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#Thank you, <UNK>hew.
Good morning, and thank you for joining us for our first-quarter conference call.
We will begin today's call with prepared remarks from <UNK> <UNK>, our President and Chief Executive Officer, and our interim Chief Financial Officer, <UNK> <UNK>.
Available to answer your questions after our prepared remarks are: Jack Roche, President of Business Insurance; <UNK> <UNK>, President of Specialty Lines; <UNK> <UNK>, President of Personal Lines; and <UNK> <UNK>, Chief Executive Officer of Chaucer.
Before I turn the call over to <UNK>, let me note that our earnings press release, financial supplement and a complete slide presentation for today's call are available in the Investor 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, including our 2016 outlook.
There are certain factors that could cause actual results to differ materially from those anticipated with this press release, slide presentation, and conference call.
We caution you with respect to reliance on forward-looking statements, and in this respect refer you to the forward-looking statement section in our press release, slide 2 of 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 sheer 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 or the financial supplement which are posted on our website, as I mentioned earlier.
With those comments, I will turn the call over to <UNK>.
Thank you, <UNK>, and good morning everyone, and thank you for joining our first-quarter earnings call.
I'm pleased to share with you we're off to a solid start to the year with strong financial results and continued earnings momentum.
We delivered net income per share of $1.80 and have a record first-quarter operating per share of $1.64, yielding an operating ROE of nearly 11%.
(technical difficulties).
Excuse me, operator.
Sorry about that.
Okay.
(laughter) For a minute there we were in a new business, but that's okay.
(laughter) So as I said, we recorded a first-quarter operating earnings per share of $1.64 which was a record for us, and we yielded operating ROE of nearly 11%.
Our success during the quarter was fostered by strong execution of our business strategy that resulted in an improvement of our consolidated accident year ex-CAT combined ratio of 93%, 1 point better than the same period last year.
A relatively low level of catastrophe losses, domestic growth of 4%, and a strong business mix which favorably positions our Company for the current-market environment.
Strong investment income and stability in earned yield and some thoughtful capital management actions.
Our results through the quarter are fundamentally in line with our expectations, and we remain confident that we will be able to achieve continued progress and deliver earnings growth going forward this year.
I will now turn the call over to <UNK> to go forward over financial results, and then I will further discuss our outlook and accomplishments of each of our businesses.
Thank you, <UNK>, and good morning, everyone.
Our first-quarter results were strong, underscoring the breadth and balance of our underwriting portfolio and our operating and financial expertise.
Net income was $78.2 million or $1.80 per diluted share, compared to $54.9 million or $1.22 per diluted share in the first quarter of last year.
Operating income was $71.5 million or $1.64 per diluted share, compared to $57.1 million or $1.27 per diluted share for the first quarter of last year.
The combined ratio was 95% in the quarter, compared to 97% in the prior-year quarter.
Catastrophe losses added 3 points to the combined ratio, 2 points lower than in the prior-year quarter, virtually all stemming from domestic business.
Loss-reserve development was again favorable but somewhat lower than the prior-year quarter.
In commercial lines, we were able to drive over 2 point\
Thanks, <UNK>.
We're very pleased with the progress we made in the first quarter in both our domestic and our international businesses.
Overall we performed in line with our expectations.
Specifically, we grew our personal-lines business, achieving strong profitability, we grew in targeted segments and commercial lines while continuing to prove mix, and we continue to navigate through challenging market conditions at Lloyd's, while continuing to invest in our specialty portfolio.
We feel good about our progress made to date and the prospects that lie ahead.
More specifically, in personal lines, net written premium gross was slightly ahead of our expectations at 3.2%, driven by our strategic focus on account business, new business momentum and strong pricing disciplines.
We held rate at approximately 5%, which remains above loss costs, and our retention improved to 83%, up 1/2 point over the same period last year.
We have several initiatives underway to capitalize on the momentum we have established in our personal-lines business.
We continue to gain strong traction in our Hanover Platinum product, now fully deployed across all our target states.
This enhanced coverage and service offering associated with high quality account business, high umbrella penetration as well as much stronger retention.
Our Platinum product has elevated the overall quality of our personal-lines business and has allowed us to write more of our agents' best business.
