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Text: Today's discussion will also reference certain non-GAAP financial measures, such as operating income and accident year loss and combined ratios, excluding catastrophes among others.
It seems like only yesterday we spoke to you at our Investor Day.
We enjoyed the opportunity to update you on our businesses and share our vision for the future.
I'll begin today's earnings call by discussing our third quarter financial highlights in the context of the current business and economic environment.
I'll then provide a strategic review of each of our business segments.
Overall, we are pleased with our financial performance for the quarter, especially in light of the severe weather and inflationary pressures that are broadly affecting the industry.
We posted net written premium growth of 8.4% and a combined ratio excluding catastrophes in line with our original expectations for this quarter.
Our performance on both metrics underscores our ability to capitalize on market opportunities, while prudently managing the complexities of the current environment.
In particular, I want to call your attention to three highlights for the quarter.
First, our continuing growth momentum.
Second, our overall business diversification, which was emphasized with some unevenness in our segment results in the quarter.
And third, the effectiveness of the steps we are taking to position our company to manage the effects of changing weather patterns.
Our net written premium growth again exceeded our expectations with strong contributions across all segments.
Year-to-date through September, our growth rate of 8.4% was equally robust, driven by successful execution of our differentiated business strategy and disciplined capital allocation.
Our balanced approach to personal lines pricing has proven to be quite effective and critical as loss trends continue to evolve.
At the same time, the overall Commercial Lines environment, including rate and exposure remains strong, fueling our robust premium momentum.
During our recent Investor Day, we highlighted the growth levers that have and will continue to enable us to build competitive advantage in this dynamic market.
Specialized capabilities, a unique distribution approach and an extraordinarily talented team are among the many reasons why we are becoming a premier P&C franchise for the nation's top independent agents.
And we continue to lean into our mission every day.
Our distinctive strategy and our high-quality book of business inspire confidence in our ability to achieve our guidance of high single-digit growth for the full year.
Overall, ex-CAT loss activity was in line with our expectations with many moving parts, which Jeff will review in more detail shortly.
From a macro perspective, there is no doubt that the environment is changing rapidly.
The third quarter reflected that movement for us and the industry.
Our Personal Auto and some other lines continue to benefit from lower loss frequency in the current uncertain environment.
At the same time, inflation, labor shortages, rising cost of materials and supply chain bottlenecks are adversely affecting certain lines albeit to different degrees.
As I noted during our Investor Day, in my more than 3.5 decades in this business, industry trends have never been as dynamic as they are today.
But as our results have demonstrated over time, our diversified book of business and broad-based profitability have enabled us to maintain a well-balanced portfolio and consistently deliver strong overall performance.
This result speaks directly to the quality of our underwriting integrated capabilities and the analytical tools we leverage to effectively manage the fluctuations inherent in our industry and we believe we will continue to win in this dynamic environment that presents both challenges and opportunities.
The third quarter marked an especially active catastrophe season across the industry.
At $153.5 million, our third quarter losses were in line with the preliminary estimate we shared with you in our September 22, pre-release.
Hurricane Ida represented approximately $75 million of the total with the balance comprised of rain, flood and tornado events.
We are looking carefully at the increase in the frequency and severity of weather events including non-modeled storms.
The changing weather patterns are an issue we and others in the industry will likely contend with going forward.
We have been monitoring and addressing this issue for several years using all the levers available to us, including exposure management, reinsurance and improvements in data and analytics.
Our continued focus on exposure management has proven effective across our portfolio.
As you'll recall, we have withdrawn from the Personal Lines market entirely in Florida and have carefully managed our exposures in other Gulf states.
We have benefited from this strategy in the wake of Hurricane Ida, when we sustained lower cat losses proportional to the industry in general in the South.
We also restricted our capital allocation in wildfire exposed regions in the West and coastal exposures in the East.
And we continue to emphasize growth in casualty lines to ensure good balance and enable continued property capacity in our most profitable territories.
Additionally, we bought a substantial amount of catastrophe and property per risk reinsurance with broad terms.
Finally, we have augmented our cat management and aggregation tools including PML underwriting, dynamic cat pricing, single property cat load and micro concentration models.
While these actions have served us well in the past and continue to do so, we believe pricing still requires additional focus.
Given the volatility the industry is seeing on cat and non-cat basis, we expect commercial property rates to remain firm going forward and even move higher.
