HANOVER INSURANCE GROUP INC

Business operations consist of four operating segments: Core Commercial, Specialty, Personal Lines and Other.

Our strategy, which focuses on the independent agency distribution channel, supports THG’s commitment to our select independent agents. It is designed to generate profitable growth by leveraging the strengths of our distribution approach, including expansion of our agency footprint in underpenetrated geographies, as warranted. As part of that strategy, we have increased our capabilities in specialty markets and made investments designed to develop growth solutions for our agency distribution channel that meet the needs of our customers. Our goal is to grow responsibly in all of our businesses, while managing volatility.

Net income was $35.3 million in 2023, compared to $116.0 million in 2022, a decrease of $80.7 million, primarily due to lower after-tax operating results, partially offset by reduced losses from changes in the fair value of equity securities.

Operating income before interest expense and income taxes (a non-GAAP financial measure; see also “Results of Operations – Consolidated – Non-GAAP Financial Measures”) was $105.6 million in 2023 compared to $285.1 million in 2022, a decrease of $179.5 million. This decrease was primarily due to higher catastrophe losses in our Personal Lines segment, partially offset by an improvement in current accident year underwriting results in both our Core Commercial and Specialty segments, higher net investment income and earned premium growth. The higher catastrophe losses were primarily due to multiple convective storms across many states, particularly in the Midwest, during 2023. Hail and wind damage represented the majority of reported losses, primarily impacting our Personal Lines business.

Pre-tax catastrophe losses were $690.1 million in 2023, compared to $402.6 million in 2022, an increase of $287.5 million. Net favorable development on prior years’ loss reserves was $15.9 million in 2023, compared to $20.6 million in 2022, a decrease of $4.7 million.

Core Commercial includes two businesses, small commercial and middle market, both of which focus on account business, including coverage for commercial multiple peril, commercial automobile, workers’ compensation and other (monoline general liability, ancillary professional, commercial umbrella, and monoline property). Small commercial focuses on small businesses, with annual policy premiums generally up to $50,000. Middle market provides coverage to mid-sized businesses with annual policy premiums generally between $50,000 and $500,000. Middle market offers coverage in distinct industry segments, including technology, manufacturing, human services, retail, real estate, and others. We believe that our account-focused approach to the small commercial market and distinctiveness in the middle market, including our diversified portfolio of products, delivers significant value to agents and policyholders. We continue to pursue our core strategy of developing strong relationships with retail agents, enhanced franchise value through selective distribution, distinctive products and coverages, and through continued investment in products for additional industry segmentation.

Net premiums written increased 5.4% in 2023, compared to the same period in 2022, primarily driven by renewal price increases. Underwriting results increased in 2023, primarily due to an increase in current accident year underwriting profit and lower catastrophe losses, partially offset by unfavorable development on prior years’ loss reserves. The competitive nature of the Core Commercial market requires us to be highly disciplined in our underwriting process to ensure that we write business at acceptable margins, and we continue to seek rate increases across many lines of business.

Specialty offers a comprehensive suite of products focused predominately on small to mid-sized businesses. This includes numerous specialized product areas that are organized into four distinct divisions – Professional and Executive Lines, Specialty Property and Casualty (“Specialty P&C”), Marine, and Surety and Other. We believe that this diverse set of Specialty products, distributed primarily through retail agents, supplemented by select specialists, helps to enhance our overall agent value and increase growth opportunities by providing agents easier access to placement solutions for Specialty needs, including those that complement Core Commercial accounts.

Net premiums written increased 4.0% in 2023, compared to 2022, primarily due to renewal price increases, partially offset by lower retention driven by underwriting actions. Underwriting results increased in 2023, primarily due to higher favorable development on prior years’ loss reserves and an increase in current accident year underwriting profit. The competitive nature of the Specialty market requires us to be highly disciplined in our underwriting process to ensure that we write business at acceptable margins, and we continue to seek rate increases across many lines of business.

Personal Lines focuses on working with high quality, value-oriented agencies that deliver consultative selling to customers and stress the importance of account rounding, which is the conversion of single policy customers to accounts with multiple policies and/or additional coverages, to address customers’ broader needs and objectives. Approximately 88% of our policies in force (“PIF”) have been issued to customers with multiple policies and/or coverages with us. We are focused on seeking profitable growth opportunities, building a distinctive position in the market in order to meet our customers’ needs, and diversifying geographically. We continue to seek appropriate rate increases that meet or exceed underlying loss cost trends, subject to regulatory and competitive considerations.

Net premiums written increased 7.9% in 2023, compared to 2022, primarily due to renewal price increases, partially offset by decreased new business. Underwriting results decreased in 2023, primarily due to higher catastrophe losses.