HANOVER INSURANCE GROUP INC

Previous wording

The following discussion contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this discussion and analysis, words such as: “believes,” “anticipates,” “expects,” “projections,” “outlook,” “should,” “could,” “plan,” “guidance,” “likely,” “on track to,” “potential,” “continue,” “targeted,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. We caution readers that accuracy with respect to forward-looking projections is difficult and subject to risks and uncertainties. Those risks and uncertainties, in some cases, have affected, and in the future could affect, our actual results and could cause our actual results and beyond to differ materially from historical results and from those expressed in any of our forward-looking statements. For important factors that could cause actual results to differ materially from those contained in forward-looking statements, see “Risk Factors” in Part I – Item 1A.

Current wording

The following discussion contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this discussion and analysis, words such as: “believes,” “anticipates,” “expects,” “projections,” “outlook,” “should,” “could,” “plan,” “guidance,” “likely,” “on track to,” “potential,” “continue,” “targeted,” “designed,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. We caution readers that accuracy with respect to forward-looking projections is difficult and subject to risks and uncertainties. Those risks and uncertainties, in some cases, have affected, and in the future could affect, our actual results and could cause our actual results and beyond to differ materially from historical results and from those expressed in any of our forward-looking statements. For important factors that could cause actual results to differ materially from those contained in forward-looking statements, see “Risk Factors” in Part I – Item 1A.

Previous wording

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

Current wording

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

Previous wording

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.

Current wording

Net income was $426.0 million in 2024, compared to $35.3 million in 2023, an increase of $390.7 million, primarily due to higher after-tax operating income.

Previous wording

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.

Current wording

Net favorable development on prior years’ loss reserves was $67.4 million in 2024, compared to $15.9 million in 2023, an increase of $51.5 million.

Previous wording

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.

Current wording

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 (commercial umbrella, monoline general liability, claims-made liability, 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, human services, manufacturing, 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.

Previous wording

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.

Current wording

Net premiums written increased 4.2% in 2024, compared to 2023, primarily driven by renewal price increases. Operating income before interest expense and income taxes increased in 2024, primarily due to lower catastrophe losses and higher net favorable 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.

Previous wording

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.

Current wording

Net premiums written increased 6.2% in 2024, compared to 2023, primarily due to renewal price increases and improved new business. Operating income before interest expense and income taxes increased in 2024, primarily due to lower current accident year losses, relative to earned premiums, higher net investment income, and earned premium growth, partially offset by higher expenses. 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.

Previous wording

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.

Current wording

Net premiums written increased 4.3% in 2024, compared to 2023, primarily due to renewal price increases, partially offset by decreased new business and lower retention. Operating income before interest expense and income taxes improved in 2024, compared to 2023, primarily due to lower catastrophe losses, improvements in current accident year underwriting results, and favorable development on prior years’ loss reserves.

Previous wording

Primary business operations include insurance products and services currently provided through four operating segments: Core Commercial, Specialty, Personal Lines and Other. Core Commercial includes commercial multiple peril, commercial automobile, workers’ compensation, and other commercial lines coverages provided to small and mid-sized businesses. Specialty includes four divisions of business: Professional and Executive Lines, Specialty P&C, Marine, and Surety and Other. Specialty P&C includes coverages such as program business (providing commercial insurance to markets with specialized coverage or risk management needs related to groups of similar businesses), specialty industrial and commercial property, excess and surplus lines and specialty general liability coverage. Personal Lines includes personal automobile, homeowners and other personal coverages, such as umbrella. Included in the “Other” segment are Opus Investment Management, Inc., which markets investment management services to institutions, pension funds, and other organizations; earnings on holding company assets; holding company and other expenses, including certain costs associated with retirement benefits due to our former life insurance employees and agents; and our run-off voluntary assumed property and casualty pools, run-off direct asbestos and environmental, and product liability businesses.

Current wording

Primary business operations include insurance products and services currently provided through four reporting segments: Core Commercial, Specialty, Personal Lines and Other. Core Commercial includes commercial multiple peril, commercial automobile, workers’ compensation, and other commercial lines coverages provided to small and mid-sized businesses. Specialty includes four divisions of business: Professional and Executive Lines, Specialty P&C, Marine, and Surety and Other. Specialty P&C includes coverages such as program business (providing commercial insurance to markets with specialized coverage or risk management needs related to groups of similar businesses), specialty industrial and commercial property, excess and surplus lines and specialty general liability coverage. Personal Lines includes personal automobile, homeowners and other personal coverages, such as umbrella. The “Other” segment includes earnings on holding company assets; holding company and other expenses, including certain costs associated with retirement benefits due to our former life insurance employees and agents; and our run-off voluntary assumed property and casualty pools, run-off direct asbestos and environmental, and product liability businesses. Also included in the “Other” segment during the first half of 2024 and prior were the operations of Opus Investment Management, Inc. (“Opus”), which provided investment management services to THG, as well as institutions, pension funds, and other organizations. During the second and third quarters of 2024, we exited all of Opus’ business operations serving unaffiliated entities. Investment management services provided by Opus to THG related to its investment-grade fixed maturities portfolio were also transferred to an external manager during the second quarter of 2024.

Previous wording

We report interest expense on debt separately from the earnings of our operating segments. This consists primarily of interest on our senior and subordinated debentures.

Current wording

We report interest expense on debt separately from the earnings of our reporting segments. This consists primarily of interest on our senior and subordinated debentures.

