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 September 30, 2024 Compared to Three Months Ended September 30, 2023

Operating income before interest expense and income taxes was $150.6 million for the three months ended September 30, 2024, compared to $13.7 million for the three months ended September 30, 2023, an improvement of $136.9 million. This increase was primarily due to lower catastrophe losses in our Personal Lines and Core Commercial segments, improvements in current accident year underwriting results in our Personal Lines Segment, and favorable development on prior years’ loss reserves. Catastrophe losses in the third quarter of 2024 primarily resulted from Hurricane Helene and, to a lesser extent, Hurricane Beryl and several severe wind and hail storms in the Midwest and Southeast. The higher catastrophe losses in the third quarter of 2023 were primarily due to several convective storms across the Midwest, with hail and wind damage representing the majority of reported losses, primarily impacting our Personal Lines business. The lower Personal Lines current accident year losses were primarily due to the benefit of earned pricing outpacing loss trends in both the personal automobile and homeowners lines, and moderated loss trends, particularly in automobile collision coverages.

Net premiums written increased $67.0 million for the three months ended September 30, 2024, compared to the three months ended September 30, 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 net premiums written were $599.2 million for the three months ended September 30, 2024, compared to $589.4 million for the three months ended September 30, 2023. The $9.8 million increase in net premiums written was primarily driven by renewal price increases.

Core Commercial underwriting profit for the three months ended September 30, 2024 was $14.6 million, compared to $5.3 million for the three months ended September 30, 2023, an improvement in underwriting results of $9.3 million. Catastrophe losses for the three months ended September 30, 2024 were $31.7 million, compared to $44.6 million for the three months ended September 30, 2023, a decrease of $12.9 million. Net favorable development on prior years’ loss reserves for the three months ended September 30, 2024 was $3.6 million, compared to net unfavorable development of $2.7 million for the three months ended September 30, 2023, a favorable change of $6.3 million.

Core Commercial current accident year underwriting profit, excluding catastrophes, was $42.7 million for the three months ended September 30, 2024, compared to $52.6 million for the three months ended September 30, 2023. The $9.9 million decrease in underwriting results was primarily driven by higher current accident year losses, relative to earned premiums, in our commercial multiple peril and workers’ compensation lines of business.

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 net premiums written were $350.2 million for the three months ended September 30, 2024, compared to $338.7 million for the three months ended September 30, 2023. The $11.5 million increase in net premiums written was primarily due to renewal price increases.

Specialty underwriting profit for the three months ended September 30, 2024 was $52.6 million, compared to $52.7 million for the three months ended September 30, 2023, a decrease of $0.1 million. Catastrophe losses for the three months ended September 30, 2024 were $4.4 million, compared to $6.9 million for the three months ended September 30, 2023, a decrease of $2.5 million. Net favorable development on prior years’ loss reserves for the three months ended September 30, 2024 was $10.2 million, compared to $5.0 million for the three months ended September 30, 2023, an increase of $5.2 million.

Specialty current accident year underwriting profit, excluding catastrophes, was $46.8 million for the three months ended September 30, 2024, compared to $54.6 million for the three months ended September 30, 2023. The $7.8 million decrease in underwriting results was primarily due to strategic business investments, including in talent and technology, as well as an increase in variable compensation expenses.

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 net premiums written were $714.0 million for the three months ended September 30, 2024, compared to $668.3 million for the three months ended September 30, 2023. The $45.7 million increase in net premiums written was primarily driven by renewal price increases, partially offset by decreased new business and lower retention.

Net premiums written in the personal automobile line of business were $411.1 million for the three months ended September 30, 2024, compared to $385.0 million for the three months ended September 30, 2023, an increase of $26.1 million. Personal automobile PIF decreased by 8.5% since September 30, 2023. Net premiums written in the homeowners and other lines of business for the three months ended September 30, 2024 were $302.9 million, compared to $283.3 million for the three months ended September 30, 2023, an increase of $19.6 million. Homeowners PIF decreased by 7.8% since September 30, 2023.

Personal Lines underwriting loss for the three months ended September 30, 2024 was $6.7 million, compared to $127.3 million for the three months ended September 30, 2023, an improvement in underwriting results of $120.6 million. Catastrophe losses for the three months ended September 30, 2024 were $69.8 million, compared to $144.3 million for the three months ended September 30, 2023, a decrease of $74.5 million. Net favorable development on prior years’ loss reserves for the three months ended September 30, 2024 was $0.2 million, compared to unfavorable development of $0.2 million for the three months ended September 30, 2023, a favorable change of $0.4 million.

