The Hanover Insurance Group, Inc. (NYSE:THG) Q3 2024 Earnings Call Transcript

The Hanover Insurance Group, Inc. (NYSE:THG) Q3 2024 Earnings Call Transcript October 31, 2024

Operator: Good day, and welcome to The Hanover Insurance Group’s Third Quarter Earnings Conference Call. My name is Sanjay, and I’ll be your operator for today’s call. At this time, all participants are in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Oksana Lukasheva. Please go ahead.

Oksana Lukasheva: Thank you, operator. Good morning and thank you for joining us for our quarterly conference call. We will begin today’s call with prepared remarks from Jack Roche, our President and Chief Executive Officer; and Jeff Farber, our Chief Financial Officer. Available to answer your questions after our prepared remarks are Dick Lavey, President of Agency Markets and Bryan Salvatore, President of Specialty Lines. Before I turn the call over to Jack, let me note that our earnings press release, financial supplement and a complete slide presentation for today’s call are available in the Investors section of our website at www.hanover.com. After the presentation, we will answer questions in the Q&A session. Our prepared remarks and responses to your questions today, other than statements of historical fact, include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995.

These statements can relate to, among other things, our outlook and guidance for 2024 economic conditions and related effects, including economic and social inflation, potential recessionary impact as well as other risks and uncertainties such as severe weather, catastrophes that could affect the company’s performance and/or cause actual results to differ materially from those anticipated. We caution you with respect to reliance on forward-looking statements, and in this respect, refer you to the forward-looking statements section in our press release, the presentation deck and our filings with the SEC. 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.

A reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis can be found in the press release, the slide presentation or the financial supplement, which are posted on our website, as I mentioned earlier. With those comments, I will turn the call over to Jack.

Jack Roche: Thank you, Oksana. Good morning everyone, and thank you for joining us. We delivered exceptional results in the third quarter, driven by outstanding execution across our organization. The significant profitability improvements we delivered in the third quarter of the direct result of the strategic initiatives we have been discussing with you for the past 18-months, including enhanced pricing, significant insurance to value adjustments, terms and condition changes, and targeted underwriting actions. Before we get into the details of the quarter, I want to acknowledge the people and communities affected by the recent hurricanes in Florida, the Southeast and Mid-Atlantic. Hurricane Celine and Milton cause tragic loss of life and tremendous disruption.

While only a small portion of our business is written in those regions, we are committed to providing our insured with much needed assistance and claims support. Our experienced and committed team is working around the clock to ensure that claims are processed as quickly and efficiently as possible. Now turning to our results. We generated operating income of $3.5 per diluted share, yielding an operating return on equity of 14.4%. Our ex-cat combined ratio improved by 2.4 points compared to last year’s quarter, further validating the impact of our margin recapture initiatives. We delivered substantial improvements in Personal Lines, outstanding underwriting results and specialty and strong performance in core commercial despite prudent loss selections resulting from industry liability trends.

As evidenced by the favorable prior-year development across all three of our major segments, our reserves remain healthy and we believe we are well positioned to navigate social inflation trends, and we continue to make notable advancements in our margin recapture and cat mitigation plans demonstrating our agility and resilience and enabling our strong and improving profitability trends. Next I’ll discuss our segment performance at a high level starting with Personal Lines. We’re very pleased with the progress we’re making in this business on both the top and bottom lines. Excluding catastrophe losses we made significant year-over-year improvements in both Auto and Home, as a result of underwriting actions we have taken and the benefits of price increases.

Auto is now at target returns on both are written and earned rate basis. Home is that target on a written basis. Our Personal Lines team generated premium growth of 6.8% in the quarter, driven entirely by pricing with policies in force still declining year-over-year and sequentially as expected. The decline in policies in force reflects our continued efforts to carefully balance our geographic exposures in certain areas of the Midwest. Pricing continues to be very robust in personal lines. Despite tip reductions we generated net written premium growth of approximately 3.5% in Midwest states and over 10% in the rest of our Personal Lines footprint. As we continue to see rapidly improving margins, we are focused on accelerating growth in states with attractive profitability and geographic profiles.