Additionally, we continue to make investments to improve ease-of-use for agents and to help them address business opportunities.
We expect these investments to strengthen our market position and accentuate our value proposition to our agency partners.
Additionally, we remain on track to enter into Pennsylvania personal lines at the end of this year.
While this will not have meaningful impact on 2016 results, it's a significant milestone that marks our momentum and confidence in our ability to strategically expand our geographic footprint across the US and with our value-added offerings.
The benefits of the hard work we have done over the last few years to improve our mix, both geographically and through the launch of Platinum, have come to fruition and are clearly evident in our results.
We delivered a very good underlying performance, improving our accident-year combined ratio, excluding catastrophes, by over 3 points to 88.3%, compared to the same period last year.
Overall, we're very pleased with our strong first-quarter results in personal lines, and we believe we can continue to deliver improved underwriting profitability and grow at a steady, deliberate pace of low single digits in 2016.
Turning to commercial lines, we delivered solid net premium growth of 4%, remained disciplined in our approach, balancing price and retention to drive needed margin, while maintaining steady growth momentum.
We achieved pricing increases of 4.3% in the core lines in the quarter with solid retentions of 83%.
While the market continues to exert rate pressure, we have been tightly executing our pricing segmentation in both our small and middle-market businesses.
We continue to prudently balance retention on our best business while simultaneously driving higher price increases on less profitable risks.
As we have said in the past, pricing sophistication is not the only one of the levers we use to improve margins in today's competitive environment.
We implemented property and exposure actions, we have taken substantial action in auto, and we have over the last handful of quarters taken targeted underwriting and pricing actions in CMP liability in response to the elevated prior-year activity we experienced.
Additionally, we are building upon industry specialization and target segments to better align customer risks to our capabilities, enhancing our value-based offering and mix to achieve consistent performance through the cycle.
This approach better positions us to help our agents consolidate their business, and to compete more effectively in the current-market environment.
In specialty lines, we continue to build scale and momentum, as these businesses are benefiting from the market disruption and the addition of top-quality talent.
In healthcare, our expanded allied capabilities focusing on facilities risks has given us strong momentum coming out of 2015 and into the first quarter of 2016.
In management and professional liability, the 2015 launch of our updated private company and not-for-profit DNO package is gaining real traction with true best-in-class product claims and service center capabilities.
Additionally, our launch of Merit, our transactional A&S business, in its fourth year of operation, is beginning to make notable contribution.
We expect that specialty will be a strong source of profitable growth going forward.
Overall, we're very pleased with the composition of our business, the pace of growth and the overall quality of the commercial-business portfolio.
And we continue to be on the path to deliver profitable growth of mid single digits this year.
Turning to Chaucer, overall earnings were in line with our expectations, although lower than in prior quarters.
As we reported in the past, underwriting performance in our recent years have benefited in part from very benign claims experience.
Given the competitive market of Lloyd's, we are being cautious with out approach to growth and focusing on our areas of distinctive capabilities.
We believe will be able to deliver our long-term financial target with a combined ratio in the mid-90%s.
On the premium side, the decline of 20% in the quarter at Chaucer, ex-UK motor, was at the high end of our expectation but very consistent with our strategic approach.
Underwriting margins and profitability remains the utmost priority at Chaucer.
As discussed, we're actively using reinsurance to manage our risk appetite, while retaining leadership and influence in our chosen specialty classes.
This enables us to effectively exchange top-line premium for greater earning stability.
About half of Chaucer's net premium decline in the first quarter was due to this strategy, as most of our reinsurance renews in the first quarter.
Additionally, in the quarter we responded proactively to a challenging energy market, reducing our position in certain parts of this business.
As you know, these actions have been and will be offset by our investments in a number of specialty areas that we have pursued over the last couple of years.
These initiatives will continue to develop and provide increasing benefit to our top and bottom line in 2016 and beyond.
For example, we recently introduced a new freight forwarder and logistics insurance unit, which will work closely with the Hanovers in the marine team to deliver new solutions for the cargo logistics industry.
Early in the quarter, we had added a new team and we created political risk solution for emerged markets that builds on our emerging market offering to provide brokers and clients a broader solution set for their political risk requirements.