Previous wording

Consolidated net income was $35.3 million in 2023, compared to $116.0 million in 2022, a decrease of $80.7 million. The year-over-year comparison of consolidated net income reflects lower operating income, partially offset by lower after-tax net realized and unrealized investment losses of $58.2 million primarily related to the change in the fair value of equity securities. Operating income before interest expense and income taxes 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, most significantly in our Personal Lines, 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.

Current wording

Consolidated net income was $426.0 million in 2024, compared to $35.3 million in 2023, an increase of $390.7 million. This increase was due to higher after-tax operating income of $429.7 million, partially offset by an increase in after-tax net realized and unrealized investment losses of $34.2 million. Operating income before interest expense and income taxes was $650.1 million in 2024, compared to $105.6 million in 2023, an increase of $544.5 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.

Previous wording

The following table reflects operating income (loss) before interest expense and income taxes for each operating segment and a reconciliation to consolidated net income from operating income before interest expense and income taxes (a non-GAAP measure).

Current wording

The following table reflects operating income (loss) before interest expense and income taxes for each reporting segment and a reconciliation to consolidated net income from operating income before interest expense and income taxes (a non-GAAP measure).

Previous wording

In addition to consolidated net income, discussed above, we assess our financial performance based upon pre-tax “operating income,” and we assess the operating performance of each of our four operating segments based upon the pre-tax operating income (loss) generated by each segment. As reflected in the table above, operating income before interest expense and income taxes excludes interest expense on debt and certain other items, which we believe are not indicative of our core operations, such as net realized and unrealized investment gains and losses. Such gains and losses are excluded since they are determined by interest rates, financial markets and the timing of sales. Also, operating income before interest expense and income taxes excludes net gains and losses on disposals of businesses, gains and losses related to the repayment of debt, discontinued operations, costs to acquire businesses, restructuring costs, the cumulative effect of accounting changes and certain other items. Although the items excluded from operating income before interest expense and income taxes are important components in understanding and assessing our overall financial performance, we believe a discussion of operating income before interest expense and income taxes enhances an investor’s understanding of our results of operations by highlighting net income attributable to the core operations of the business. However, operating income before interest expense and income taxes, which is a non-GAAP measure, should not be construed as a substitute for income before income taxes or income from continuing operations, and operating income should not be construed as a substitute for net income.

Current wording

In addition to consolidated net income, discussed above, we assess our financial performance based upon pre-tax “operating income,” and we assess the operating performance of each of our four reporting segments based upon the pre-tax operating income (loss) generated by each segment. As reflected in the table above, operating income before interest expense and income taxes excludes interest expense on debt and certain other items, which we believe are not indicative of our core operations, such as net realized and unrealized investment gains and losses. Such gains and losses are excluded since they are determined by interest rates, financial markets and the timing of sales. Also, operating income before interest expense and income taxes excludes net gains and losses on disposals of businesses, gains and losses related to the repayment of debt, discontinued operations, costs to acquire businesses, restructuring costs, the cumulative effect of accounting changes and certain other items. Although the items excluded from operating income before interest expense and income taxes are important components in understanding and assessing our overall financial performance, we believe a discussion of operating income before interest expense and income taxes enhances an investor’s understanding of our results of operations by highlighting net income attributable to the core operations of the business. However, operating income before interest expense and income taxes, which is a non-GAAP measure, should not be construed as a substitute for income before income taxes or income from continuing operations, and operating income should not be construed as a substitute for net income.

Previous wording

Core Commercial net premiums written were $2,107.0 million for the year ended December 31, 2023, compared to $1,999.9 million for the year ended December 31, 2022. The $107.1 million increase in net premiums written was primarily driven by renewal price increases.

Current wording

Core Commercial net premiums written were $2,195.5 million for the year ended December 31, 2024, compared to $2,107.0 million for the year ended December 31, 2023. The $88.5 million increase in net premiums written was primarily driven by renewal price increases.

Previous wording

Core Commercial underwriting profit for the year ended December 31, 2023 was $16.6 million, compared to an underwriting loss of $28.7 million for the year ended December 31, 2022, an improvement in underwriting results of $45.3 million. Catastrophe losses for the year ended December 31, 2023 were $171.3 million, compared to $193.7 million for the year ended December 31, 2022, a decrease of $22.4 million. Net unfavorable development on prior years’ loss reserves for the year ended December 31, 2023 was $4.7 million, compared to net favorable development of $10.3 million for the year ended December 31, 2022, an unfavorable change of $15.0 million.

Current wording

Core Commercial underwriting profit for the year ended December 31, 2024 was $114.8 million, compared to $16.6 million for the year ended December 31, 2023, an increase of $98.2 million. Catastrophe losses for the year ended December 31, 2024 were $77.2 million, compared to $171.3 million for the year ended December 31, 2023, a decrease of $94.1 million. Net favorable development on prior years’ loss reserves for the year ended December 31, 2024 was $17.7 million, compared to net unfavorable development of $4.7 million for the year ended December 31, 2023, a favorable change of $22.4 million.

Previous wording

Core Commercial current accident year underwriting profit, excluding catastrophes, was $192.6 million for the year ended December 31, 2023, compared to $154.7 million for the year ended December 31, 2022. The $37.9 million increase in underwriting results was primarily driven by lower current accident year losses, relative to earned premiums, in our commercial multiple peril line.