We expect this trend to continue in the fourth quarter as we gradually lean into more states for new business growth. At the same time we are continuing to mitigate our overall catastrophe risk exposures with more than half of our Personal Lines portfolio now under new or enhanced deductibles. The benefit of these actions has been evident in the wake of some of the convective storms in the Midwest this year. Our higher deductibles not only have improved cost sharing on claims, but these terms and conditions have the additional benefit of encouraging policy holders to be more discriminating on full roof replacements, when storm damage is more cosmetic and helping Counteract, aggressive roofing company marketing tactics. Also we continue to broaden our account product capabilities and Personal Lines adding collector car protection via a partnership with a leading classic car franchise.

This will be critical for meeting the evolving needs of our customers as we maintain our competitive edge in the market. Turning to core commercial, our solid financial performance underscores our prudent growth strategy and small commercial and effective margin improvement actions in middle market. We are positioning our core commercial portfolio to be even more resilient, while thoughtfully capitalizing on attractive growth opportunities. We are very pleased with our ongoing execution and excited about the prospects of reaching our full potential in this business. As we have guided middle market premiums were lower in the third quarter as we finished up the journey on profitability improvement in property and proceed cautiously with the liability lines.

At the same time, we retain the business we desire to keep and gaining momentum with new business. We are confident we will generate growth in middle market starting in the fourth quarter and expect to see steady improvement moving ahead. In our small commercial business, we leveraged our solid market position in attractive product portfolio in the quarter delivering growth of approximately 6%. We have every reason to be optimistic about our small commercial prospects. Our meaningfully increased submissions and new business growth reflect the effectiveness of our TAP Sales platform as well as the investments we’ve made in expanding our sales force and distribution reach. We are particularly excited about the integration of workers’ compensation in TAP Sales next year which we believe will further enhance our opportunities.

Our small commercial team is dedicated to competing and excelling in the marketplace every day, as we continue to set ourselves apart with our underwriting expertise, advanced capabilities, digital tools and strong product offerings. At the same time, we are intensely focused on profitability, especially given the industry environment relative to social inflation and litigation of use. We are pleased with the continued increase in average price changes in core commercial lines this quarter, led by liability pricing. Since 2016, we’ve been monitoring our loss trends and refining our underwriting appetite accordingly. Since that time, we have reduced exposure in high-risk areas such as industry sectors that are more prone to slip and fall and premises liability losses, particularly in major urban centers.

Years ago we discontinued standalone umbrella and focus on maintaining low liability limits in auto policies. As a result, our growth in liability lines to-date has been more measured compared to the industry. This foresight has equipped us to navigate today’s market challenges effectively. We believe our portfolio is down more resilient than most, thanks to our business mix limits profile in the industries and geographies covered, which is evident in our third quarter results. Our commitment to underwriting excellence and disciplined positions us well for the future. Moving on our specialty business continued to achieve exceptional bottom line results in the third quarter and year-to-date delivering sustainable profitability and consistently robust margins.

We’ve accelerated our investments in this area adding skilled talent and innovative technology to excel in an increasingly digital insurance market. E&S for example, we have introduced a new policy Quote & Issue platform to enhance underwriting, response times, and operating efficiencies. In marine, we have enhanced and further strengthen our team, and are deploying new technology and processes to improve ease of use. Insurity, we are investing in additional field talent and ensuring strong market visibility to stay connected with our customers and agents and to seize new business opportunities. Although, specialty growth moderated to 3.4% in the quarter, we are very confident in our ability to rebound a strong growth. We continued to develop upper single or double digit growth in our most profitable lines, including E&S, surety and management liability.

At the same time, our prior and ongoing profitability improvement initiatives in specific segments, particularly programs have led to higher than expense effected premium attrition in the quarter and have impacted our overall specialty top line performance. Excluding the programs business, specialty grew 5.4% in the quarter, and 7.4% year-to-date. And we expect high single-digit growth in the fourth quarter and subsequent quarters. We believe the specialty market remains robust and full of attractive opportunities in our targeted growth areas. We are enthusiastic about maintaining and enhancing significant growth in the E&S sector, facilitated by our new platform. In marine, we are growing new business, while expanding our portfolio, both geographically and across various business classes, reinforcing our position as a top tier go to carrier.

We continue to show steady growth in surety, while maintaining underwriting discipline in the current market. Conversely, in markets where we witness increased competition particularly in sub-sectors of the professional lines market, we exercise the required prudence. Our business is comparatively position to numerous attractive growth opportunities. We see a wealth of new business prospects and have great confidence in the investments we are making and specialty, as well as in its growth trajectory. Overall, our third quarter results are built on our solid momentum from the first half of the year, providing strong evidence of our ability to navigate a dynamic market environment, the effectiveness of our team’s efforts and still profound confidence in our future as we continue to drive growth alongside healthy profitability.

