enabling us to attract and retain outstanding talent.
We have begun to invite employees back to work on a largely voluntary basis and expect to fully reopen our offices sometime during the fall, assuming the public health environment is conducive to do so.
We are planning to embrace a progressive hybrid model, one that will enable us to provide agents and customers the products and services they expect and deserve and to provide our employees a flexible engaging work environment where they can build rewarding careers.
These are truly exciting times for those that are up for the challenge.
For the second quarter, we reported net income of $128.5 million or $3.52 per diluted share compared with net income of $115.2 million or $3.01 per diluted share in the second quarter of 2020.
After-tax operating income was $104 million or $2.85 per share compared with $62.7 million or $1.63 per share in the prior year quarter.
The difference between net and operating income is due to the increase in the fair value of equity securities.
Book value per share increased 4.8% in the quarter driven by earnings and to a lesser extent, an increase in unrealized gains in our fixed income portfolio.
With the economy largely closed in most of the country placed under stay-at-home orders, many lines of business experienced historically low frequency of claims last year.
In response to the fewer miles driven, we returned some premiums to our auto policyholders which impacted our reported net written premiums and underwriting ratios.
In addition, business exposures, payrolls and receipts were exceptionally low in 2020.
As the economy continues to open up and individuals return to the roadways, we believe our more recent growth trajectory and loss experience, as well as our original expectations for 2021 are better barometers by which to assess our performance.
We are pleased with our overall combined ratio of 94.4% in the second quarter of 2021 compared to 96.2% in the prior year quarter, which, a year ago, reflected several large catastrophe events, including losses from social unrest.
In the second quarter 2021, we incurred catastrophe losses of $76.8 million or 6.5% of net earned premium, 40 basis points above our quarterly expectation, primarily reflecting severe wind, torrential rain and hail events throughout the Midwest in June on the heels of a very light April and May.
Michigan, our largest Personal Lines state, was severely impacted by the rain and flooding events in mid- to late June, particularly in the homeowners line.
Michigan is a very profitable state for us and historically runs at a low 90s combined ratio.
However, when adverse weather events occur, as expected, we do see losses.
We also experienced some favorable catastrophe development in the quarter from prior years, which is a testament to our prudent reserving approach.
Prior year reserve development, excluding catastrophes, was favorable in the quarter, adding $12.6 million to the bottom line, primarily reflecting continued favorability in workers' compensation, Personal Auto and several Specialty lines.
We continue to be prudent in our reserving in Commercial Auto, where extension of loss patterns and prior bodily injury development warrant a cautious approach.
Additionally, in light of the pandemics effect on loss patterns in 2020, we remain vigilant as we assess ultimate loss costs.
With the economy regaining momentum, we are also mindful of the potential for reserving uncertainties related to social and economic inflation, delayed medical procedures and information as well as ongoing court delays.
Over the past several years, we have placed a considerable amount of emphasis on strengthening our balance sheet.
It is stronger than it has been in many years coming out of the second quarter, and we believe such prudence will serve us well.
Claims activity related to COVID-19 exposures continues to be very manageable, and we are holding substantial IBNR in that area.
Our expense ratio for the second quarter of 2021 was 31.2%.
This was in line with our expectations, consistent with the second quarter of 2020, an improvement from the first quarter of this year.
We are confident that we can deliver a 30 basis point expense ratio improvement for full year 2021.
Overall, current accident year combined ratio ex-CAT was 89% in the quarter.
This very strong underwriting result is a reflection of our diversified book of business, our earning in of rate increases and some lingering frequency benefit in Auto Lines.
Looking at our underlying underwriting results by segment.
Our Commercial Lines combined ratio, excluding catastrophes, was 89.5%, up 2.7 points from the second quarter of last year, primarily reflecting a comparison to an extraordinarily low level of losses in the second quarter of last year.
Our CMP current accident year loss ratio, excluding catastrophes, was 57.6%, in line with most recent trends but slightly elevated compared to our expectations, driven by a higher incidence of property large losses.
We believe that our experience is relatively consistent with that of the industry, adding to our continued expectation that there is room for additional property rate increases in the marketplace.
We achieved substantial CMP property rate increases in the second quarter, and we believe this trend will continue.
In other Commercial Lines, the current accident year loss ratio, excluding catastrophes, was 55.3%.
This result reflected the impact of a large loss and reinstatement premium triggered thereon in our highly profitable Hanover Specialty Industrial business.
In fact, this particular loss was offset by the overall favorability in our specialty business within the quarter to bring overall loss amounts generally in line with our expectations.
Our specialty industrial business runs at a long-term combined ratio in the sub 80s.
We are confident in our underwriting capabilities and future strong performance in this business.
Our Commercial Auto current accident year loss ratio, excluding catastrophes, remains relatively consistent with the recent quarter's results.
We are continuing to take substantial rate increases to address the industrywide multiyear liability issues affecting this line.
Turning to workers' comp.
Current accident year loss ratio was 61.5%, which was generally in line with recent historical results.
Our second quarter 2020 ratio was unusually low due to stay-at-home mandates for much of the country.