Additionally, we recently joined in a strategic partnership with AXA to expand our access to new business opportunities in Africa through our extension distribution network.
Though we expect Chaucer's top line to reflect the challenging market this year, we will continue to leverage our access to business through Lloyd's, the Hanover Agency Network and other production platforms to create profitable growth opportunities.
All in all, Chaucer remains on target to reach our outlook and financial plans for 2016.
We also had an active quarter for capital actions.
Our main capital priority remains to support our growth.
We continue to return capital to shareholders, repurchasing $48 million worth of shares in the first quarter, and additionally we actively managed our debt and took advantage of the low interest rate environment by issuing $375 million of 10-year notes at 4.5%.
As a whole we look ahead with confidence as we track in line with our original earnings guidance.
We have good momentum in our businesses, which sets us up for this year and for next, as we enjoy the impact of improved retention, positive rate, and a strong quality of the business we are riding.
In regards to our progress to name my successor, I expect an announcement will be made relatively soon.
In the meantime, as you can see from our results, the business is performing well, we are not skipping a beat financially or strategically, as demonstrated by the numerous business initiatives domestically and at Chaucer, as well as our capital management actions.
The Board remained rock solid on selecting the right candidate for the job, and I'm confident that it is succeeding and you will learn the fruits of its efforts before long.
With that said, this is all in all likelihood my last conference call with you.
It has been an honor and privilege to serve here, and I have every confidence that the Company will continue to prosper and that my successor, the Leadership Team, our employees and our partner agents will succeed in taking this Company to the next level.
I appreciate the support you've show me over these last 13 years, and I will miss these quarterly calls with you.
At least most of you.
(laughter) And with that said, we would like to now turn it over to the operator for questions.
(Operator Instructions) <UNK> <UNK>, JMP Securities.
I would say no more than that.
We will continue to be opportunistic and it's one of the levers that we use to achieve our overall performance targets.
So I wouldn't necessarily take it and multiply it times 4.
It's a question of what the opportunities ---+ (multiple speakers)
<UNK>, you know that what we try to do is make sure we're thoughtful and not carry a lot of excess capital.
We think we have ---+ what we have done is build a pretty resilient earnings, and in my view much more consistent earnings and earnings growth power.
We try not to hold a lot of capital.
So we will continue to do it.
Now it's an interesting time, right.
There's a lot of different ways to do that.
We're trying to be opportunistic on the shares, price given the volatility, but you'll see a continuation of thoughtfulness as far as getting capital back there.
I am going to hit if off a little bit to my colleagues.
One of the things, what I look at as we look at what happened in the first quarter, as you know for the last three years or something, what we try to do is react very quickly to any activity and take as much of it to the bottom line that we see immediately.
I would tell you that it is all in areas that we've kind of been focused on.
It's within kind of the context of our plan and our outlook.
So I think, for me, we're right on track to continue the earnings increase, there's really no surprise.
The current accident years are holding up really quite nicely.
And so there hasn't been any emergency or anything in areas that at all new or surprising.
And <UNK> do you want to get some more color on this ---+
Chuck, this is <UNK>.
Not ---+ as <UNK> said, there isn't really a great deal of change in terms of what we saw from the prior quarter.
There's a little bit of a tilt towards GL, that was driven by four specific claims, two of which were of large settlements, which were considerably above our case reserves, and two that we moved to limit its losses.
What I would say is, slightly different is that where last quarter, some of what you saw was IBNR strengthening in this particular case, most of what you saw or nearly all of what you saw is case strengthening.
And I think that the decision here is that after the fourth quarter movements, we didn't want to erode the IBNR strengthening that we have put up.
There's a little bit of that going on, but in terms of the underlying trends, there's not a great deal of change from the last quarter.
So when we see this, I think in general, we are as an Organization, and I think it cuts across the Organization, we are very attentive to go back and ask ourselves to what extent we have the right case strength in light types of exposure.
Because you can start to see, while those four examples are rather random, some of them fit with some other things that we've seen in the past.
So we do go back and we asked ourselves for similar types of legacy claims.
Do we have the right case strength.
Frequently we will do a bit of a sort of volatility analysis on our claims.