We are determined to continue to provide innovative high-quality insurance solutions for our partners and customers, to generate strong sustainable profitable growth and to deliver strong results in a market environment that demands diligence and expertise qualities we possess in abundance. Our execution to date in my covenants in our team reinforces my unwavering conviction in the Hanover’s future trajectory. With that, I’ll turn the call over to Jeff.

Jeff Farber: Thank you, Jack, and good morning, everyone. I’m very pleased with our performance which has gained significant momentum in recent quarters. In the third quarter, we’ve seen notable improvements in personal lines and sustained strong margins in both our core Commercial and Specialty segments. These achievements are the result of our disciplined underwriting prudent pricing, and strong execution. For the third quarter, are all in combined ratio was 95.5% which included 7.2 points of catastrophe losses. The Hanover has strategically limited exposure in Florida. The Carolinas opting not to over participate in the Gulf Coast wind markets. Catastrophe losses from Hurricane Helene were approximately EUR40 million primarily impacting personal lines in Georgia and core commercial in the Carolinas.

Losses in the quarter also included a lesser impact from Hurricane barrel along with a few weather events in the Midwest and Southeast. These losses were partially offset by 0.7 points of favorable development from prior year catastrophes. Due to our low exposure to Florida wind including not writing personal lines in Florida at all, we expect losses from Hurricane Milton in October to be minimal. Excluding catastrophes, our third quarter combined ratio was 88.3%, the best in several years and an improvement of 2.4 points over the prior year quarter. Year to date our ex-cat combined ratio stands at 88.7%, one of our best performances as well and surpassing our original guidance range for the year of 90% to 91%. Prior year development in the quarter was favorable by 0.9 points, highlighted by widespread favorability in property lines.

While our liability loss experience and trends are largely within expectations, we continue to exercise prudence in our loss picks to guard against volatility in what remains an uncertain loss trend environment. Looking at favorability in more detail, specialty was favorable by 3.1 points. The segment benefited from lower than anticipated losses in our professional and executive claims made policies and favorable results in surety. Core Commercial favorable development of 0.7 points was spread among multiple lines with favorability in each major line. Core commercial umbrella is experiencing some pressure but it remains well within manageable levels. Consequently, we have increased pricing in the third quarter from Q2 and we plan additional increases in the coming months.

Personal Lines development was immaterial in the quarter overall, with some continuing elevated trend in umbrella. Accordingly, we are filing rates to achieve pricing in the 20% range for next year. Our consolidated expense ratio of 31% was 0.8 points higher than the same quarter last year. This increase is due to higher agency and employee compensation this quarter, especially when compared to the lower level of variable compensation in the third quarter of last year. Additionally, the expense ratio increase reflects ongoing investments in talent and technology, particularly in our specialty segment. We are confident in the investment choices we made and we remain committed to our long-term goal of improving the expense ratio by 20 basis points per a year.

When we look at bigger picture, our combined ratio is coming in well below our original expectations. Now turning to our segment results starting with Personal Lines. This business posted another quarter of meaningful improvement reporting an ex-cat combined ratio of 89.2%, down by 7.2 points from the prior year quarter driven by the loss ratio. Personal lines. Auto continues to see an exceptional rebound in profitability delivering a current accident year loss ratio excluding catastrophes of 69.8%, an improvement of 7.7 points from the prior year quarter. The comparison was somewhat impacted by higher loss picks in the third quarter last year which developed favorably in Q4. The majority of the improvement however is the result of earning in very substantial price increases and to a lesser extent lower than expected auto collision loss experience, collision severity has normalized which should drive further margin improvement.

Additionally, we continue to experience lower than expected frequency of losses, which might be attributable to multiple factors like the impact of crash prevention technology in cars and changing customer behavior, including being more discerning on whether to file small claims. Although bodily injury frequency remains well below pre-COVID levels, severity continues to be elevated due to riskier driving behaviors and distracted driving resulting in a higher proportion of deadly crashes involving pedestrians, bicycles and motor side cycles. While we are not attributing personal auto BI severity to social inflation, we continue to vigilantly monitor these trends. Turning to the home and other components of our Personal Lines segment. Our ex-cat current accident year loss ratio of 55.7%, improved by 7.3 points from the prior year quarter, primarily driven by the benefit of rate and underwriting actions.