Current wording

Core Commercial current accident year underwriting profit, excluding catastrophes, was $174.3 million for the year ended December 31, 2024, compared to $192.6 million for the year ended December 31, 2023. The $18.3 million decrease in underwriting results was primarily due to higher expenses, and higher current accident year losses, relative to earned premiums, in our umbrella product within other core commercial lines, partially offset by lower losses, relative to earned premiums, in our commercial automobile line of business. The higher expenses were primarily due to increased variable compensation expenses.

Previous wording

Specialty net premiums written were $1,293.3 million for the year ended December 31, 2023, compared to $1,243.7 million for the year ended December 31, 2022. The $49.6 million increase in net premiums written was primarily due to renewal price increases, partially offset by lower retention driven by underwriting actions.

Current wording

Specialty net premiums written were $1,373.9 million for the year ended December 31, 2024, compared to $1,293.3 million for the year ended December 31, 2023. The $80.6 million increase in net premiums written was primarily due to renewal price increases and improved new business.

Previous wording

Personal Lines net premiums written were $2,409.9 million for the year ended December 31, 2023, compared to $2,232.9 million for the year ended December 31, 2022. The $177.0 million increase in net premiums written was primarily driven by renewal price increases, partially offset by decreased new business.

Current wording

Personal Lines net premiums written were $2,514.2 million for the year ended December 31, 2024, compared to $2,409.9 million for the year ended December 31, 2023. The $104.3 million increase in net premiums written was primarily driven by renewal price increases, partially offset by decreased new business and lower retention.

Previous wording

Net premiums written in the personal automobile line of business for the year ended December 31, 2023 were $1,404.2 million, compared to $1,317.2 million for the year ended December 31, 2022, an increase of $87.0 million. Personal automobile policies in force decreased by 2.2%. Net premiums written in the homeowners and other lines of business for the year ended December 31, 2023 were $1,005.7 million, compared to $915.7 million for the year ended December 31, 2022, an increase of $90.0 million. Homeowners policies in force decreased by 1.4%.

Current wording

Net premiums written in the personal automobile line of business for the year ended December 31, 2024 were $1,463.6 million, compared to $1,404.2 million for the year ended December 31, 2023, an increase of $59.4 million. Personal automobile policies in force decreased by 7.0% since December 31, 2023. Net premiums written in the homeowners and other lines of business for the year ended December 31, 2024 were $1,050.6 million, compared to $1,005.7 million for the year ended December 31, 2023, an increase of $44.9 million. Homeowners policies in force decreased by 6.1% since December 31, 2023.

Previous wording

We were able to obtain pricing increases of approximately 24% in our homeowners line and 13% in our automobile line in 2023 and believe that our ability to obtain pricing increases will continue. Consistent with our expectations, PIF declined in 2023 driven by lower new business, as our new business pricing is at levels at or above our renewal price increases. We are becoming more selective on new business quoting, where permissible, around certain geographies, driver and vehicle history, building and roof condition type, and by implementing changes to certain policy terms and conditions. As a result of our pricing and underwriting actions, Personal Lines PIF decreased in the second half of 2023. We expect our sequential PIF counts to continue to shrink into next year. Additionally, our Personal Lines net premiums written may be affected by price competition and the regulatory environment. These factors, along with the aforementioned issues contributing to our recent increase in losses, may also affect our ability to maintain and improve underwriting results.

Current wording

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 19% in our homeowners line and approximately 16% in our personal automobile line during 2024 and believe that our ability to obtain pricing increases, while moderating, will continue. Consistent with our expectations, PIF declined in 2024, driven by lower renewal business. We expect our sequential PIF counts to continue to shrink in 2025, primarily driven by our targeted actions in the Midwest. 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.

Previous wording

Our Other segment had an operating loss of $0.8 million for the year ended December 31, 2023, compared to operating income of $1.0 million for the year ended December 31, 2022, a decrease of $1.8 million.

Current wording

Our Other segment had an operating loss of $0.5 million for the year ended December 31, 2024, compared to $0.8 million for the year ended December 31, 2023, an improvement of $0.3 million.

Previous wording

The IBNR reserve includes both a provision for claims that have occurred but have not yet been reported to us, some of which may not yet be known to the insured, and a provision for future development on reported claims. IBNR represents a significant proportion of our total net loss reserves (i.e., net of estimated reinsurance recoverables), particularly for long-tail liability classes. In fact, approximately 51% of our aggregate net loss reserves at December 31, 2023 were for IBNR losses and loss expenses.

Current wording

The IBNR reserve includes both a provision for claims that have occurred but have not yet been reported to us, some of which may not yet be known to the insured, and a provision for future development on reported claims. IBNR represents a significant proportion of our total net loss reserves (i.e., net of estimated reinsurance recoverables), particularly for long-tail liability classes. In fact, approximately 53% of our aggregate net loss reserves at December 31, 2024 were for IBNR losses and loss expenses.