And then we will adjust case if we believe there's like situations that require that kind of adjustment.
I would say we feel very good about what our picks are, as I said, and that we are on track.
That's what I meant by ---+ within our plan and in our focus.
And on track to do kind of what we said we were going to do and increase earnings.
And I would also say that our balance sheet, for me, last year/this year is stronger.
We are in a good place.
Chuck, this is <UNK> <UNK>.
We are excited and happy with the performance on the top line, so that when you look at all of the KPIs associated to that buildup to that top line number, feeling really good about the retention lift.
We do think there's some room there still, Platinum will contribute to improved retention going forward.
Our new business was strong, up 7%.
So yes, the answer is Platinum, which now makes up close to 20% of our book, and you know, 75% to 80% of our new business is absolutely going to lead to improved performance, we think.
And we hear from our agent partners that it's a first-rate, kind of best-in-class product offering.
So going forward, we continue ---+ we will see that mix improve.
I think I've cited before some of the nice kind of mix statistics that come along with Platinum, like 44% of the time we are selling an umbrella with the full package.
That overtime leads to higher retention.
We know from kind of our analytic work, so all things kind of point to the right direction.
That said, we feel comfortable that a low single-digit growth is the right number for us to see into the rest of the 2016 ---+ you know, our PIF is, as you may have seen, kind of flat sequentially from prior quarters, so we're happy about that.
Meanwhile, our account PIF has been growing really since the first quarter of 2015.
So that we expect to continue as well.
So all in, you should expect from us kind of a thoughtful measured growth plan.
As we think about expansion into other states, we're also going to be very thoughtful about that.
<UNK> referenced that we'll be heading into Pennsylvania, tail end of this year into the winter.
That will open up some nice growth opportunities for us going forward.
But you should expect kind of what you're seeing from us this year.
Hello, Chuck.
I'll respond.
It's <UNK> speaking.
In general the commodity prices we're referring to is in the steel and iron ore area.
And most of this is IBNR rather than case reserves.
As a result of the deterioration, you can imagine the scenario whereby autos have been placed in prepaid and a declining commodity price whereby the trader receives the goods at a substantial lower value.
And that will continue to put pressure on the trade credit exposure.
So from that perspective, we're anticipating there will be deterioration, so we have put in an IBNR to reflect that in the first quarter.
It splits into two different areas.
There is energy, outside of the trade credit and political risks scenario, where we have a number of larger than expected losses across ---+ or an additional turret loss which reflects low deck.
And then we have had one or two other smaller ones.
But there is 50% of it is energy, the other 50% would be our political-risk-type credit exposures.
Thanks, I appreciate it.
Appreciate it.
That's exactly right, <UNK>.
Our efforts to improve profitably and shed some of the monoline business will start to tail off and that has been the drag.
So we ---+ you'll start to see that PIF take up.
As you know, we did a lot of exposures stuff early on, this is really just the monoline, right.
Letting the monoline go.
In various ways.
Sometimes proactively with arrangements with other competitors where we facilitate it and some places it's just through the planning process.
And so that ---+ what's exciting about where personal lines is to me is that ends.
And then you're really living off the partnership.
The other thing I would tell you is that we just came back from our partnership meeting with our best partners, and what's interesting to me is they all, the importance to their business of this account oriented business is quite significant, and they see our product distinctively better.
So what we're all working hard with them is actually transitioning some of their install base business to our product set, because it would be better for them long-term, which will give us a boost at the tail end of this year.
And going into next year, I think we have really good momentum in that product.
Just one final comment, <UNK>, to put it into perspective, we sort like to boast about this number, but 86% of our new business coming on the books today from our partner agents is account business.
So you can really feel that our distribution plan understands the kind of business that we write.
It doesn't mean we don't write any monoline, obviously, but the majority of it is account business, and we ---+ that's a coveted thing to be able to achieve in this industry, we think.
81% of our install book is account business.
The demographics are perfect.
It's really ---+ it is their sweet spot for account middle-market and upper-middle-class customers that really want the full-service, which really bodes well for our future retention.
So as you heard me say, that account PIF has been growing since earlier last year, so it is this kind of drag that will soften as we go forward from the monoline business.
Yes, I think that's true.
