Thank you for attending the conference this year. Today we have The Hanover here with us. I'm Grace Carter. I cover The Hanover at Bank of America, and we have Jack Roche, CFO or sorry, CEO, and Jeff Farber, the CFO, with us today. We're gonna go ahead and go into the questions. Starting with the top-line growth target. At the 2021 Investor Day, you established a five-year top-line growth target of 7%. How might targeted re-underwriting actions impact the ability to achieve the segment-by-segment growth targets, and has pricing, increasing over the last few years been sufficient to maybe offset the policy count hit from re-underwriting actions?
Well, first off, thanks, Grace, for allowing us to participate in the conference, and we're excited to be here. You know, we're still very supportive and confident in our longer-term goals. In our business, which is a dynamic one, when you see loss trends really start to change and you see some of the challenges that we faced, specific to weather and the inflationary environment, you have to think about how you maneuver through those short-term issues to be able to continue to grow and prosper, consistent with our longer-term targets. And so I think that's what you should expect from us is that, you know, I think over the last, you know, 2022 and 2023, we averaged somewhere in the neighborhood of 8% growth.
While doing some re-underwriting and repositioning, this year, we'll, we'll taper that down a little bit, particularly in personal lines, to make sure that we get healthy and that we get back to the profitability that people expect of us. But we're very confident that we can reemerge in the second half of the year with some strong growth. And through that, I would tell you that we will continue to push hard in specialty and small commercial in particular, and targeted portions of our middle-market business to grow upper single digits or more. So really, it's about not painting a broad brush across your portfolio, really knowing where you have confidence in that profitable growth and where you need to do a little bit of resetting.
And maybe last, even in Personal Lines, we already are starting to reset the dial in states where we think price adequacy is right, and growing in some of those other states will help us further diversify the firm.
Thank you. Moving on to the ROE target. So considering the projected margin improvement going forward, as well as stronger investment income compared to original expectations, do you think that the 14% ROE target for 2024 could ultimately prove conservative? And if we could just go over the macro assumptions underpinning that target, as well as what are the most important downside risks that have kept it at 14% so far?
Sure. We established a 14% long-term ROE when we did our last Investor Day, which was September of 2021, really for the five-year period from 2022 through 2026. Clearly, a lot has changed since then. We've had inflation. We've had weather events. And when I think about our confidence level in that, we've never been more confident by, you know, 2025 getting to that level. If I think, Grace, of the underlying levers, it was really about holding loss ratio the same, getting leverage around our expenses. And so much of that is the same, but also, the weather has changed. And so we've published a new cat load, which is 7%. I think we were at more like 4.7 when we put our guidance out there. And for the first quarter, it's 6.5%, which at this point we feel comfortable with.
But offsetting that increase from, call it, high 4s or 5-7, the net investment income has changed so dramatically, and we have opportunities to improve the loss ratio as, particularly in Personal Lines, the earned renewal price change earns in and overwhelms the loss trend over 2024 and even into 2025. In terms of the last part of your question, in terms of some of the challenges, I, I don't think they're overwhelming, but our Social Inflation or, you know, weather being worse than we anticipated in a particular quarter or in a particular year, you know, could put some pressure on that notion.
Thank you. You briefly mentioned geographic diversification. How should we think about which states and regions you're targeting for growth in the Personal Lines book at the moment? And could, while you're pursuing geographic diversification, could that eventually include adding new states and just how you see the long-term targeted geographic breakdown in that book?
Yeah. So as you asked that question, Grace, we think of diversification within the firm more broadly than a particular sector or line of business, obviously. And so it's important to think about that. We have 20 states in Personal Lines. We're a national company with regard to both our core commercial and specialty commercial lines business. And so we have multiple opportunities to diversify the firm, both property casualty, geographically, line of business, and even from a micro-concentration standpoint, which is where the rubber meets the road if you believe that Severe Convective Storms are gonna participate more in the catastrophes going forward.
