HANOVER INSURANCE GROUP INC

The following is our discussion and analysis of the results of operations by reporting segment. The operating results are presented before interest expense, income taxes and other items, which management believes are not indicative of our core operations, including realized gains and losses, as well as unrealized gains and losses on equity securities, and the results of discontinued operations.

The following table summarizes the results of operations for the periods indicated:

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

Operating income before interest expense and income taxes was $149.7 million for the three months ended March 31, 2024, compared to $13.2 million for the three months ended March 31, 2023, an increase of $136.5 million. This increase was primarily due to lower catastrophe losses across all segments, improvements in current accident year underwriting results in both our Personal Lines and Specialty segments, and higher net investment income. The higher catastrophe losses in the first three months of 2023 were primarily due to widespread wind, hail and tornadic activity and several severe freeze events across multiple states.

Net premiums written increased $32.5 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase in net premiums written was primarily due to renewal price increases.

Premium Production and Underwriting Results

The following tables summarize premiums written on a gross and net basis, net premiums earned and, loss and LAE (including catastrophe losses), expense, and combined ratios for our Core Commercial, Specialty and Personal Lines segments. Loss and LAE, catastrophe loss and combined ratios shown below include prior year reserve development. These items are not meaningful for our Other segment.

The following table summarizes U.S. GAAP underwriting results for our Core Commercial, Specialty, Personal Lines and Other segments and reconciles them to operating income (loss) before interest expense and income taxes.

Core Commercial

Core Commercial net premiums written were $582.4 million for the three months ended March 31, 2024, compared to $565.3 million for the three months ended March 31, 2023. This $17.1 million increase in net premiums written was primarily driven by renewal price increases, partially offset by lower retention driven by underwriting actions.

Core Commercial underwriting profit for the three months ended March 31, 2024 was $30.9 million, compared to an underwriting loss of $24.8 million for the three months ended March 31, 2023, an improvement in underwriting results of $55.7 million. Catastrophe losses for the three months ended March 31, 2024 were $20.7 million, compared to $63.9 million for the three months ended March 31, 2023, a decrease of $43.2 million. Net favorable development on prior years’ loss reserves for the three months ended March 31, 2024 was $9.2 million, compared to net unfavorable development of $3.5 million for the three months ended March 31, 2023, a favorable change of $12.7 million.

Core Commercial current accident year underwriting profit, excluding catastrophes, was $42.4 million for the three months ended March 31, 2024, compared to $42.6 million for the three months ended March 31, 2023. The $0.2 million decrease in underwriting results was primarily driven by higher employee-based compensation costs, partially offset by earned premium growth.

We continue to manage underwriting performance through rate actions, risk selection and mitigation, pricing segmentation, specific underwriting actions and targeted new business growth. Our ability to achieve overall rate increases is affected by many factors, including regulatory activity and the competitive pricing environment, particularly within the workers’ compensation line.

Specialty

Specialty net premiums written were $339.8 million for the three months ended March 31, 2024, compared to $324.3 million for the three months ended March 31, 2023. The $15.5 million increase in net premiums written was primarily due to renewal price increases.

Specialty underwriting profit for the three months ended March 31, 2024 was $38.9 million, compared to $30.7 million for the three months ended March 31, 2023, an increase of $8.2 million. Catastrophe losses for the three months ended March 31, 2024 were $7.0 million, compared to $21.5 million for the three months ended March 31, 2023, a decrease of $14.5 million. Net favorable development on prior years’ loss reserves for the three months ended March 31, 2024 was $1.1 million, compared to $18.1 million for the three months ended March 31, 2023, a decrease of $17.0 million.

Specialty current accident year underwriting profit, excluding catastrophes, was $44.8 million for the three months ended March 31, 2024, compared to $34.1 million for the three months ended March 31, 2023. The $10.7 million increase in underwriting results was primarily due to lower current accident year losses, relative to earned premiums, in our specialty industrial business and, to a lesser extent, from improved underwriting results in several other lines of business, partially offset by higher employee-based compensation costs and business growth.

We continue to manage underwriting performance through rate actions, risk selection and mitigation, pricing segmentation, specific underwriting actions and targeted new business growth. Our ability to achieve overall rate increases is affected by many factors, including regulatory activity and the competitive pricing environment.

Personal Lines

Personal Lines net premiums written were $531.8 million for the three months ended March 31, 2024, compared to $531.9 million for the three months ended March 31, 2023. The $0.1 million decrease in net premiums written was primarily driven by renewal price increases and other underwriting actions, resulting in decreased new business and lower retention.

Net premiums written in the personal automobile line of business for the three months ended March 31, 2024 were $317.0 million, compared to $323.0 million for the three months ended March 31, 2023, a decrease of $6.0 million. Personal automobile PIF decreased by 5.5% since March 31, 2023. Net premiums written in the homeowners and other lines of business for the three months ended March 31, 2024 were $214.8 million, compared to $208.9 million for the three months ended March 31, 2023, an increase of $5.9 million. Homeowners PIF decreased by 4.7% since March 31, 2023.