This is a trend we expect to continue. New lower attritional and large loss frequency is helping our Personal Lines property results. We anticipate our home and other line will reach target returns on an earned basis by mid-2025. Personal Lines top line growth was 6.8% in the quarter, showing nice sequential acceleration, driven by strong pricing and improving retention across many states. Pricing is expected to further moderate, but remained healthy exiting 2020. As a result, we remain on track to return to target profitable EBIT on an earned basis next year in Personal Lines overall. Moving on to Core Commercial Lines, we delivered a combined ratio excluding catastrophes of 91.1%, up 1 point from the prior year quarter. Core Commercial current accident year loss ratio excluding catastrophes was 58.2%, relatively in line with expectations, but 1.9 points above the prior year quarter, which reflected lower than expected property large losses.

Property margins remain favorable in each line. At the same time, we are setting our liability current accident year loss picks higher to effectively position ourselves for increases in loss trends. This resulted in an increase in the loss ratio in the commercial multi-peril line and in other Core Commercial. In terms of pricing we have increased umbrella pricing to 12.7%, while overall GL rates are up nearly 1 point year-over-year and continuing to move up directionally. We are picking our workers’ compensation loss ratio higher as well based on our normal long-term loss trend assumption and a relatively flat earned rate. At the same time, the commercial auto loss ratio is demonstrating improvement, driven by a similar collision frequency favorability we observed in Personal Lines.

Core Commercial top line growth slowed to 1.7% in the quarter, driven by premium reduction in middle market due to property actions and lower new business. In the Specialty segment, the combined ratio excluding catastrophes increased 1.3 points to 82.6% compared to the prior year period, driven by higher expenses as noted before. The Specialty current accident year loss ratio excluding catastrophes came in at 48% for the quarter on strong results across the business and favorable to our low 50s loss ratio expectation. Property large loss experience was again below expectations, especially in our Marine Hanover Specialty Industrial Property and E&S segments. We are monitoring select liability lines for inflationary indicators and maintaining a prudent approach in our current accident year loss selections.

Specialty’s net written premiums grew 3.4% in the quarter compared with 8.2% in the second quarter. But as Jack noted, we expect the pace of growth to snap back in the fourth quarter. Moving on to our investment performance. Third quarter net investment income increased 9% year-over-year to $91.8 million, propelled by higher earned yields on our fixed income portfolio, partially offset by lower partnership income. Income from limited partnerships was subdued in the quarter, driven by under-performance in a handful of private credit and real estate funds. Excluding partnerships, net investment income was up approximately 15% in the third quarter 2024 as compared to the year-ago quarter. We’ve also benefited from repositioning within our portfolio.

As in Q2, in the third quarter, we divested a portion of our lower-yielding fixed income securities in consideration of expiring tax carryback capacity from 2021. Against the backdrop of a shifting interest rate environment, relatively tight credit spreads and expectation of lower short-term rates going forward, we believe we are well positioned. Our 4.1 year duration should result in increasing net investment income going forward. In the current interest rate environment, we are still seeing about 150 basis point gap between new money and expiring yields. Looking at our equity and capital position, the combination of earnings and change in unrealized losses in the quarter drove book value per share up 12.6% from Q2 to 79.90. We continue to pursue a thoughtful capital allocation strategy.

We refrain from repurchasing shares during the winter season. Historically, we’ve consistently return capital to our investors through increasing regular dividend payments and strategic share buybacks when the timing was right. Our core approach hasn’t changed. We continue to see both dividends and share repurchases as key tools for managing capital allocation and to create further shareholder value. Moving on to an update on our guidance. With one quarter left in the year, we feel we are on track to beat our original ex-cat combined ratio guidance for the year, driven by better than expected improvements in the current accident year, ex-cat combined ratio as well as favorable development, which is helping to more than offset a slight miss on the expense ratio guidance.

We now expect our full year expense ratio to be at or near 30.9% compared to the 30.7% to which we guided. It is related to largely temporary items such as incentive compensation, which we expect to normalize in the following year. Accordingly, we are expecting to guide to a 30.5% expense ratio in 2025, which should realign us with our long-term expense ratio goals. Most importantly, we anticipate the 2024 ex-cat combined ratio to be below our goal guidance range of 90% to 91% that we established early in the year. On a consolidated basis, we expect net written premium growth in the fourth quarter to be greater than 6%. Given the minimal impact expected from hurricane Milton, our planned cat load guide for Q4 remains unchanged at 5.7%. To conclude, we are extremely pleased with our Q3 results and increasing earnings growth momentum.