So, you know, relative to Personal Lines, the silver lining, if there is one, from the last year that we've been challenged with where, you know, disproportionate of the weather, compounded by inflation, hit the Midwest and particularly in Michigan where we have a significant market share. So as you've seen, we're taking the opportunity in this firm market to both reduce our overall share there through tapering some growth, and I say tapering because we'll still probably grow on a premium basis even though our PIF will shrink and our repositioning in certain counties and towns will change. But we'll also get some help from what we believe is a firming of terms and conditions.
Whether you use the deductible approach that we're favoring or roof valuation changes, there'll be an opportunity to get your cat load or cat exposure down without having to over-rely on just pure shrinkage. Simultaneously, as I said in my first question or response, we are going to use the opportunity in a firm market in Personal Lines to grow where we're most confident in the other 19 states. Realistically, we've got about a half a dozen of them that we've already started to, you know, change the dials and move towards a more offensive approach. But simultaneously, we see opportunities to continue to grow our commercial lines business and get to those diversification kind of milestones, thinking well beyond Personal Lines.
Thank you. That's helpful. So you did a detailed reserve review back in 2016. That ultimately resulted in a charge. And ever since then, the consolidated reserve development has been neutral to modestly positive. And in the meantime, there are growing industry concerns about, you know, industry-wide reserves for the 2016 to 2019 accident years. To what extent has modest reserve development over the past several years reflected just the heightened uncertainty of the current environment? And what data points would you direct investors to, to get more comfortable with current reserving levels in light of everything going on with the industry? And just how should we think about maybe increasing current casualty loss cost trends impacting prior year reserves?
Grace, I think there are three primary areas why one should be comfortable with our loss picks and reserves, notwithstanding the social inflation issues that we're seeing. They really relate around reserve and reserve prudence in history, our limits, profile, and then finally reinsurance. I'll just briefly touch on each of those. Number one, for those that have been around for a bit, in 2016, we took a very large for us reserve charge of $174 million. We were committed to having a conservative, prudent balance sheet. So that has served us well, and that philosophy has served us well. Fast forward a bit to 2020, and you have frequency benefits that come in, not just in auto but in a lot of areas where businesses were shut. So you had opportunities to think about what you were gonna do there.
Was there a delay, a deferral? Did certain expenses or certain losses not happen? And so I think our prudence there really has served us well in terms of making our balance sheet prepared for some social inflation that we might have not have thought about. Then you think about our lower limits loss profile and our aversion really starting in 2016, 2017, and 2018 to not doing as much business in the major metropolitan cities. And so that has allowed us to avoid some of the slip, trip, and falls in some of the more litigious environments. And, you know, even today, a very large proportion of our specialty business is very low limits. You know, almost all much of it's under $2 million, and a very substantial portion is really even under $1 million. And then finally, reinsurance.
So we've always had relatively low limits in our reinsurance, and our performance is very good. So our renewal at 1.1 was actually a little bit better than what we had expected. And so, you know, reinsurers have been really pleased to stick by us and haven't raised limits.
Just to clarify too, I think when Jeff refers to our reinsurance limits, we're talking about our attachment points, which kind of, you know, relative to some competitors, is pretty low, you know, at $2.5 million on our casualty business. So when you think about how much of our limits are below that, but if we, where we all get affected by, you know, the awards that are being granted these days, the question is, how much of that are you gonna take net, and how much of that are you gonna be able to either pay for over time or prove via your reinsurance performance that you're different and you're worthy of different treatment? I think that can be a strong lever, over the next couple of years, to differentiate your company.
Thank you. You've mentioned, you know, the lower limit profile. So as we think about Social Inflation, to what extent do you think that focusing on maybe small-case risk and midsize-case risk maybe insulates you from mass tort risk relative to maybe competitors who look at more large-case business? Do you think over time, to the extent that Social Inflation maybe impacts more large high-profile organizations to a greater extent than smaller organizations, could we see a decoupling in casualty loss cost trends and pricing by account size?