Previous wording

We regularly update our reserve estimates as new information becomes available and additional events occur which may impact the resolution of unsettled claims. Reserve adjustments are reflected in the results of operations as adjustments to losses and LAE. Often, these adjustments are recognized in periods subsequent to the period in which the underlying policy was written and the loss event occurred. When these types of subsequent adjustments affect prior years, they are described separately as “prior year reserve development.” Such development can be either favorable or unfavorable to our financial results and may vary by line of business. As discussed below, estimated loss and LAE reserves for claims occurring in prior years, in the aggregate, developed favorably by $15.9 million and $20.6 million for the years ended December 31, 2023 and 2022, respectively, although there was some significant variance by segment. Additionally, our estimated loss and LAE reserves for catastrophe claims occurring in prior years was zero for the year ended December 31, 2023 and developed favorably by $12.0 million for the year ended December 31, 2022. There can be no assurance that current loss and LAE reserves will be sufficient.

Current wording

We regularly update our reserve estimates as new information becomes available and additional events occur which may impact the resolution of unsettled claims. Reserve adjustments are reflected in the results of operations as adjustments to losses and LAE. Often, these adjustments are recognized in periods subsequent to the period in which the underlying policy was written and the loss event occurred. When these types of subsequent adjustments affect prior years, they are described separately as “prior year reserve development.” Such development can be either favorable or unfavorable to our financial results and may vary by line of business. As discussed below, estimated loss and LAE reserves for claims occurring in prior years, in the aggregate, developed favorably by $67.4 million and $15.9 million for the years ended December 31, 2024 and 2023, respectively, although there was some significant variance by segment. Additionally, our estimated loss and LAE reserves for catastrophe claims occurring in prior years developed favorably by $42.0 million for the year ended December 31, 2024 and was zero for the year ended December 31, 2023. There can be no assurance that current loss and LAE reserves will be sufficient.

Previous wording

We regularly review our reserving techniques, our overall reserving position and our reinsurance. Based on (i) our review of historical data, legislative enactments, judicial decisions, legal developments in impositions of damages and policy coverage, political attitudes and trends in general economic conditions, (ii) our review of per claim information, (iii) our historical loss experience and that of the industry, (iv) the nature of policies written by us, and (v) our internal estimates of required reserves, we believe that adequate provision has been made for loss reserves. Given the inherent complexity of our loss reserve estimation process and the potential variability of the assumptions used, the actual emergence of losses will vary, perhaps substantially, from the estimate of losses included in our financial statements, particularly in those instances where settlements or other claim resolutions do not occur until well into the future. Our net loss reserves at December 31, 2023 were $5.5 billion. Therefore, a relatively small percentage change in the estimate of net loss reserves would have a material effect on our results of operations. Similarly, a one percentage point change in the aggregate loss and LAE ratio resulting from a change in reserve estimation is currently projected to have an approximate $57 million impact on operating income, based on 2023 full year premiums.

Current wording

We regularly review our reserving techniques, our overall reserving position and our reinsurance. Based on (i) our review of historical data, legislative enactments, judicial decisions, legal developments in impositions of damages and policy coverage, political attitudes and trends in general economic conditions, (ii) our review of per claim information, (iii) our historical loss experience and that of the industry, (iv) the nature of policies written by us, and (v) our internal estimates of required reserves, we believe that adequate provision has been made for loss reserves. Given the inherent complexity of our loss reserve estimation process and the potential variability of the assumptions used, the actual emergence of losses will vary, perhaps substantially, from the estimate of losses included in our financial statements, particularly in those instances where settlements or other claim resolutions do not occur until well into the future. Our net loss reserves at December 31, 2024 were $5.6 billion. Therefore, a relatively small percentage change in the estimate of net loss reserves would have a material effect on our results of operations. Similarly, a one percentage point change in the aggregate loss and LAE ratio resulting from a change in reserve estimation is currently projected to have an approximate $60.8 million impact on operating income, based on 2024 full year premiums.

Previous wording

Some risk factors affect multiple lines of business. Examples include changes in claim handling and claim reserving practices, changes in claim settlement patterns, regulatory and legislative actions, court actions, social inflation, timeliness of claim reporting, state mix of claimants and degree of claimant fraud. The extent of the impact of a risk factor will also vary by components within a line of business. Individual risk factors are subject to interactions with other risk factors within line of business components. Thus, risk factors can have offsetting or compounding effects on required reserves.

Current wording

Some risk factors affect multiple lines of business. Examples include changes in claim handling and claim reserving practices, changes in claim settlement patterns, claims complexion, regulatory and legislative actions, increased attorney involvement in claims, court actions or delays in legal proceedings, social inflation and legal system abuse dynamics, timeliness of claim reporting, state mix of claimants and degree of claimant fraud. The extent of the impact of a risk factor will also vary by components within a line of business. Individual risk factors are subject to interactions with other risk factors within line of business components. Thus, risk factors can have offsetting or compounding effects on required reserves.

Previous wording

Inflation generally increases the cost of losses covered by insurance contracts. The effect of inflation varies by product. Our insurance premiums are established before the amount of losses and LAE and the extent to which inflation may affect such expenses are known. Consequently, we attempt, in establishing rates and reserves, to anticipate the potential impact of inflation in the projection of ultimate costs. For example, we monitor, and continue to experience, increases in medical costs, wages, and legal costs, all of which are key considerations in setting reserve assumptions for workers’ compensation, bodily injury and other liability lines. We are also monitoring the continued advancements in technology and design found in automobiles and homes, and the increased claims settlement costs that result from labor shortages, and repairs or replacement of such equipment impacted by supply chain disruptions, which could lead to material shortages and elevated prices of building materials. Estimated increases are reflected in our current reserve estimates, but continued increases are expected to contribute to increased losses and LAE in the future.