Our performance reflects the successful implementation of key strategies we’ve been executing over the past two years. We will continue to focus on creating long-term growth and superior returns for our shareholders. We are optimistic about our ability to achieve our stated long-term return objectives over the next couple of years. With that, we’ll be happy to take your questions. Operator?

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Matt Carletti with Citizens JMP. Please go ahead.

Matt Carletti: Hey. Thanks. Good morning.

Jack Roche: Good morning.

Matt Carletti: I just had a couple of questions on the Personal Lines segment. Jack, you spoke about in a bit in your opening comments. I think I heard you say that both auto and home are kind of at target margin on a return basis. With that in mind, can you give us a little bit of an idea how you view kind of the progression of kind of returning to pay growth over the over the next several quarters or it feels like we’re at an inflection point? Maybe I’m getting that wrong.

Jack Roche: We definitely are moving forward with additional offense, and particularly in those states where we are well past our threshold of start hitting the target returns. So, I’ll let Jeff speak a little bit to that. But the way I would have you to continue that think about it Matt is we are excited about how quickly we’ve been able to get our margins back in line, and simultaneously enhance our diversification. So we’re going to continue that process of moving to more offense, particularly on new business because our retention ratios have come back nicely. And we’ve already started to do that in several states to try to move towards more offense, but continue to be diligent in the Midwest and in particular, Michigan, so that we get a good balance of production and profitability and accelerate our diversification. So Dick, maybe build on that.

Dick Lavey: Yes, I’ll just echo a couple of things Jack said, and I’ll give you some more specifics, but feel very good about the progress we’re making against this strategic objective we have of bringing PL portfolio back to target returns, while simultaneously improving our geographic diversification. So we’re well on the way towards this blueprint that we’ve created. As you’d expect, our 20 states, we segment them based on profitability and how they contribute to our CAT profile. So we already have a handful of states, where PIF has turned positive and where we feel the new business engine can be — has been turned on more aggressively. But as a full enterprise, when you look at all 20 states, you can expect PIF shrinkage to moderate into next quarter and then really throughout 2025 and see some very modest positive PIF growth by the end of the year or at the end of the year.

So just couldn’t be prouder of our team and their execution. I think it’s — I’d like to say it’s one of our superpowers that we have here at Hanover is just how we collaborate with our agent partners and get them on board with the action plans we have.

Matt Carletti: Great. That’s very helpful. And then one other, if I could, sticking with personal lines. I think we view kind of your kind of peak cat exposure, if you will, is SCS or spring weather, however you want to think about it. And you guys obviously have been undergoing not just rate, but maybe more of like the non-rate actions, the deductibles and things like that. And we saw some improvement kind of the second quarter versus 2023 second quarter, and we were kind of middle innings of those changes working through the portfolio. And it feels like we’ll be kind of at the end of the game or very close to it by this coming spring. Can you give us a kind of order of magnitude, if it’s possible, if x event were to happen, whether that’s spring — second quarter 2023, kind of when we get to the end, maybe that’s second quarter 2025, how that same event would look different once you get all those changes through the book?

Jack Roche: Yes, Matt, this is Jack again. Listen, we — you’re right in that by April of next year, we will have been through the renewal cycle of our deductible changes, which are particularly meaningful in the Midwest, where the severe convective storms have been most prevalent. So that is true. We will be at a dramatically improved place with our portfolio with the pricing that we’ve achieved, the full insurance to value enhancements that we’ve had, deductibles that not only include all peril deductibles at 2,500, but 1% and 1.5% wind deductibles, wind inhaled deductibles in that region. And then some PIF shrinkage that we manufactured during this period. So the combination of all those are going to be meaningful. But I know it will frustrate you modeling previous storms or thinking about it really doesn’t, I think, achieve the goal.

The way we try to look at it is we run our simulated models and we ask ourselves overall, how much benefit are we getting from that property aggregation management and the new pricing and terms and conditions. And I think the only fair thing we can say to you is it will be meaningful. It will be significant in any storms that come across us in 2025.

Matt Carletti: Fair enough. Thanks for the color. Appreciate it.