Yeah. I, I think you're already seeing that. I, I think what it's always what we try to remind ourselves is that it's, it's not how many how what limits we provide to a customer. It's how much the customer buys, right? And I think that's where you have to differentiate. If somebody has relatively low limits because they let somebody else do the umbrella, so you have $1 million or $2 million primary, that's different than focusing on smaller customers who where that's all they buy, and therefore, they're just less attractive to, you know, to the tort system and to plaintiff attorneys through this process, right? The bigger the limits and you're even seeing this in some of the Personal Lines. If somebody has a large umbrella, you know, who really cares whether that car is owned by a person or a company?
The question is, I can really take advantage of that individual case. So I think what I think of it as a short-term relative advantage by having a low-profile casualty book both in core commercial and in specialty complemented with low attachment points on reinsurance. It kind of boxes things in a bit, but maybe in the mid-range, an actual, profitable growth opportunity. Those companies that navigate the next couple of years and generate good returns and likely take advantage of affirming of the casualty market will be well-positioned to even maybe move upstream a little bit when the pricing and terms and conditions are better and when the liability landscape is more understood. And the last thing I would say about that is we're an active participant in the APCIA.
There's a lot of work being done by the trade associations and broader in the industry to go after social inflation, to go after legal abuse reform. And that eventually will help. So the question is, what does that timeline look like, and how do you navigate those changes and turn, you know, some headwinds into potential tailwinds, over the next few years? That's our quest: can we do that eventually?
Last one on casualty, I promise. You've mentioned that just given elevated catastrophic losses in 2023, that you're looking to shift more towards liability versus property over the next several years. How do you think about the balance between growing your liability book and just avoiding any of the social inflation-oriented challenges that we've seen across the industry? I guess, are the liability growth opportunities more attractive in the core commercial space or the specialty space, or are they equally attractive?
Yeah. So I think you have to be, you know, this environment, this dynamic loss trend environment requires you to be better at anticipating and to increase the agility within your firm. And so while we have targets that we set for ourselves over time to become more a little bit more casualty-centric, and some of that's by taking the tops off of our property aggregation and some of our middle market limits, but we do so in a way where we're focused on, you know, where are we more confident that the liability trends won't end up backing up on us. So making sure that we're not over-invested in consumer-centric products or even, you know, OL&T exposures, you know, slip, trip, and fall type exposures where an individual gets hurt. And that's where I think the focus is, particularly from the plaintiff attorneys.
So I think we know that we have, you know, the lower end of executive protection and professional liability is still an area where we have a lot of confidence that while there'll be some liability pressure, it won't be anywhere near what is happening in the upper limits or some of the bigger firm type of exposures. We play in kind of the lower end of the E&S business. That's one of our fastest-growing businesses and obviously presents huge opportunity as long as you know what the future trends are gonna look like and not over-rely on your past analysis. Inside a core commercial, we're gonna emphasize small commercial over middle market.
But when I get done saying that, we have a lot of, you know, tech and life sciences and some targeted niches within the middle market business that are some of our best-performing businesses. So we do portfolio management and some segmentation like the better firms, and we don't try to paint with one broad brush. Where are we confident in our growth? And all of that accumulates into, I think, the right portfolio mix balance, going forward.
Perfect. Thank you. And I wanted to take a quick pause to see if anyone in the audience would like to ask a question. All right. I could keep asking them. So it's been a few quarters since you repurchased shares. How should we think about this as maybe a function of elevated catastrophe activity versus other factors? And just how should investors think about the timeline from the timeline for maybe a resumption of share repurchases and if there's any sort of targeted metrics like leverage metrics or anything that we should keep in mind that you want to reach a certain level before you're willing to re-engage in share repurchases?
We have a long track record of being active capital managers between stock buyback, ordinary dividends, and even some special dividends in 2019 following the sale of Chaucer in late 2018. So in that year in 2019, we actually returned $850 million of capital, and then we really continued on. Given the current environment, so 2023, weather events including the fourth quarter of 2022, some inflation issues that took us a bit to sort of dig out of, and then also the rise in interest rates, which impacts the fixed income portfolio, we decided to be conservative and pause. Given the strong earnings in 2024 that we're projecting and the even stronger, target long-term target earnings that we're thinking about for 2025, I suspect that you'll see capital management become an increasing portion over time. So we'll, we'll be back at it, over time for sure.