Personal Lines current accident year underwriting profit, excluding catastrophes, was $62.9 million for the three months ended September 30, 2024, compared to $17.2 million for the three months ended September 30, 2023. The $45.7 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. The lower Personal Lines current accident year losses were primarily due to the benefit of earned pricing outpacing loss trends in both personal automobile and homeowners lines, and moderated loss trends, particularly in automobile collision coverages.

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 16% in our homeowners line and approximately 15% in our personal automobile line during the third quarter of 2024 and believe that our ability to obtain pricing increases, while moderating, will continue. Consistent with our expectations, PIF declined in the third quarter 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 in the fourth quarter of this 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 operating income was de minimis for the three months ended September 30, 2024, compared to $0.7 million for the three months ended September 30, 2023, a decrease of $0.7 million.

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

Operating income before interest expense and income taxes was $395.7 million for the nine months ended September 30, 2024, compared to an operating loss of $52.5 million for the nine months ended September 30, 2023, an improvement of $448.2 million. This increase was primarily due to lower catastrophe losses, improvements in current accident year underwriting results, primarily in our Personal Lines segment, and, to a lesser extent, higher net favorable development on prior years’ loss reserves and higher net investment income. Pre-tax catastrophe losses were $349.9 million for the nine months ended September 30, 2024, compared to $632.4 million during the same period of 2023, a decrease of $282.5 million. The catastrophe losses in the first nine months of 2024 were primarily due to several convective storms across multiple states, with wind and hail damage representing the majority of reported losses, primarily in the Midwest, and, to a lesser extent, the impacts of hurricanes Helene and Beryl. The higher catastrophe losses in the first nine months of 2023 were primarily due to several convective storms across multiple states, particularly in the Midwest, with hail and wind damage representing the majority of reported losses, primarily impacting our Personal Lines business. The lower Personal Lines current accident year losses were primarily due to the benefit of earned pricing outpacing loss trends in both personal automobile and homeowners lines, and moderated loss trends, particularly in automobile collision coverages.

Net premiums written increased $173.8 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 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 (including catastrophe losses) and LAE, expense, and combined ratios for the 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 the Core Commercial, Specialty, Personal Lines and Other segments and reconciles them to operating income (loss) before interest expense and income taxes.

Core Commercial net premiums written were $1,695.0 million for the nine months ended September 30, 2024 compared to $1,641.5 million for the nine months ended September 30, 2023. The $53.5 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 nine months ended September 30, 2024 was $88.3 million, compared to $1.0 million for the nine months ended September 30, 2023, a favorable change of $87.3 million. Catastrophe losses for the nine months ended September 30, 2024 were $68.8 million, compared to $141.8 million for the nine months ended September 30, 2023, a decrease of $73.0 million. Net favorable development on prior years’ loss reserves for the nine months ended September 30, 2024 was $14.9 million, compared to unfavorable development of $6.9 million for the nine months ended September 30, 2023, a favorable change of $21.8 million.

Core Commercial current accident year underwriting profit, excluding catastrophes, was $142.2 million for the nine months ended September 30, 2024, compared to $149.7 million for the nine months ended September 30, 2023. The $7.5 million decrease in underwriting results was primarily due to higher current accident year losses, relative to earned premiums, in our umbrella product within other core commercial lines, and in our workers’ compensation line, partially offset by lower losses, relative to earned premiums, in our commercial automobile line of business.

Specialty net premiums written were $1,042.1 million for the nine months ended September 30, 2024, compared to $988.4 million for the nine months ended September 30, 2023. The $53.7 million increase in net premiums written was primarily due to renewal price increases.

Specialty underwriting profit for the nine months ended September 30, 2024 was $113.5 million, compared to $119.5 million for the nine months ended September 30, 2023, a decrease of $6.0 million. Catastrophe losses for the nine months ended September 30, 2024 were $33.5 million, compared to $37.5 million for the nine months ended September 30, 2023, a decrease of $4.0 million. Net favorable development on prior years’ loss reserves for the nine months ended September 30, 2024 was $22.6 million, compared to $34.8 million for the nine months ended September 30, 2023, a decrease of $12.2 million.

Specialty current accident year underwriting profit, excluding catastrophes, was $124.4 million for the nine months ended September 30, 2024, compared to $122.2 million for the nine months ended September 30, 2023. The $2.2 million increase in underwriting results was primarily due to lower current accident year losses, relative to earned premiums, partially offset by strategic business investments, including in talent and technology, as well as an increase in variable compensation expenses. The lower current accident year losses, relative to earned premiums, were primarily due to our specialty property and casualty and marine lines, partially offset by higher current accident year losses, in our professional and executive lines.