We also expect industry participants to coalesce and partner more with the government to protect our customers through better infrastructure, stronger building codes and expanded risk-sharing pools among other things.
Overall, our past and current actions combined with our commitment to sustainability position us to effectively navigate the ongoing effects of changing weather.
I will now turn to a review of our business, beginning with Personal Lines, which generated net written premium growth of 8% in the quarter.
Policies in force continued on an upward trajectory with all lines contributing to the growth.
Broad interest in our offerings combined with our measured and less reactive pricing strategy continues to drive increased retention and spur new business growth.
At 88.7%, our retention places us in the top quartile in the industry, supported by our account strategy and focus on being a market leader for customers with sophisticated insurance needs.
New agency partner appointments are on track and continue to supply a robust flow of new business as they work to achieve relevance with us.
In addition, we are also seeing a new business lift from continuing market and book consolidations among our strongest and most established agents.
I also would mention that we are continuing to see terrific momentum with Hanover Prestige, our popular full account offering.
This solution has found a sweet spot between commodity players and high net worth carriers for customers in the $750,000 to $3 million homeowners coverage range with broader and more complex insurance needs, providing us a substantial competitive advantage and future growth opportunities.
Overall, we are successfully navigating the dynamic Personal Lines market environment, while striking the right balance between growth and profitability.
Our Personal Lines results are tracking in line with our expectations for the quarter.
That said, we are actively watching frequency and severity trends particularly given the industrywide increase in severity in 2021.
The loss frequency benefit in the third quarter was greater than we had originally anticipated at the start of the year, and is helping to counteract the increase in auto severity.
The pricing environment remains competitive, although, we are observing signs of auto rates increasing across the industry with a significant uptick in competitor rate filings.
We are carefully reviewing our pricing selections along with the competitive environment and have made necessary adjustments.
Turning to Commercial Lines.
Strong growth of 8.7% in the quarter was driven by positive exposure activity, rate increases, strong renewals in core Commercial Lines and continued momentum in specialty.
Exposures continue to meaningfully contribute to our premium increases, as businesses grew in a more favorable economic environment.
We are maintaining our strong agency position and continuing to capitalize on book consolidation opportunities.
The pricing environment continues to be robust in our markets within both core commercial and specialty.
We achieved core commercial rate increases of 6.9% in the third quarter consistent with the second quarter dynamics.
Specialty rate remained strong with robust pricing trends in most lines particularly in property including HSI and Marine.
We expect the firm market to continue, as the drivers of rate increases are not showing any signs of slowing down.
With such dynamic loss trends and a more uncertain risk environment than ever, marked by elevated weather, supply chain disruptions, materials inflation and a return of litigation trends and increased severity we will be seeking additional rate in many lines of business.
The rollout of our TAP Sales platform for small commercial is progressing very well.
We added 10 more states over the last three months, bringing the total number to 30, now covering the vast majority of our existing small commercial footprint.
As the deployment of this platform continues, it is supporting our transactional and new business flow, as well as providing additional growth and agency penetration opportunities.
In middle market, we continue to focus on pricing segmentation and mix management, emphasizing growth in our target states, product lines and industry classes.
Over time, we see significant opportunity to further penetrate this segment and enhance our agency partnerships.
However, we remain somewhat cautious in the near term particularly until loss trends become a bit more predictable.
Specialty continues to be a strong source of revenue expansion with underlying growth holding at near double digits for our most profitable businesses and continuing robust rate of 8% in the quarter.
We continue to make strides in E&S and professional and executive lines, as we advance our digital capabilities and market our broad capabilities more holistically.
Book consolidations with many of our best agents continue to build and supplement our new business flow.
We are also excited to further drive our total Hanover strategy by expanding our distinctive Specialty offerings across more and more of our core commercial customers.
Earlier this month, several members of our leadership team joined other industry leaders at the Council of Insurance Agents & Brokers' Leadership Forum, a gathering of many of the largest and most successful agents in our business.
We conducted over 40 executive meetings both in-person and virtually talking with many of the top 100 agents around the country.
These conversations allowed us to review our current and planned capabilities and discuss how we can help them more effectively serve their customers and expand their businesses.
We came away from these meetings extremely encouraged about our prospects and with several key takeaways.
First Agency M&A is continuing at a rapid pace with new consolidators emerging and presenting new opportunities for small and midsized agents to join forces.