Thank you. Now moving on to distribution. How does the advent of AI influence your long-term thinking regarding distribution just given maybe risk of some of the, the small commercial risk, maybe some additional homeowners and auto business moving into the direct channel that's historically been in the agency channel? Do you think that this could be an opportunity for you? Do you think that there's any advantages in an agent-centric mo-model that you wanna call out? Or maybe even just given that the nature of your book with a heavy emphasis on specialty commercial and upmarket personal lines maybe doesn't make as much sense. Just any thoughts there, would be helpful.
Yeah. I think this is an exciting time for companies both on the agency side of the business and the carrier side that have some talent and scale to be able to evaluate and explore the power of AI including Generative AI. If you don't have some skill set and some piloting going on, then at best, you're gonna be a slow follower. That said, this is a very complex business more than most people know, right? Figuring out how much touch you need to underwrite appropriately, what does pricing sophistication look like, and where do you go too far where you're churning your own book? What does operational efficiency look like when you have 35,000 agents and hundreds of carriers all on different platforms with very complex interfaces?
So it's one of those things where I'd like to believe, and we're working hard to take advantage of skill sets that we've developed over time to be what I call an operating model company, right? We spend more time understanding the independent agency system and how that's evolving through consolidation. Where is there opportunities to create some efficiencies? Our agency insights tool gives us kind of an unfair advantage in understanding how that business is shifting, how it's getting placed, what's going through portals versus what's going through AI connections, or API connections. Internally, we've put some resource around this to pilot in a very thoughtful and safe way. Where can the action be?
In the macro pace, we're starting really with a claims focus where we think there's much opportunity to help adjusters not only be more efficient but to have even stronger models to kind of predict what, what types of claims likely lend themselves to kind of litigation or, or severity. We're already starting to see opportunities to, to better serve customers with, some of that AI-driven, business. We're also focused in parts of underwriting. No doubt in Personal Lines and small commercial, we have a little bit more scale in terms of number of accounts and operating kind of a, a mindset versus a bespoke specialty unit. I think the power initially will be on how much of that work can you streamline? Where can you inform the underwriting? I think it'll be some time, frankly, before the independent agency channel is disrupted by this.
But I do think it will accelerate the consolidation. I think it's gonna be increasingly hard for the small agent to go it alone. And, and some of that will be dictated by whether the direct pressure starts to, to mount or the carriers reemerge. So we're quite excited about this. We've got, I think, the right amount of attention and resource on it not just in the technology group but in the business group because this is about use cases that we think are hypothesis-led that can drive to outcomes not just exploring and spending money 'cause this industry, frankly, is spending a lot of money on tech and advanced analytics, and, and not everybody has something to show for it. So we're, we're being very balanced and thoughtful and targeted in our approach.
Thank you. So have challenging market conditions impacted the quality of new business? Like, are there more high-quality accounts seeking a new home just given elevated rate increases across the industry in various lines over the past couple of years? And I'm just curious as to how that answer might differ across the different segments as well.
Yeah. I think what I would say a year ago what I did say often in public settings was that the independent agency system was struggling with two major problems. And that is the firming of the market that was, you know, causing some remarketing, you know, particularly for some of the less good accounts and a real labor shortage. Everywhere we go, it's still the case where people are either paying more for or desperately struggling to find good account managers and CSRs. And so the capacity to remarket a lot of your business is still very challenged. That said, when you get two or three years in affirming or hardening, you have to attend to your better customers who, frankly, have had enough. And so whether that be atrophy or whatever you wanna call it.
So what I see is a shift of particularly some of the larger-scale agents is they're making more time for the higher-quality customers to make sure that those are getting marketed appropriately and not just spending time on the problematic business both PL and CL. What you're seeing for us is that and I don't think it's as different, sectorally. I think I do think it's really more about the quality of the consumer, and where the agent is focused on making sure they don't lose their better business. We are definitely our discipline around pipelining and not just sifting through the piles, not just waiting for what comes through the door. We have our agency insights tool that's used across Personal Lines and Commercial Lines is meant to get ahead of it and say, "What does our future partnership look like?