Current wording

Inflation generally increases the cost of losses covered by insurance contracts. The effect of inflation varies by product. Our insurance premiums are established before the amount of losses and LAE and the extent to which inflation may affect such expenses are known. Consequently, we attempt, in establishing rates and reserves, to anticipate the potential impact of inflation in the projection of ultimate costs. For example, we monitor, and continue to experience, increases in medical costs, wages, and legal defense costs, all of which are key considerations in setting reserve assumptions for workers’ compensation, bodily injury and other liability lines. We are also monitoring the continued advancements in technology and design found in automobiles and homes, and the increased claims settlement costs that result from labor shortages, and repairs or replacement of such equipment impacted by supply chain disruptions, which could lead to material shortages and elevated prices of building materials. Estimated increases are reflected in our current reserve estimates, but continued increases are expected to contribute to increased losses and LAE in the future.

Previous wording

We are also defendants in various litigation matters, including putative class actions, which may seek punitive damages, bad faith or extra-contractual damages, legal fees and interest, or claim a broader scope of policy coverage or settlement and payment obligations than our interpretation. Resolution of these cases is often highly unpredictable, could result in extending the time to settle, and could involve material unanticipated damage awards. We have experienced, and others in the industry have reported, increased attorney involvement in claims resulting in delayed claim settlements, and a trend toward higher valued settlements and litigation, all of which contribute to uncertainty regarding reserve estimates.

Current wording

We are also defendants in various litigation matters, including putative class actions, which may seek punitive damages, bad faith or extra-contractual damages, legal fees and interest, or claim a broader scope of policy coverage or settlement and payment obligations than our interpretation. Resolution of these cases is often highly unpredictable, could result in extending the time to settle, and could involve material unanticipated damage awards. We have experienced, and others in the industry have reported, increased attorney involvement in claims resulting in delayed claim settlements, legal system abuse dynamics, and a trend toward higher valued settlements and litigation, all of which contribute to uncertainty regarding reserve estimates.

Previous wording

While we estimate that approximately half of our written premium is in, what we would characterize as, shorter-tail classes of business, most of our loss reserves relate to longer-tail liability classes of business. Long-tailed classes include commercial liability, automobile liability, third-party coverage and workers’ compensation. For many liability claims, significant periods of time, ranging up to several years or more, may elapse between the occurrence of the loss, the discovery and reporting of the loss to us and the settlement of the claim. As a result, loss experience in the more recent accident years for long-tailed liability coverage has limited statistical credibility because a relatively small proportion of losses in these accident years (the calendar years in which losses are incurred) are reported claims and an even smaller proportion are paid losses. Liability claims are also more susceptible to litigation and can be significantly affected by changing contract interpretations, the legal, political and social environments, the risk and expense of protracted litigation, and inflation. Consequently, the estimation of loss reserves for these coverages is more complex and typically subject to a higher degree of variability and uncertainty compared to short-tailed coverages.

Current wording

While we estimate that approximately half of our written premium is in, what we would characterize as, shorter-tail classes of business, most of our loss reserves relate to longer-tail liability classes of business. Long-tailed classes include commercial general liability, automobile liability, personal and commercial umbrella, third-party coverage and workers’ compensation. For many liability claims, significant periods of time, ranging up to several years or more, may elapse between the occurrence of the loss, the discovery and reporting of the loss to us and the settlement of the claim. As a result, loss experience in the more recent accident years for long-tailed liability coverage has limited statistical credibility because a relatively small proportion of losses in these accident years (the calendar years in which losses are incurred) are reported claims and an even smaller proportion are paid losses. Liability claims are also more susceptible to litigation and can be significantly affected by changing contract interpretations, the legal, political and social environments, the risk and expense of protracted litigation, legal system abuse dynamics, and inflation. Consequently, the estimation of loss reserves for these coverages is more complex and typically subject to a higher degree of variability and uncertainty compared to short-tailed coverages.

Previous wording

For longer-tailed lines of business, applying the loss development factor method often requires even more judgment in selecting development factors, as well as more significant extrapolation. For those long-tailed lines of business with high frequency and relatively low per-loss severity (e.g., personal automobile liability), volatility will often be sufficiently modest for the loss development factor method to be given significant weight, even in the most recent accident years, but expected loss methods and adjusted loss methods are always considered and frequently utilized in the selection process. For those long-tailed lines of business with low frequency and high loss potential (e.g., commercial general liability), anticipated loss experience is less predictable because of the small number of claims and erratic claim severity patterns. In these situations, the loss development factor methods may not produce a reliable estimate of ultimate losses in the most recent accident years since many claims either have not yet been reported or are only in the early stages of the settlement process. Therefore, the loss reserve estimates for these accident years may be based on methods less reliant on extrapolation, such as Bornheutter-Ferguson. Over time, as a greater number of claims are reported and the statistical credibility of loss experience increases, loss development factor methods or adjusted loss methods are given increasing weight.