Personal Lines underwriting loss for the three months ended March 31, 2024 was $9.1 million, compared to $72.2 million for the three months ended March 31, 2023, an improvement in underwriting results of $63.1 million. Catastrophe losses for the three months ended March 31, 2024 were $59.2 million, compared to $89.6 million for the three months ended March 31, 2023, a decrease of $30.4 million. Net favorable development on prior years’ loss reserves for the three months ended March 31, 2024 was $0.1 million, compared to unfavorable development of $11.6 million for the three months ended March 31, 2023, a favorable change of $11.7 million.

Personal Lines current accident year underwriting profit, excluding catastrophes, was $50.0 million for the three months ended March 31, 2024, compared to $29.0 million for the three months ended March 31, 2023. The $21.0 million increase in underwriting results was primarily due to lower current accident year losses, relative to earned premiums, in our personal automobile and homeowners lines, as well as earned premium growth and lower expenses.

We have been taking actions to improve financial results and reduce volatility within our Personal Lines segment. These actions include increasing pricing, changing certain policy terms and conditions, and being more selective on new business quoting, where permissible, around certain geographies, driver and vehicle history, and building and roof condition type. We were able to obtain pricing increases of approximately 30% in our homeowners line and 18% in our personal automobile line during the first quarter of 2024 and believe that our ability to obtain pricing increases will continue. Consistent with our expectations, PIF declined in the first three months of 2024, driven by lower new business, as our new business pricing is at levels at or above our renewal price increases. We expect our sequential PIF counts to continue to shrink throughout the year. Additionally, our Personal Lines net premiums written may be affected by price competition and the regulatory environment. These factors, along with the aforementioned actions, may also affect our ability to maintain and improve underwriting results.

Other

Our Other segment had operating income of $0.5 million for the three months ended March 31, 2024, compared to $0.3 million for the three months ended March 31, 2023, an increase of $0.2 million.

Reserve for Losses and Loss Adjustment Expenses

The table below provides a reconciliation of the gross beginning and ending reserve for unpaid losses and loss adjustment expenses.

The table below summarizes the gross reserve for losses and LAE by line of business and division.

Loss and LAE reserves in our “Other core commercial” lines include monoline general liability, commercial umbrella, and monoline property. “Specialty Property & Casualty” includes program business, specialty industrial and commercial property, excess and surplus lines, and specialty general liability coverage. “Professional and Executive Lines” includes professional and management liability, fidelity and crime, and other property and liability lines for healthcare firms. Loss and LAE reserves in our “Total Other” segment relate to our run-off voluntary assumed property and casualty reinsurance pools business and our run-off direct asbestos and environmental, and product liability businesses.

The following table summarizes prior year (favorable) unfavorable development for the periods indicated:

It is not possible to know whether the factors that affected loss reserves in the first three months of 2024 will also occur in future periods. We encourage you to read our 2023 Annual Report on Form 10-K for more information about our reserving process and the judgments, uncertainties and risks associated therewith.

Catastrophe Loss Development

For the three months ended March 31, 2024, favorable catastrophe development was $7.0 million, primarily due to lower than expected losses in our commercial multiple peril line related to 2022 and 2023 events, including hurricane Ian and tornadic activity. For the three months ended March 31, 2023, total catastrophe loss development was not meaningful.

2024 Loss and LAE Development, excluding catastrophes

For the three months ended March 31, 2024, net favorable loss and LAE development, excluding catastrophes, was $10.4 million. Core Commercial favorable loss and LAE development of $9.2 million was due to lower than expected losses across several lines of business.

2023 Loss and LAE Development, excluding catastrophes

For the three months ended March 31, 2023, net favorable loss and LAE development, excluding catastrophes, was $3.0 million. Specialty favorable loss and LAE development of $18.1 million was primarily due to lower than expected losses of $11.3 million in our Professional and Executive Lines division, notably in accident years 2019 through 2022 and, to a lesser extent, lower than expected losses in our surety line. Personal Lines unfavorable loss and LAE development of $11.6 million was primarily due to higher than expected losses in our personal automobile line within property damage coverages in accident year 2022. Core Commercial unfavorable loss and LAE development of $3.5 million was primarily due to higher than expected losses and LAE in our commercial automobile and commercial multiple peril lines.

Reinsurance Recoverables

Reinsurance recoverables were $1,999.8 million and $2,056.1 million at March 31, 2024 and December 31, 2023, respectively, of which $120.3 million and $162.0 million, respectively, represent billable recoverables. A reinsurance recoverable is billable after an eligible reinsured claim is paid by an insurer. Billable reinsurance recoverables related to the Michigan Catastrophic Claims Association (the “MCCA”) were $57.0 million and $72.2 million at March 31, 2024 and December 31, 2023, and billable non-MCCA reinsurance recoverables totaled $63.3 million and $89.8 million at March 31, 2024 and December 31, 2023, respectively. At March 31, 2024 and December 31, 2023, billed balances outstanding greater than 90 days were not material.