What business and we realize even some of our best partners have other friends. So we have to be thoughtful about, well, where is their business that fits our appetite, fits our future partnership that you feel like needs to be freed up either because it's with less strategic carriers or because some of your strategic carriers are deciding to be a little too firm and maybe broad-brushed in their pricing as opposed to being more segmented and letting some of the better customers get a better deal, if you will. So I do think the last year probably the last two or three quarters, we're starting to see a little bit more competition for the better business, which again can be helpful as long as you're good at underwriting and pricing and not letting that just overall lower your pricing, as a company.
Thank you. That makes sense. Thinking about reinsurance. So following elevated catastrophe losses in the past several quarters, you've done a lot of work to reorient your book and try and avoid any sort of, outsized exposures in the future. Does this impact your thinking around reinsurance for, for the property CAT exposed lines at upcoming renewals? And do you think that all the actions that you've taken might translate to maybe more favorable terms or pricing from your reinsurance partners?
I'm gonna do that.
Yeah. We look at new ideas, new ways to reinsure aggregates, a variety of things all the time. And we really try to get the relationship between the coverage you get and the cost in the right balance. You'll probably remember from our 2021 renewal, we were able to renew at fairly attractive terms notwithstanding the market, and maintain our attachment point at $200 million. That attachment point hasn't changed in our firm for that program since 2006. So over that 18-year period, we have grown quite dramatically. And so the you know, relative return period has changed. We continue to add to the top. So we've done two CAT bonds, and we've also added traditional reinsurance. And in that 18-year period, the reinsurers have never been asked to pay a claim in that program. So it is a very desirable program.
And the reinsurers have done very well. So the likelihood that we would have to raise that attachment point, I think, is quite low. And I think the term should be very reasonable. One of the things that's really helped us over time blend it in is we tend to buy our CAT reinsurance on a three-year rolling basis. So it tends to smooth some of the shocks of renewal. And even the two CAT bonds we've done have three-year lives assuming that you don't actually have losses in them, which is, you know, a real tail period. And I think as you suggested, Grace, the bigger activity in managing so-called kitty cats or volatility that has aggregated to a large number in 2023 is really around terms and conditions and the aggregation of losses and the microconcentrations.
Thank you. I wanted to give the audience another chance to ask questions. If anybody has one, please raise your hand.
You were right, Grace. You do have a shy group.
Yeah. You have a very quiet crew today. That's okay. We can keep going.
Maybe, maybe as an extension of that on the reinsurance side, I, I think when you think about what we've gone through in the Midwest and, and particularly with Personal Lines, there's no doubt that's having a profound effect on kind of much smaller mutuals and, and smaller regionals in that period, which is why I think the market is, is behaving the way it is. And so that relative position that Jeff was talking about is what, how are you diversified? Do you have the right reinsurance schematic and relationships? And how does that compare to the people you're competing against, particularly in, in, in, in certain geographies? So that, that's what gives me comfort is that the market will be what it'll be. The question is how advantaged or disadvantaged are you gonna be when it shifts?
I think the work we're doing right now to reposition a little bit with terms and conditions and our microconcentrations, which by the way, everybody's microconcentrations went up when we had this ITV surge, right? When the industry is now much closer to insurance-to-value targets than they've ever been in some time. So if you're not making some adjustments in your concentrations regardless of whether you got hit or not, you are potentially gonna pay more reinsurance if you're not getting that property aggregation right. So that's, that's where we really try to focus some effort on, on not just playing whack-a-mole to the last storm, but how do we make sure that our property aggregations are appropriate so that when we buy reinsurance, we don't we don't pay disproportionately for that?
Right. That makes sense. I guess if we think about some of the actions that you all have taken, part of it has been non-renewing certain accounts in the middle market piece of core commercial. Could we talk about whether middle market and small commercial have similar margin targets over the long term or whether you expect those to diverge over time? And to what extent do you expect all of the actions that you've taken in the middle market book to maybe benefit the core loss ratio versus the CAT loss ratio?