Current wording

For longer-tailed lines of business, applying the loss development factor method often requires even more judgment in selecting development factors, as well as more significant extrapolation. For those long-tailed lines of business with high frequency and relatively low per-loss severity (e.g., personal automobile liability), volatility will often be sufficiently modest for the loss development factor method to be given significant weight, even in the most recent accident years, but expected loss methods and adjusted loss methods are always considered and frequently utilized in the selection process. For those long-tailed lines of business with low frequency and high loss potential (e.g., commercial general liability and personal and commercial umbrella), anticipated loss experience is less predictable because of the small number of claims and erratic claim severity patterns. In these situations, the loss development factor methods may not produce a reliable estimate of ultimate losses in the most recent accident years since many claims either have not yet been reported or are only in the early stages of the settlement process. Therefore, the loss reserve estimates for these accident years may be based on methods less reliant on extrapolation, such as Bornheutter-Ferguson. Over time, as a greater number of claims are reported and the statistical credibility of loss experience increases, loss development factor methods or adjusted loss methods are given increasing weight.

Previous wording

Our carried reserves for each line of business and coverage are determined based on our quarterly loss reserving process. In making the determination, we consider numerous quantitative and qualitative factors. Quantitative factors include changes in reserve estimates in the period, the maturity of the accident year, trends observed over the recent past, the level of volatility within a particular class of business, the estimated effects of reinsurance, including reinstatement premiums, general economic trends, and other factors. Qualitative factors may include legal and regulatory developments, changes in claim handling and case reserving practices, recent entry into new markets or products, changes in underwriting practices or business mix, concerns that we do not have sufficient or quality historical reported and paid loss and LAE information with respect to a particular line or segment of our business, effects of the economy and political outlook, perceived anomalies in the historical results, and evolving trends or other factors. In doing so, we must evaluate whether a change in the data represents credible actionable information or an anomaly. Such an assessment requires considerable judgment. Even if a change is determined to be apparent, it is not always possible to determine the extent of the change. As a result, there can be a time lag between the emergence of a change and a determination that the change should be partially or fully reflected in the carried loss reserves. In general, changes are made more quickly to reserves for more mature accident years and less volatile classes of business.

Current wording

Our carried reserves for each line of business and coverage are determined based on our quarterly loss reserving process. In making the determination, we consider numerous quantitative and qualitative factors. Quantitative factors include changes in reserve estimates in the period, the maturity of the accident year, trends observed over the recent past, the level of volatility within a particular class of business, the estimated effects of reinsurance, including reinstatement premiums, general economic trends, and other factors. Qualitative factors may include legal and regulatory developments, changes in claim handling and case reserving practices, recent entry into new markets or products, changes in underwriting practices or business mix, concerns that we do not have sufficient or quality historical reported and paid loss and LAE information with respect to a particular line or segment of our business, effects of the economy and political outlook, litigation trends and legal system abuse dynamics, perceived anomalies in the historical results, and evolving trends or other factors. In doing so, we must evaluate whether a change in the data represents credible actionable information or an anomaly. Such an assessment requires considerable judgment. Even if a change is determined to be apparent, it is not always possible to determine the extent of the change. As a result, there can be a time lag between the emergence of a change and a determination that the change should be partially or fully reflected in the carried loss reserves. In general, changes are made more quickly to reserves for more mature accident years and less volatile classes of business.

Previous wording

As stated above, numerous factors (both internal and external) contribute to the inherent uncertainty in the process of establishing loss reserves, including changes in the rate of inflation for goods and services related to insured damages (e.g., medical care, home and automobile repairs, etc.), changes in the judicial interpretation of policy provisions and settlement obligations, changes in the general attitude of juries in determining damage awards, legislative actions, such as expanding liability, coverage mandates or expanding or suspending statutes of limitations which otherwise limit the times within which claims can be made, changes in the extent of insured injuries, changes in the trend of expected frequency and/or severity of claims, changes in our book of business (e.g., change in mix due to new or modified product offerings, new or rapidly expanding geographic areas, etc.), changes in our underwriting practices, and changes in claim handling procedures and/or systems. Regarding our indirect business from voluntary and involuntary pools, we are periodically provided loss estimates by managers of each pool. We adopt reserve estimates for the pools that consider this information and other facts.

Current wording

As stated above, numerous factors (both internal and external) contribute to the inherent uncertainty in the process of establishing loss reserves, including changes in the rate of inflation for goods and services related to insured damages (e.g., medical care, home and automobile repairs, etc.), changes in the judicial interpretation of policy provisions and settlement obligations, changes in the general attitude of juries in determining damage awards, delayed court proceedings, legislative actions, such as expanding liability, coverage mandates or expanding or suspending statutes of limitations which otherwise limit the times within which claims can be made, changes in the extent of insured injuries and claims complexion, changes in the trend of expected frequency and/or severity of claims, changes in our book of business (e.g., change in mix due to new or modified product offerings, new or rapidly expanding geographic areas, etc.), changes in our underwriting practices, and changes in claim handling procedures and/or systems. Regarding our indirect business from voluntary and involuntary pools, we are periodically provided loss estimates by managers of each pool. We adopt reserve estimates for the pools that consider this information and other facts.

Previous wording

In addition, we must consider the uncertain effects of emerging or potential claims and coverage issues that arise as legal, judicial and social conditions, political risks, and economic conditions change. For example, claims which we consider closed may be re-opened as additional damages surface or new liability or damage theories are presented. Also, historically, we have observed more frequent and higher severity in workers’ compensation, bodily injury and other liability claims and more credit-related losses (for example, in our surety business) during periods of economic uncertainty or high unemployment. Economic and labor force dynamics have resulted in many experienced workers retiring from their positions, who have been replaced with newly skilled workers, which could result in more workplace accidents. Another example may be changes in driving behavior over time and the impacts to the make-up, complexity and severity of claims in the automobile lines of business. These, and other issues, could have a negative effect on our loss reserves by either extending coverage beyond the original underwriting intent or by increasing the number or size of claims.