Second, Agency M&A trends combined with labor shortages are driving more agents to further explore various tech solutions and engage with carriers that have invested in state-of-the-art platforms and capabilities seeking to drive operating efficiencies and enhance EBITDA margins.
Our commitment to innovate alongside and for the benefit of our agents and their customers is making our value proposition even more attractive as evidenced by the success of our Agency Insights engagement and market consolidation efforts.
Third, differentiated Personal Lines and Small Commercial offerings continue to be in high demand among the best agents in the country as they acquire midsize and smaller agents, who have considerable amounts of this business.
Agents are getting very serious about consolidating their flow of business with the right carriers to drive additional operational efficiencies and better serve their customers.
The combination of our Agency Insight work and our TAP Sales offering presents an unmatched competitive advantage.
Fourth, many agents continue to develop areas of specialization particularly among vertical industry segments and are deliberately pursuing growth in these areas very often including healthcare, manufacturing, human services, tech and life sciences among others areas where we are especially strong.
Our industry specialization and our admitted and non-admitted product capabilities garnered substantial interest during these strategic conversations.
Ultimately, we came away from the conference with even greater conviction that our strategy is further resonating and we are well positioned going forward to drive strong, sustained and profitable growth and to deliver outstanding value for our shareholders and other stakeholders.
We are delighted by the continued growth momentum and strong underlying results we have generated year-to-date.
Our differentiated agency and customer-centric strategy combined with our specialized capabilities are key to our continued success.
Supported by our strong team and unique culture, I have immense confidence in our ability to monitor and adapt to changing market dynamics and capitalize on emerging opportunities for profitable growth.
In the third quarter we reported net income of $34 million or $0.94 per fully diluted share compared with net income of $118.9 million or $3.13 per fully diluted share in the same period last year.
After-tax operating income was $30.8 million or $0.85 per diluted share compared with $93.5 million or $2.46 per diluted share in the prior year third quarter.
Before I review our quarterly performance in more detail, I would like to note that similar to our second quarter 2021 analysis prior year quarterly comparisons reflect unprecedented distortions the pandemic created in our results and industry results last year.
Given the unusual nature of the third quarter of 2020, we believe our more recent growth trajectory and loss experience, as well as our original expectations for 2021 are better parameters by which to assess our performance.
We recorded an all-in combined ratio of 102.3% which included catastrophe losses from Hurricane Ida.
Third quarter catastrophe losses of $153.5 million before taxes which represented 12.9% of net earned premiums were at the lower end of the guidance we provided in our prerelease on September 22.
Ida added $75 million in losses to an already active cat season within our geographic footprint.
This hurricane caused significant and widespread damage in Louisiana, New Jersey, New York and Pennsylvania.
Together with our agent partners, we continue to help our customers and the affected communities recover from the storm.
Our performance particularly in Southern states speaks to our prudent catastrophe management philosophy and the proactive steps, we have taken over the past decade to diversify our geographic footprint and reduce our exposure in cat-prone regions.
And equally important it speaks to our use of sophisticated cat management and aggregation tools, data analytics and pricing to mitigate the effect of climate change on our business.
Our ex-CAT combined ratio is 89.4%, reflecting the strong underlying performance of our diversified business.
Turning to our reserves, we reported net favorable development of $20.9 million in the third quarter 2021, primarily due to continued favorability in Personal Auto and workers' compensation, in addition to some favorability in other commercial lines.
Personal Auto favorability of $10 million includes the benefit from revised fee schedules and loss control measures that came into effect in Michigan on July 1st, 2021, as part of the PIP insurance reform there.
Mindful of uncertainties surrounding inflation, court and medical delays and changing weather patterns, we continue to maintain and establish a prudent level of reserves.
And we remain committed to maintaining a strong balance sheet and our overall conservative reserving philosophy.
Looking at expenses, our expense ratio improved 0.7 points from the prior year third quarter to 31.1%, largely as expected.
Our expense ratio year-to-date stands at 31.3%, a 20 basis point improvement from the first nine months of 2020.
And we are confident in our ability to deliver on a 30 basis point improvement for the full year.
Now let's review our underlying performance by segment, beginning with Personal Lines.
We delivered a combined ratio excluding catastrophes of 87.7%, better than our original quarterly expectations driven by favorable development.
Our Personal Auto current accident year loss ratio was 68.9%, which is consistent with our plan and was contemplated in our guidance.