Yeah. I think realistically, I've been at this business for three and a half decades, and I, I've not seen middle market generic or overall middle market outperform small commercial in any one year. So do we have a bias as a firm to make sure that where we're putting up bigger limits or where we're competing with people who are less specialized or don't have as intense operating models, are we more thoughtful about how competitive we wanna be or how much of that we wanna write? The answer is yes. So middle market, we have slightly less, you know, target aspirations from a performance standpoint. When I get done saying that, though, things are changing. And I think we've been through a period where limits have attracted both property volatility and casualty volatility.
If the market continues to respond the way it's been responding, I think that that could present new opportunities. And we have a gentleman running our middle market business that's as talented as anybody I've worked with. So we're working hard to take that improvement and in the short term, have outsized growth in small commercial where we have terrific margins and great platforms and tremendous agency momentum and kinda rebuild kinda that power, that we, we would like to have beyond just some of the targeted niche areas where we've had great margins. But so much of this has to do with the limits profile, right? If.
Right.
When you had commercial auto leading the way, then you had some property volatility. Now people are worried about the liability trend. You have to be respectful of where those limits accumulate and not get over your skis. And so, again, our hope is look out two years from now, and I might be on this stage telling you that middle market's outpacing small commercial growth because the opportunity has represented itself.
From a loss ratio perspective, middle market has the most opportunities for improvement relative to small commercial. And therefore, the middle market improvement over time will help to improve core commercial. And there will be growth opportunities as Jack suggests. But I think the likelihood that middle market improves so much on a loss ratio or an ROE basis that it actually crosses and improves higher than small commercial, I think, is not foreseeable in the next couple of years. It just small commercial is just too profitable.
Thank you. Speaking of highly profitable commercial lines, so the specialty book has looked really good in recent quarters. I mean, how are you thinking about the sustainability of the margins in that book? Do you consider them to be at or near the peak? You've also taken some reunderwriting actions over the past couple of quarters in certain accounts in that book. I mean, does that imply potential future expansion, or do you think that margins in 2023 are pretty close to where you think that they could cap out?
Yeah. I think first off, for those that are less familiar with us, our specialty business is a bit different than what gets talked about more broadly. Where we, the preponderance of our specialty business comes from retail agents that we have a broader relationship with that's increasingly consolidating and building and looking to place some of their smaller specialty business either directly or more efficiently. And our operating models that we've worked so hard to build over time allows us to do that. Whereas I think even some of the better specialty markets, they've been midsize to larger account writers, a lot of them in the wholesale channel, and they just haven't been able to kinda invest like we have in operating models that allows you to get low loss ratio business at appropriate expense levels.
So when we look at specialty going forward, what Bryan has done with his team is said, "Oh, what is the proper level of offense where we see immediate growth opportunities? You're seeing us in the E&S business, both retail and wholesale, in the lower end of executive protection, professional liability, including our healthcare practice, our surety business." So there's a number of areas. Our new specialty general liability policy are all significant drivers of growth.
At the same time, and I think ultimately gets to your question, Grace, is we're always thinking about where defense is appropriate, either because a program or two has not met our hurdle rates or has run into some challenges, and we have to, you know, kinda remove it before it becomes cancerous, or because we're starting to see the margins deteriorate because of social inflation, because of some of the liability trends, and we don't wanna wait until that contaminates the well. I think that's what allows you to grow over time at that upper single digits or better because you don't let the broader portfolio performance get in the way of that, portfolio management and that discipline. All in, I, I believe you'll see us continue to invest in growing specialty in a disproportionate way. That's the charge that Bryan has.
And, frankly, that's the investment capital that he's using to make that a reality within the firm.
Perfect. Thank you so much. I think that we're running pretty short on time. So I think we'll go ahead and close it here. But thank you all so much for attending today. Thank you to the team for participating in the conference. We really appreciate it. A lot of interesting stuff today. So yeah, everyone, have a good day.
All right. Thank you.
Thank you, Grace.