Jack Roche: Thank you, Matt.

Operator: Thank you. The next question comes from Mike Zaremski with BMO. Please go ahead.

Mike Zaremski: Hey, good morning. First question on some of the commentary about setting your liability picks higher. I believe that was in core commercial. How do we think about that, when we also hear your commentary about the underlying core commercial loss ratio being a bit worse, but you said, most of it was because last year was just — you had cited being exceptionally better than expected. So I think, I could probably do some math on your implied 4Q guide to. So I’m trying to get at are you how should we expect a bit of a higher underlying in order to embed conservatism on liability given the environment?

Jeff Farber: So Mike in the third quarter we had a loss ratio of 58.2 and 57.4 year-to-date. And those are both right on our expectations. And that compares to 56.3 for 2023 quarter and 55.7 for the sequential quarter. But those were both super low on unusually low large losses that we mention those in those quarters. The 1.9 points of higher loss ratio was 1.6 of it was due to the lower large losses in the year-ago quarter. So a relatively small amount was the loss picks for the for the liability trends. I think, overall, we believe 57 to 58 is the right level for 2024 that may improve a little bit next year because we’re getting 12 plus points of renewal price change versus overall core trend. But I think generally speaking we feel really good about our balance sheet about our loss picks.

And if you look back we see at page six of our earnings deck, you’ll see we provided an awful lot of information as to why we feel that will be relatively advantaged on liability loss trends biggest issue being the frequency benefit which is the bottom right corner that we’re seeing for lower frequency in a lot of the industries in which we participate which is dramatic.

Mike Zaremski: Interesting. I’m okay. Then maybe just — thanks for that. Sticking with them liability lines and commercial — not personal lines, you talk about any puts and takes on reserve releases mostly this so has been kind of adding a bit to some of their GL umbrella commercial auto line. The – we see the overall was ever done it again. But any puts and takes we should be thinking about?

Jack Roche: Nothing really major. As we said PL was minimal favorable, CL was 3.6 million with favorability in all four major lines. So you didn’t have a dramatic issue with workers’ comp covering up the other liability lines. There were all favorable as we have the frequency benefit in a variety of areas you’re helping us to overcome severity. And then specialty was our big contributor was about 10 million largely on the professional executive lines. And those are claims made shorter type tail policies.

Mike Zaremski: Got it. Okay. And since you point out 5 – 6 which is an interesting slide, thanks for adding that. I think you added that at KBW and updated here. So we can see that your mix points to last some a little less liability than others. You also show contractors frequency being up materially while frequency is down materially for from most other industry classes would you say that you are also underway contractors that are not there’s a way that even sites up but the industry looks like on contractors, but I’m — in as contractors a continued source of higher frequency only? Or is it anything severity to in any of these industry classes? Thanks.

Jack Roche: Thanks. Hello, Mike this is Jack. I’m going to let Dick comment on specifically profile in core commercial including contracting percentages. But I think you’re thinking about it, exactly right. We share the same severity as the industry. We’re seeing similar trends to a lot of other folks. But our book composition as well as the actions that we took in the last few years, I think, our advantaging us particularly on the frequency of severity and what that chart shows you that Dick and kind of a build upon is that though the non-contract and classes of business are predominantly showing the improvement based on the actions that we took. But the construction business continues, I think for two major reasons; a, the inventory of claims is pretty fulsome since most contractors work through the pandemic.

And because of the activity levels, the frequency is not coming down like we’re seeing in other sectors of the business. So that’s just a little color commentary. So we have been super thoughtful about how we built our construction portfolio over the years, today it represents a fairly modest portion of our core C&I portfolio really in the low teens percentage and been very thoughtful about state mix, which is really important when you’re talking about this industry, the legal environment, construction defect environments, and then also thinking about and tightly meaning the sub-sectors, the types of contractors that you’re right, which is equally important to state mix. So just have been very thoughtful about all of that, and then of course risk solutions and premium audit play a critical role in this segment and where we do both of those exceptionally well.

Jeff Farber: Mike, you probably noticed as others have that we have no the Year-axis or vertical axis on that chart, and wanted to share a little bit of information. So while Dick said, the contractors are relatively small think 10% to 15% of our portfolio relative to others in the industry that bigger portfolios, contractors frequency is up, single digits where some of the other industries would have frequency decline since 2019 through 2023 in the 20% to 30% range. So when you think about all that together in total we have a pretty substantial frequency decline.