However, it rose 8.8 points relative to the third quarter of 2020, and was up 6.7 points sequentially.
Severity pressures coming from increased prices for auto parts, used cars and supply chain disruptions were well covered by industry press.
They certainly affect our book of business as well.
However, our book continued to benefit from lower frequency, albeit at a lesser degree than in the second quarter of 2021.
We believe the underlying causes for rising auto property loss costs are temporary, but they likely will persist over the next several quarters, putting continuing pressure on severity.
Looking ahead, we expect the long-term persistency of the frequency benefit in our book of business to offset some industrywide severity trends.
We also believe, that the higher cost of vehicles countrywide in combination with unwinding frequency benefits will drive industry insurance pricing up.
We are seeing signs of it already.
And believe the trend will continue for the near future.
With our balanced and prudent rate strategy throughout the pandemic and our granular pricing and competitiveness monitoring tools, we are successfully balancing our rate and growth to preserve pricing consistency and overall profitability of our book of business.
Our Personal Lines strategy during the pandemic has been to focus on long-term value creation.
The unusual frequency benefits served to reduce the loss ratio, but also created a more competitive pricing environment.
We reacted by adjusting our pricing later in 2020 to protect our renewal book.
And to obtain new business that we believe will create long-term value.
By temporarily moving pricing below long-term loss trend, we allowed the temporary frequency benefit, to fund profitable business growth.
Our renewal rate always remained positive.
And the current Personal Lines rate of 2.1% in the third quarter is the low watermark in our rate trajectory.
We knew that later in 2021 as frequency benefit waned, margins would reduce on some of this business.
We anticipated this in our plans.
As it turned out, some of the frequency benefit persisted, but was offset with the severity increase we are seeing now.
We are confident, that the business we are writing and the rate we will be getting will set us up for substantial value creation, even if the Personal Lines auto margins are reduced a bit for the next year or so.
Fortunately, we have a very, diversified book of business which will show itself in the potential margin expansion of the Commercial Lines businesses.
More on that shortly, our profits are broad-based with nearly all segments, delivering target long-term profitability and we have full confidence in our continuing trajectory including 2022.
Homeowners current accident year loss ratio excluding cats was 51.9%, up 3.7 points from the prior year period, which was reduced last year during COVID.
This quarter's loss ratio was in line with most recent trends.
Our homeowners rate including exposure is approximately 6% in the third quarter and it is moving to approximately 8% starting in 2022.
Inflationary pressures in this line combined with active weather continued to support the need and ability to achieve additional rate, which is substantially within our control.
Premium growth of 8% in personal lines was driven by robust new business activity and increased retention.
Policies in force continued on an upward trajectory with all lines contributing to the growth.
Turning to Commercial Lines, we reported a combined ratio excluding catastrophes of 90.5%, a decrease of 1.3 points from the prior year period helped by an improved expense ratio from growth and higher favorable development.
Our current accident year loss ratio excluding catastrophes was relatively stable only slightly elevated.
An increase in large property loss activity in CMP was nearly offset by improvements in other commercial lines and to a lesser degree workers' compensation.
Our CMP current accident year loss ratio ex-CAT was 64.2%, an increase from the third quarter of last year and above our expectations.
And while there is always an element of randomness in large property losses, our team completes a thorough review of each loss during, which policies were determined to be generally consistent with our underwriting guidelines.
Our loss experience primarily fire and water damage was spread across several industries and geographies with no obvious patterns.
We are seeing some potential correlation in the losses to the unevenness of the economic recovery post COVID.
Some clients are having tremendous success in record sales and in turn are likely straining their facilities and equipment to keep up with demand.
As such there was a need for additional rate in property in response to materials cost inflation weather pattern changes and some labor disruption issues.
Our CMP property rate is in the high single digits and we are consistently achieving double-digit rate increases in our specialty property coverages.
We expect to take additional rate going forward and we believe the market will support it.
In Commercial Auto, the ex-cat loss ratio was generally in line with the third quarter of 2020 at 65%.
Consistent with our experience in personal lines, we are observing an increase in property severity, offset by some lingering frequency benefits.
We are taking rate increases to address that evolving dynamic and continue addressing the industrywide multiyear liability issues affecting this line.
Our workers' comp ex-cat loss ratio improved 4.2 points to 57%, primarily due to positive audit premium adjustments for prior period policies.
Our underlying loss picks remain in line with prior quarters.