Current wording

In addition, we must consider the uncertain effects of emerging or potential claims and coverage issues that arise as legal, judicial and social conditions, political risks, and economic conditions change. For example, claims which we consider closed may be re-opened as additional damages surface or new liability or damage theories are presented. Also, historically, we have observed more frequent and higher severity in workers’ compensation, bodily injury, umbrella and other liability claims and more credit-related losses (for example, in our surety business) during periods of economic uncertainty or high unemployment. Economic and labor force dynamics have resulted in many experienced workers retiring from their positions and being replaced with less skilled workers, which could result in more workplace accidents. Another example may be changes in driving behavior over time and the impacts to the make-up, complexity and severity of claims in the automobile lines of business. These, and other issues, could have a negative effect on our loss reserves by either extending coverage beyond the original underwriting intent or by increasing the number or size of claim settlements.

Previous wording

As part of our loss reserving analysis, we consider the various factors that contribute to the uncertainty in the loss reserving process. Those factors that could materially affect our loss reserve estimates include loss development patterns and loss cost trends, reporting lags, rate and exposure level changes, the effects of changes in coverage and policy limits, business mix shifts, the effects of regulatory and legislative developments, economic circumstances, the effects of changes in judicial interpretations, the effects of emerging claims and coverage issues, and the effects of changes in claim handling and claim reserving practices. In making estimates of reserves, however, we do not necessarily make an explicit assumption for each of these factors. Moreover, all estimation methods do not utilize the same assumptions and typically no single method is determinative in the reserve analysis for a line of business and coverage. Consequently, changes in our loss reserve estimates generally are not the result of changes in any one assumption. Instead, the variability will be affected by the interplay of changes in numerous assumptions, many of which are implicit to the approaches used.

Current wording

As part of our loss reserving analysis, we consider the various factors that contribute to the uncertainty in the loss reserving process. Those factors that could materially affect our loss reserve estimates include loss development patterns and loss cost trends, reporting lags, rate and exposure level changes, the effects of changes in coverage and policy limits, business mix shifts, the effects of regulatory and legislative developments, economic circumstances, the effects of changes in judicial interpretations, the level of attorney involvement in claims, the effects of legal system abuse dynamics, the effects of emerging claims and coverage issues, and the effects of changes in claim handling and claim reserving practices. In making estimates of reserves, however, we do not necessarily make an explicit assumption for each of these factors. Moreover, all estimation methods do not utilize the same assumptions and typically no single method is determinative in the reserve analysis for a line of business and coverage. Consequently, changes in our loss reserve estimates generally are not the result of changes in any one assumption. Instead, the variability will be affected by the interplay of changes in numerous assumptions, many of which are implicit to the approaches used.

Previous wording

The future impact of the various factors that contribute to the uncertainty in the loss reserving process is impossible to predict. There is potential for significant variation in the development of loss reserves, particularly for long-tailed classes of business and classes of business that are more vulnerable to economic or political risks.

Current wording

The future impact of the various factors that contribute to the uncertainty in the loss reserving process is impossible to predict. There is potential for significant variation in the development of loss reserves, particularly for long-tailed classes of business and classes of business that are more vulnerable to economic, social or political risks.

Previous wording

The following discussion presents disclosure related to possible variations in net reserve estimates (i.e., net of estimated reinsurance recoverables) due to changes in key assumptions. This information is provided for illustrative purposes only. Many other assumptions may also lead to material reserve adjustments. If any such variations do occur, then they would likely occur over a period of several years and therefore their impact on our results of operations would be recognized during the same periods. It is important to note, however, that there is the potential for future variations greater than the amounts described below and for any such variations to be recognized in a single quarterly or annual period. No consideration has been given to potential correlation or lack of correlation among key assumptions or among lines of business and coverage as described below. As a result, and because there are so many other factors which affect our net reserve estimate, it would be inappropriate to take the amounts described below and simply add them together in an attempt to estimate volatility in total. While we believe these are reasonably possible scenarios, the following sensitivity analysis is not illustrative of a net reserve range.

Current wording

The following discussion presents disclosure related to possible variation in net reserve estimates (i.e., net of estimated reinsurance recoverables) due to changes in key assumptions. This information is provided for illustrative purposes only. Many other assumptions may also lead to material reserve adjustments. If any such variations do occur, then they would likely occur over a period of several years and therefore their impact on our results of operations would be recognized during the same periods. It is important to note, however, that there is the potential for future variations greater than the amounts described below and for any such variations to be recognized in a single quarterly or annual period. No consideration has been given to potential correlation or lack of correlation among key assumptions or among lines of business and coverage as described below. As a result, and because there are so many other factors which affect our net reserve estimate, it would be inappropriate to take the amounts described below and simply add them together in an attempt to estimate volatility in total. While we believe these are reasonably possible scenarios, the reader should not consider the following sensitivity analysis as illustrative of a net reserve range.

Previous wording

Personal and Commercial Automobile Bodily Injury – loss reserves recorded for bodily injury on voluntary business were $911.8 million as of December 31, 2023. A key assumption for bodily injury is the inflation rate underlying the estimated reserve. A five point change (e.g., 3% changed to 8% or -2%) in the embedded inflation rate would have changed total reserves by approximately $124 million, either positive or negative, at December 31, 2023.