Mike Zaremski: Got it. That’s helpful. And maybe I’ll just sneak one last one in on just the overall competitive environment. So there’s a number of companies have reported some of your peers and everyone has a little different mix and geographic mix as well. It looks like pricing has been sequentially accelerating a little bit, but there’s also some conflicting industry surveys that shelf pricing decelerating a little bit. And so just curious, what from a competitive environment would you say — is that what you — from what you’re saying — is the increase you’re seeing more on core commercial Hanover specific, or is the industry pushing through a little bit more rate and if they are, what’s driving that? Thanks.

Jeff Farber: Yeah, I think as you’re observing Mike this is — there is a bit of a sectoral view there in account size view. And I would tell you that in the small to lower middle market area of the business across the sectors that we play-in, we are seeing and a flattening of the property pricing, but as things are improving but an increase in the liability pricing, which is appropriate given the environment that we’re seeing. So I think when you get into the larger accounts there’s a lot more pressure and you’re reading about that. You’re seeing that, and I think Bryan can even speak to that within a within the specialty portfolio that we’re still generating double digit pricing overall. But within the nine businesses within specialty, we clearly have variances and differences that represent a competitive marketplace. Bryan, you want to say a few words on that?

Bryan Salvatore: Yeah, sure. So fewer points, some of our environment it is pretty competitive but the professional online marketplace. That said we have been getting very, very good rate in that business for a number of years, highly profitable, and so yeah we’re adjusting thoughtfully to be competitive in that space. In other areas, we’re continuing to see that the need for increased rate, accomplishing rate. I think about that in the E&S environment for example. So there was a real mix there and we balance that makes, we navigate that mix in our different marketplace.

Mike Zaremski: Thank you.

Operator: Thank you. The next question comes from Michael Phillips with Oppenheimer. Please go ahead.

Michael Phillips: Thanks. Good morning. I wanted to go back to on one of the earlier questions. Jeff, your answer on the core commercial, you said around 57, 58 about right maybe you could improve a bit in 2025 given the pricing levels are north of 12%. I guess and you talked about strong pricing of property and liability, but I’m wondering how much of that possible improvement of 2025 it could be one of the other property versus liability? And can you kind of parse that out?

Jeffrey Farber: So what’s happening is for the last couple of years property pricing has been stronger than liability. Core has been strong overall and the loss trend was heavier in property. Now we’re seeing the cost of materials, building, et cetera. Big into slowed a little bit. So the need for price around property and core will slow. And our view on liability pricing will increase and we’re an account writer. So we think about it in total across the portfolio. And we believe that we’re maintaining or increasing our profit along the way. Yes, I would remind you Mike that you study this that you know the companies such as ours that have really done a good job on insurance to value are really in the catbird seat in that we have that part of the pricing equation in a really good place and can start to have more nominal increases.

And that allows us to be competitive for the good businesses. Some of the competitors a lot of the regional companies that were told are still catching up and they have to catch up on insurance to value or their reinsurance on a challenges to get worse. So I think that puts us in a really good situation. That property is improving. Liability, we’re watching carefully but continuing to perform well. And I like the combination of that in a market that will continue to kind of figure out where exactly the loss trends are going in liability and how severe they are going to be for particularly for those that didn’t I didn’t do it. They need to do on the reserve side.

Michael Phillips: Okay. Thank you. If we look at the premium growth and growth commercial, the [indiscernible] down this quarter and I assume that’s because of your comments you said about middle market and kind of underwriting actions you take that. I want to make sure that the case. Then you said you expect kind of that to improve over the next few quarters. So that also sort of specific to what we see and CMP this quarter 1.8 maybe that could improve from here?

Jack Roche: Yes. This is that — yes that’s exactly right. There’s some little bit in there about some of the actions we’ve taken. And then on the new business side, it can be if — you can see lumpiness quarter to quarter on a line basis. But we expect as the prepared remarks earlier suggested that middle market will make its way back to that mid single digit kind of growth into next year.

Michael Phillips: Okay. And then just lastly maybe just more high level, a lot of your stuff that you’re talking about is strong and you’ve improved personal and you talked about how that’s going to our investors for homeowners next year and your core commercials along quite well. And just said it could improve even their 2025 lots of improvements. So hats off to that I guess as you as you put all that together and thank you and maybe a capital management and how do you put all that together and gets the time to look at some share repurchase for next year?