While the underlying trends in this line remained largely favorable, we continue to be very prudent with our loss picks in light of the rate environment and the potential for new risks posed by office reopenings for certain businesses.
Commercial Lines net written premiums grew exceptionally well at 11.7% in the second quarter, powered by our small commercial and Specialty businesses.
We achieved strong operating metrics, including improved rate, meaningful increases in exposures, return to strong new business growth and a solid core commercial retention of 84.9%.
Overall, despite some minor and expected variability in losses, we are very satisfied with Commercial Lines trends and underwriting returns in the quarter.
Turning to Personal Lines.
Our combined ratio, excluding catastrophes, was quite low at 85.3%, but up from 76.8% in the same period last year reflecting the benefit of COVID-19 related auto claims frequency declines.
Our Personal Lines auto current accident year loss ratio, excluding catastrophes, was 62.2% below historical trends, but up slightly from 60% in the first quarter.
While frequency trends industrywide are quickly moving toward historical norms, our business is still benefiting slightly from lower frequency.
We believe there may be a modest longer-term frequency benefit due to changing driving patterns from work from home flexibility of our customer base.
So we are observing these trends carefully, and we continue to do an excellent job managing the balance between growth, rate and profitability.
Current accident year loss ratio in our homeowners line remained relatively consistent with prior results, but was slightly above our expectations.
Elevated property loss activity and higher material costs indicate the need for future rate increases.
We are seeing a significant push for rate in homeowners in the independent agency space.
Personal Lines net written premiums grew 11.6% in the quarter or 5% adjusted for last year's premium returns.
This strong result was driven by meaningful acceleration in new business.
We also reestablished momentum in our renewal premiums as a result of lower rate increases in certain areas and improve retention.
The strength of our data and analytics team and swift communication of market trends across our businesses positions us to opportunistically grow when market conditions allow and make well-informed adjustments when necessary.
We are pleased to see Personal Lines largely rebound to its pre-COVID-19 growth levels.
We have full confidence in Personal Lines strong growth and profitability prospects.
Moving to investment performance.
Our net investment income was $75.6 million for the quarter, up $17.9 million or 31% from the prior year period.
This is largely due to an unusual fluctuation in partnership income from period to period.
Net investment income in the second quarter of 2020 was adversely affected by a $4.6 million loss on limited partnerships, while partnership income in the second quarter of 2021 was $16 million, exceeding our expectations by $9 million.
Our partnership results through the first half of 2021 do not change our outlook for investment partnerships or overall net investment income for the balance of the year.
New money yields continue to put pressure on our overall net investment income.
Although so far, we've been able to meaningfully offset it with robust cash flows from operations.
We expect cash generation from our underwriting operations to remain strong.
Cash and invested assets at the end of the second quarter were $9.1 billion, with fixed income securities and cash representing 85% of the total.
Our fixed maturity investment portfolio has a duration of five years and is 96% investment grade.
We have a high-quality portfolio with a weighted average of A plus.
Net unrealized gains on the fixed maturity portfolio at the end of the second quarter 2021 were $357.8 million before taxes.
Moving on to our equity and capital position.
Our book value per share of $88.23 reflects an increase of 4.8% in the quarter.
We continue to be thoughtful stewards of our shareholders' capital and deliver on our capital allocation strategy.
Through July 26, 2021, we repurchased approximately $10 million of stock, leaving about $395 million of capacity under our stock repurchase authorization that the Board expanded in May.
In addition, during the quarter, we paid a regular cash dividend of approximately $25 million.
Our capital priorities remain unchanged.
First, we strive to maintain our strong capitalization and liquidity; second, we continue to prioritize organic growth for which we generate plenty of capital; and third, we continue to maintain our policy of returning excess capital to shareholders through cash dividends and share repurchases.
We will continue to remain nimble and actively manage our capital with the best interest of shareholders in mind.
Looking ahead, we now expect net written premium growth in the mid- to high single digits in the second half of the year.
Based on our strong results in the first half of the year, we believe upper mid-single-digit growth for the full year is possible.
With two quarters of better-than-expected ex-CAT combined ratio performance, we are improving our full year 2021 ex-CAT combined ratio outlook from 90% to 91% to 89% to 90%.
As noted earlier, we remain on track to reduce our expense ratio by at least 30 basis points in 2021 to 31.3% and we expect our third quarter cat load to be 5.2%.
We are very pleased with our underlying performance and our ability to continue our positive momentum in the quarter.
We are well positioned to sustain our robust growth momentum and top quartile profitability, delivering value to our agents, customers and shareholders.
In addition, we are pleased to announce that we will be hosting a Virtual Investor Day on September 23, in which we will discuss the key aspects of our differentiated strategy, go-forward growth drivers and long-range financial targets.
We will be providing additional details in the coming weeks and look forward to seeing you there.

user
compname reports second quarter net income and operating income of $3.52 and $2.85 per diluted share, respectively.
combined ratio of 94.4%.
q2 operating earnings per share $2.85.
q2 earnings per share $3.52.

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