Workers' compensation frequency is now level with our pre-COVID experience and we are watching for the unskilled or not fully trained labor phenomenon in this line.
While we are confident that our favorable portfolio mix toward smaller accounts and skilled professional industries will continue to deliver favorable workers' comp results, we remain cautious in our reserving approach given the still anemic rate environment and further risks posed by offices and facilities reopening for more businesses.
In other Commercial Lines, the ex-cat loss ratio improved 2.4 points from Q3 2020 to 51.7%, which was also better than our expectations driven entirely by Marine and HSI, which both experienced lower than expected losses in the quarter.
Our Commercial Lines segment generated premium growth of 8.7% in the quarter with solid contributions from both core and specialty.
Core commercial is benefiting from strong retention and exposure as the economy strengthens.
Professional lines, as well as excess and surplus fueled the growth momentum in Specialty, which overall achieved rate increases of 8% in the quarter.
We remain focused on driving growth in our most profitable Core Commercial and Specialty segments.
And rounding out our total Hanover value proposition, through which we offer our highly specialized capabilities to our Core Commercial Lines clients.
Q3 was a strong quarter from an investment income perspective, as we delivered net investment income of $78.8 million up nearly 17% from the prior year quarter, on higher investment partnership income.
Partnership income continued to contribute significantly to our investment income, adding approximately $19 million to our pre-tax income instead of an expected $7 million based on the strong equity returns and some meaningful underlying investment monetization.
Fixed maturities earned yields, continue to slowly drift lower, now standing at 2.96%, due to lower new money yields.
We do expect continuing strong cash flows to offset pressure from lower new money yields in the future.
Cash and invested assets were $9.3 billion at the end of the third quarter, with fixed income securities and cash representing 85% of the total.
Our fixed maturity investment portfolio has duration of five years and is 96% investment grade.
Our well-laddered and diversified portfolio remains high quality with a weighted average rating of A+.
Turning now to our equity and capital position, our book value per share of 87.04 reflects a decline of 1.3% from the second quarter, due to the impact of rising interest rates on our fixed income portfolio and quarterly dividends.
We remain focused on our capital management priorities and committed to being strong stewards of our investors' capital.
For the third quarter and through October 27, we repurchased approximately $34 million of stock, slowing down the pace of repurchases a bit during the cat season.
In addition we paid a regular cash dividend of approximately $25 million during the quarter.
Our priority is to maintain strong capitalization and adequate liquidity and to use internally generated capital to support profitable growth, which remains the most accretive use of our capital.
Reflecting the higher catastrophe losses during the quarter, our return on equity was 4.3% well below our historical trends and our long-term target.
Our annualized year-to-date ROE was 9.3%.
However, if we were to normalize the ROE for cats in the quarter and the year-to-date periods, such returns would be at or above our long-term targets.
We remain confident in our ability to deliver top quartile performance over the long-term.
Turning to guidance and incorporating our third quarter results, we now expect to deliver high single-digit growth for the full year 2021.
Additionally, with three quarters of the year now in the books, we believe that we will end the year at the bottom of our 89% to 90%, ex-CAT combined ratio guidance.
This guidance includes a typical seasonal increase in the auto loss ratios and a decline in the home loss ratios, in addition to continuing inflationary trends, we will likely see during the quarter.
We're also on target to reduce our expense ratio by at least 30 basis points, in 2021 to 31.3%.
And we expect our fourth quarter cat load to be 3.9%.
We have a well-diversified and profitable set of businesses.
Our portfolio provides ample opportunities for us to make investments in the future value of our businesses.
The strong growth in Commercial Lines and the meaningful rate in excess of loss trend for both, Specialty and Core Commercial should be very helpful as we go forward.
We executed well in Q3 despite an exceptionally active cat season and industrywide inflationary pressures.
We are well positioned to sustain our profitable growth momentum and long-term top quartile profitability.
We begin the final quarter of the year in great financial shape.
And we are excited about the opportunities ahead.

user
compname reports q3 earnings per share of $0.94.
compname reports third quarter net income and operating income of $0.94 and $0.85 per diluted share, respectively.
combined ratio of 102.3%; combined ratio, excluding catastrophes, of 89.4%.
q3 operating earnings per share $0.85.
q3 earnings per share $0.94.
qtrly net investment income of $78.8 million, up 16.6% from the prior-year quarter.

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