Jeff Farber: We’re very bullish on our opportunities for improvement particularly in personal lines NII and even cat for the reasons that we’ve talked about. We definitely are supportive of routine regular dividend growth and buybacks along the way, along with organic growth which will ramp up in the fourth quarter end in 2025. We haven’t bought stock back in a while, but we typically wait for the into wind season. I think we’re likely to be back to capital management sooner rather than later.

Michael Phillips: Okay great. Thank you, Jeff.

Jeff Farber: Thank you, Mike.

Operator: Thank you. The next question comes from Meyer Shields with KBW. Please go ahead.

Meyer Shields: Okay. When we look at the gap between pricing and rate in core commercial, I guess a little surprised to hear that gap and expand which means more exposure unit growth just because that would indicate for most insurance companies. Is there anything unique going on at Hanover that would drive that exposure unit growth?

Jeff Farber: Yes. Meyer, what we may be witnessing the exposure growth in the work comp side of things has been robust. And so that you see the distance with what exposure looks like versus what rate looks like. As you know, the rate in work comp is flat to down, depending on the state. The delta between rate and renewal price over the last five quarters, if you look at Page 7 of our earnings deck, has been pretty consistent over time, but we can certainly get back to you if there’s a deeper story there.

Meyer Shields: Yes. No, there’s small differences. I don’t know if they’re significant. That’s really what I was asking. Second, a couple of questions on auto. First, and I probably should know this, but you’ve talked about higher deductibles in personal lines. Is that actually — is that relevant to personal auto too? Or is that more on the home side?

Jeff Farber: I’m sorry — personal auto deductibles, for the most part, it’s nowhere near as improved, if you will, but we continue to inch up deductibles in PL auto.

Jack Roche: We do. Yes.

Jeff Farber: We’ve given ourselves a thorough review state by state and where we feel like it’s been modest. You have a lot of business that’s been on the books for a long time, and they might be sitting at a $500 deductible. So we’ve — and our agents are fully supportive of this. We work with them to, over time, inch those upwards to $1,000 and whatnot. But the bigger push has been on the home side.

Meyer Shields: Okay. Perfect. That’s helpful. And then finally, I know in the past, we always talked about new business penalty when growth ramps up. As — and this is again on the personal auto side. As pricing becomes more significant, is that as relevant to concern? Does a ramp-up in growth, all else equal, imply some loss ratio pressure in the near term?

Jeff Farber: We’re in an unusual time in the Personal Lines business where there was actually a period in certain states where our new business pricing was above our renewal levels. And that’s hard to do given the renewal pricing that we were pushing through. But as you know, we were trying to create some changes in our growth patterns by state. So we kept pushing pricing in our point-of-sale system until we got the results that we were looking for. So I would tell you, based on what we’re seeing today, we don’t — we are not anticipating a significant new business penalty anytime in the near future. The quality of the business that we’re writing in new business — I mean, in Personal Lines, because we narrowed the nozzle is the best it’s ever been, and it’s coming through at renewal pricing.

And so as we start to move forward and widen that nozzle a little bit, and get a little bit more competitive, I think it’s going to be commensurate with the loss trends and the improvements thereof. So I like our trajectory for the foreseeable future in Personal Lines.

Meyer Shields: Okay. Excellent. Thank you so much.

Jeff Farber: Thanks, Meyer.

Operator: Thank you. The next question is a follow-up from Mike Zaremski with BMO. Please go ahead.

Q – Mike Zaremski: Thanks. Real quick. I don’t think this is in the earnings release or the deck. I’m trying to — Jeff, I think you said the updated guidance for the year was ex cat combined ratio. I think you said below 90%, 91%, not the 90% to 91%. Just wanted to clarify that.

Jeff Farber: That’s correct. I think we are in the high 88s range year-to-date. So it would be very difficult to see deterioration. Fourth quarter is always a strong quarter for us, and we have no reason to believe not. So we haven’t updated guidance per se. But clearly, we expect to be below the 90% to 91% that we originally guided to, Mike.

Q – Mike Zaremski: Okay, just wanted to clarify. Thank you.

Operator: Thank you. This concludes our question-and-answer session. I would now like to turn the call back over to Oksana Lukashevafor any closing remarks.

Oksana Lukasheva: Thank you very much for listening in and participating today. We are looking forward to talking to you next quarter.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.