Current wording

Personal and Commercial Automobile Bodily Injury – loss reserves recorded for bodily injury on voluntary business were $940.0 million as of December 31, 2024. A key assumption for bodily injury is the inflation rate underlying the estimated reserve. A five point change (e.g., 3% changed to 8% or -2%) in the embedded inflation rate would have changed total reserves by approximately $127 million, either positive or negative, at December 31, 2024.

Previous wording

Personal Automobile Personal Injury Protection Medical Payment – loss reserves recorded for personal injury protection medical payment on voluntary business were $104.6 million as of December 31, 2023, of which approximately 91% relate to Michigan policies. A key assumption for this coverage is the inflation rate underlying the estimated reserve. Given the long reporting pattern for this line of business, an additional key assumption is the amount of additional development required to reach full maturity, thereby reflecting ultimate costs, as represented by the tail factor. A five point change in the embedded inflation rate (e.g., 6% changed to 11% or 1%) and a one point change to the tail factor assumption (e.g., 1% changed to 0% or 2%) would have changed total reserves by approximately $40 million, either positive or negative, at December 31, 2023.

Current wording

Personal Automobile Personal Injury Protection Medical Payment – loss reserves recorded for personal injury protection medical payment on voluntary business were $103.4 million as of December 31, 2024, of which approximately 89% relates to Michigan policies. A key assumption for this coverage is the inflation rate underlying the estimated reserve. Given the long reporting pattern for this line of business, an additional key assumption is the amount of additional development required to reach full maturity, thereby reflecting ultimate costs, as represented by the tail factor. A five point change in the embedded inflation rate (e.g., 6% changed to 11% or 1%) and a one point change to the tail factor assumption (e.g., 1% changed to 0% or 2%) would have changed total reserves by approximately $37 million, either positive or negative, at December 31, 2024.

Previous wording

Workers’ Compensation – loss reserves recorded for workers’ compensation on voluntary business were $475.0 million as of December 31, 2023. A key assumption for workers’ compensation is the inflation rate underlying the estimated reserve. Given the long reporting pattern for this line of business, an additional key assumption is the amount of additional development required to reach full maturity, thereby reflecting ultimate costs, as represented by the tail factor. A five point change in the embedded inflation rate (e.g., 4% changed to 9% or -1%) and a one point change to the tail factor assumption (e.g., 2% changed to 1% or 3%) would have changed total reserves by approximately $179 million, either positive or negative, at December 31, 2023.

Current wording

Workers’ Compensation – loss reserves recorded for workers’ compensation on voluntary business were $502.1 million as of December 31, 2024. A key assumption for workers’ compensation is the inflation rate underlying the estimated reserve. Given the long reporting pattern for this line of business, an additional key assumption is the amount of additional development required to reach full maturity, thereby reflecting ultimate costs, as represented by the tail factor. A five point change in the embedded inflation rate (e.g., 4% changed to 9% or -1%) and a one point change to the tail factor assumption (e.g., 2% changed to 1% or 3%) would have changed total reserves by approximately $186 million, either positive or negative, at December 31, 2024.

Previous wording

Monoline and Multiple Peril General Liability – loss reserves recorded for monoline and multiple peril general liability on voluntary business were approximately $1.2 billion as of December 31, 2023. A key assumption for monoline and multiple peril general liability is the implied adequacy of the underlying case reserves. A ten point change in case adequacy (e.g., 10% deficiency changed to 0% or 20% deficiency) would have changed total reserves by approximately $147 million, either positive or negative, at December 31, 2023.

Current wording

Monoline and Multiple Peril General Liability – loss reserves recorded for monoline and multiple peril general liability on voluntary business were approximately $1.2 billion as of December 31, 2024. A key assumption for monoline and multiple peril general liability is the implied adequacy of the underlying case reserves. A ten point change in case adequacy (e.g., 10% deficiency changed to 0% or 20% deficiency) would have changed total reserves by approximately $165 million, either positive or negative, at December 31, 2024.

Previous wording

Specialty Programs – loss reserves recorded for Hanover Programs were $318.0 million as of December 31, 2023. Two key assumptions underlying the actuarial reserve analysis for specialty programs are the inflation rate underlying the estimated reserve for our commercial automobile liability, general liability and workers’ compensation coverages, as well as the tail factor selection for workers’ compensation. A five point change to the embedded inflation rate for the aforementioned coverages (e.g., 4% changed to 9% or -1%), and a one point change in the workers’ compensation tail factor on Hanover Programs (e.g., 0.1% changed to 1.1% or -0.9%) would have changed total reserves by approximately $61 million, either positive or negative, at December 31, 2023.

Current wording

Specialty Programs – loss reserves recorded for Hanover Programs were $303.2 million as of December 31, 2024. Two key assumptions underlying the actuarial reserve analysis for specialty programs are the inflation rate underlying the estimated reserve for our commercial automobile liability, general liability and workers’ compensation coverages, as well as the tail factor selection for workers’ compensation. A five point change to the embedded inflation rate for the aforementioned coverages (e.g., 4% changed to 9% or -1%), and a one point change in the workers’ compensation tail factor on Hanover Programs (e.g., 0.1% changed to 1.1% or -0.9%) would have changed total reserves by approximately $54 million, either positive or negative, at December 31, 2024.