I think as an industry, commercial auto is far from back to where it needs to get to in terms of overall profitability, but we feel more confident than ever that our current trajectory with our accident years are looking good.
The amount of claims that are vulnerable to this kind of delayed litigation phenomenon that we've experienced is the pool of claims is going down, it has gotten to a pretty finite level.
So yes, we look back into the rear view mirror, we are seeing that accident year or prior accident drag diminish, and we're feeling as good as we ever have about our current accident year pics.
You're also seeing across the industry, and certainly in our results, again real strong pricing.
As I said at the last call, we had roughly 7 or 8 points of pricing over the last three years in this line.
This year, we're still in that mid-to upper single digit range.
And the market is continuing to allow us to both get price over loss trend, but also continue to drive our mix in a favorable way.
It's 267.
So a couple of things, so <UNK> has agreed to stay on as long as we need him.
But what one of the issues we have right now ---+ or one the opportunities we have is I'm ---+ in parallel, we have been working on the CFO search and I feel very good about that, so as soon as we finalize the CEO, I will be working with him to make the selection, and so what's going to happen is that's going to be quite accelerated from the announcement.
It won't be like this, with the length of this one.
It will be shorter, but it won't be simultaneous.
We've done a lot of work and reached out and had a lot of good conversations, so I feel very, very good about being able to move on that in short order after the CEO pick.
They're really transcending over the last three, and as I described in the last call, they are coming from a finite group of claims in primarily major metropolitan areas, heavily out of New York and Southern California and the like.
That are for the most part slip, trip and falls that we are getting kind of late notice of the medical buildups and the litigation from these claims.
In that regard, it's similar to some of what you saw in commercial auto, but what's different is that these are ---+ it's much smaller portion of claims, it's even more sensitive to the major metropolitan areas where we believe that there is an increased focus on litigation on soft tissue, and the light type injuries, that are showing up in a delayed fashion and a more pronounced fashion than historically seen.
So this is our third quarter of acknowledging some prior-year development and in the GL line as part of CMT, and as promised, we're trying to deal with this as we go and we don't see this being an outsized issue.
But we are diligently working not only on the claims side, to make sure that we're getting it right ---+ but also have taken some substantial actions in the major metropolitan areas to make sure we don't have outside exposures that primarily are coming from slip, trip, and fall type occupancies, whether that be real estate or retail.
Well I would say it's less driven by kind of a cash-on-cash analysis than it is the market opportunity that we see and the fact that we think that that has a window that isn't sustainable forever.
We know that we want to continue to use leverage in our capital structure, so we felt that this was an ---+ the right opportunity.
The issue of kind of the cash-on-cash calculation, I mean from another perspective is economically, that higher cost of our existing debt economically has already been incurred, the question is how long do you want to take to pay it.
It is already built-in to basically the fair value of that liability.
So we just felt that really there are two separate situations that we have going and we do need to manage our leverage sort of in the low 20%s.
All in all we felt this was the right time to do it because the market was available to us.
And we didn't want to miss it.
I think in general, what I would tell you is as I said, our view is that the balance sheet is stronger today than it was at the end of the year and stronger than last year.
So in that business, we are conservative about our reserving, and so we believe that you will see a similar pattern to what we've done over the last year into the future year, likely.
And again, we do not believe in any shape or form that it was outsized this quarter from our track record (technical difficulty).
I'll just add a few more comments to that, in terms of what we are seeing in the diminishing margins, you would automatically assume that the loss ratios will creep up.
However, to <UNK>'s point earlier, as we are purchasing reinsurance in a slightly different shape to avoid that.
We don't see a significant deterioration in the current year loss ratios.
Yes it is.
I'm not going to be that specific, but yes, it is.
Thank you so much, <UNK>.
I appreciate it.
What's interesting about <UNK>'s question in my view is that I think the outlook for the next two years is the brightest the Company has ever been, and I think what you've seen in the trends and most of the businesses is that our ability continue to grow earnings and be well-positioned is probably as strong as this Company's has ever had.
It's pretty exciting right now.
Thank you so much, <UNK>.
Do we have any more questions.
Thanks to all of you for your participation today, and we'll look forward to speaking to you next quarter.