Personal Lines net premiums written were $1,901.4 million for the nine months ended September 30, 2024, compared to $1,834.8 million for the nine months ended September 30, 2023. The $66.6 million increase in net premiums written was primarily driven by renewal price increases, partially offset by decreased new business and lower retention.

Personal Lines underwriting loss for the nine months ended September 30, 2024 was $74.4 million, compared to $422.4 million for the nine months ended September 30, 2023, an improvement in underwriting results of $348.0 million. Catastrophe losses for the nine months ended September 30, 2024 were $247.6 million, compared to $453.1 million for the nine months ended September 30, 2023, a decrease of $205.5 million. Favorable development on prior years’ loss reserves for the nine months ended September 30, 2024 was $4.3 million, compared to unfavorable development of $21.1 million for the nine months ended September 30, 2023, a favorable change of $25.4 million.

Personal Lines current accident year underwriting profit, excluding catastrophes, was $168.9 million for the nine months ended September 30, 2024, compared to $51.8 million for the nine months ended September 30, 2023. The $117.1 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. The lower Personal Lines current accident year losses were primarily due to the benefit of earned pricing outpacing loss trends in both personal automobile and homeowners lines, and moderated loss trends, particularly in automobile collision coverages.

Other

Our Other segment had operating income of $0.5 million for the nine months ended September 30, 2024, compared to $1.2 million for the nine months ended September 30, 2023, a decrease of $0.7 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 nine 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 nine months ended September 30, 2024, favorable catastrophe loss development was $37.0 million, primarily due to lower than expected losses related to events from accident years 2020 through 2023, including several convective storms across multiple states, Winter Storm Elliot, Hurricane Ian, and Hurricane Ida. For the nine months ended September 30, 2023, total catastrophe loss development was not meaningful.

2024 Loss and LAE Development, excluding catastrophes

For the nine months ended September 30, 2024, net favorable loss and LAE development, excluding catastrophes, was $41.8 million. Core Commercial favorable loss and LAE development was $14.9 million, with favorability in each of the main product lines: commercial multiple peril, commercial automobile, workers’ compensation and other commercial lines. Lower than expected property losses of $25.6 million were partially offset by higher than expected losses of $10.7 million across several of the liability lines. Specialty favorable loss and LAE development of $22.6 million was primarily due to lower than expected losses in our Professional and Executive Lines division’s liability claims-made coverage of $14.1 million and, to a lesser extent, lower than expected losses in our surety line. Personal Lines favorable development was primarily due to lower than expected losses of $13.4 million in our personal automobile line within physical damage coverage. This favorable development was partially offset by higher than expected losses of $10.3 million in other personal lines within our standalone umbrella coverage.

2023 Loss and LAE Development, excluding catastrophes

For the nine months ended September 30, 2023, net favorable loss and LAE development, excluding catastrophes, was $6.8 million. Specialty favorable loss and LAE development of $34.8 million was primarily due to lower than expected losses and LAE of $28.9 million in our Professional and Executive Lines division, notably in accident years 2019 through 2022 and, to a lesser extent, lower than expected losses and LAE in our surety line. Personal Lines unfavorable loss and LAE development of $21.1 million was primarily due to higher than expected losses in our personal automobile line of $17.1 million. The higher than expected losses in our personal automobile line were primarily within bodily injury coverages in accident years 2018, 2019 and 2022, and within property damage coverages in accident years in 2021 and 2022, partially offset by lower than expected losses within personal injury protection coverages in accident years 2021 and 2022. Core Commercial unfavorable loss and LAE development of $6.9 million was primarily due to higher than expected losses in our commercial automobile line of $14.0 million, driven by higher bodily injury and personal injury protection losses in accident years 2014 and 2019 and, to a lesser extent, higher than expected losses in general liability and commercial umbrella coverages, partially offset by lower than expected losses in our workers’ compensation line of $17.7 million, primarily in accident years 2013 through 2021.

Reinsurance Recoverables

Reinsurance recoverables were $1,960.9 million and $2,056.1 million at September 30, 2024 and December 31, 2023, respectively, of which $101.1 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 $48.1 million and $72.2 million at September 30, 2024 and December 31, 2023, respectively, and billable non-MCCA reinsurance recoverables totaled $53.0 million and $89.8 million at September 30, 2024 and December 31, 2023, respectively. At September 30, 2024, there were $0.6 million of billed balances outstanding greater than 90 days. At December 31, 2023, there were no billed balances outstanding greater than 90 days.