Hanover Insurance Group Inc
NYSE:THG
Hanover Insurance Group Inc
NYSE:THG
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Earnings Call Transcript
Earnings Call Recording
Other Earnings Calls
Good day, and welcome to the Hanover Insurance Group's Fourth Quarter 2024 Earnings Conference Call. My name is Joe, and I will be your operator for today's call. [Operator Instructions] Please also note that this event is being recorded today.
I would now like to turn the conference over to Oksana Lukasheva. Please go ahead.
Thank you, operator. Good morning, and thank you for joining us for our quarterly conference call. We will begin today's call with prepared remarks from Jack Roche, our President and Chief Executive Officer; and Jeff Farber, our Chief Financial Officer. Available to answer your questions after our prepared remarks are Dick Lavey, President of Agency Markets; and Bryan Salvatore, President of Specialty Lines.
Before I turn the call over to Jack, let me note that our earnings press release, financial supplement and a complete slide presentation for today's call are available in the Investors section of our website at www.hanover.com. After the presentation, we will answer questions in the Q&A session.
Our prepared remarks and responses to your questions today, other than statement of historical fact include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements can relate to, among other things, our outlook and guidance for 2025, economic conditions and related effects, including economic and social inflation, potential recessionary impacts, tariffs, as well as other risks and uncertainties such as severe weather and catastrophes that could affect the company's performance and/or cause actual results to differ materially from those anticipated. We caution you with respect to reliance on forward-looking statements, and in this respect, refer you to the forward-looking statements section in our press release, the presentation deck in our filings with the SEC.
Today's discussion will also reference certain non-GAAP financial measures such as operating income and accident year loss and combined ratios, excluding catastrophes, among others. A reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis can be found in the press release the slide presentation or the financial supplement, which are posted on our website, as I mentioned earlier.
With those comments, I will turn the call over to Jack.
Thank you, Oksana. Good morning, everyone, and thank you for joining us. Our exceptional fourth quarter performance marked the culmination of a very strong year for our company. Across the organization, our team executed remarkably well. We successfully implemented our cat mitigation actions. We delivered on our margin recapture plans. We continue to improve our claims response and delivery, and we successfully executed on targeted portfolio management and innovation initiatives, positioning the organization to deliver strong, profitable growth going forward. Our company is stronger today than ever before, poised to capitalize on some of the most promising growth opportunities in the marketplace.
For the quarter, we generated record operating return on equity of 24.4%. We improved our ex cat combined ratio by 2.7 points year-over-year to 87.5% and we grew net written premiums by 7.4%, a meaningful acceleration from recent quarters. On a full year basis, we delivered an operating ROE of 15.8%, our highest on record. We increased net written premiums to north of $6 billion. Excluding cats, we grew our operating income by 29%, demonstrating the inherent strength of our underlying earnings power. And notably, prior year development was favorable across all major business segments, further evidencing our commitment to prudent reserving practices.
Throughout the year, we took a number of proactive steps to further mitigate our catastrophe exposure, increasing pricing, modifying terms and conditions and making adjustments to our geographic mix. To provide some additional context, over the last 2 years, we increased cumulative written renewal pricing by approximately 47% in homeowners and by 29% in core commercial property. And over the past 12 months, we more evenly spread our risk geographically. We strategically reduced our Personal Lines policy count in the Midwest by 10.2% and implemented new or enhanced deductibles across the majority of our personal lines book. These actions had a positive effect on our 2024 performance, and they are expected to benefit our results in 2025 and in the years ahead.
Also, as part of our ongoing commitment to property risk management, we have successfully integrated sensor technology across target [indiscernible] of our core commercial book of business to mitigate water and freeze losses. To date, this initiative has prevented millions of dollars in potential losses.
Turning now towards segment accomplishments, starting with Specialty, which performed exceptionally well in the quarter and the year. Today, our $1.4 billion net written premium specialty portfolio consists of 9 businesses and 18 distinct product offerings. We set ourselves apart in the marketplace by providing select distribution across retail and wholesale channels, diversified product offerings and well coordinated service at both the distributor and customer level. As expected, we accelerated our top line growth to 8.8% in the fourth quarter after substantially completing the focused profitability improvement actions implemented over the past 18 months.
In addition, a number of our most profitable lines, E&S, HSI, Healthcare and Marine achieved double-digit growth in the quarter through targeted investments in talent and technology and completing specific underwriting actions, we have positioned specialty to accelerate its growth trajectory in 2025 relative to the full year 2024. In E&S, our new policy quote and issue platform is enabling our underwriting teams to prioritize and more efficiently respond to submissions for agent and wholesale partners. This platform is one of the many ways we are building on our competitive advantage in the consolidating agency market. This dynamic environment requires continued operating model enhancements to yield process efficiencies.
In marine, talent, reputation and service are setting us apart from the competition. We're confident we will continue to strengthen our market position, advancing our brand among agents as a leading go-to carrier in this business. Across our specialty portfolio, we also continue to see profitable growth and new business opportunities in surety and our professional and executive lines. Additionally, we will lean harder on some newer opportunities including smaller sized specialty accounts, wholesale distribution as well as a targeted appetite expansion in attractive classes in marine and surety, among others.
Focusing now on our core commercial segment. We delivered strong performance in the quarter and stable margins throughout the year, underscoring the effectiveness of our disciplined underwriting and middle-market property actions. We remain committed to balancing thoughtful growth with profitability in this business while proactively addressing accounts that don't meet our refined underwriting standards. Premium growth in the quarter was driven by standout performance with small commercial premiums up 9.3% and middle market premiums up 5%, reflecting significant sequential momentum. Small Commercial remains a real growth engine for us delivering strong performance in Q4 with notable new business momentum.
Submission increased approximately 25% in the quarter, a testament to the great transactional success and effectiveness of our TAP sales quote and issue platform, strong market penetration and excellent execution. We are leveraging technology and third-party data to drive new business efforts, supported by our talented and experienced team, which is the strongest it's ever been. In Middle Market, the vast majority of our underwriting adjustments are now behind us, which enabled elevated growth in the fourth quarter as expected. Our improved mix has enhanced our portfolio, particularly in property as we continue to retain our most profitable business, setting the stage for strong growth and profitability in 2025.
Turning to Personal Lines. This team delivered an outstanding turnaround performance in 2024, demonstrating strong market awareness, agility and determination. During the year, we implemented critical and industry-leading changes in terms and conditions, significantly increased pricing and meaningfully shifted geographic mix to a more balanced portfolio while still growing premiums by over 4% for the year. Our margin improvement actions marked the segment's sixth consecutive quarter of ex-cat loss ratio improvement. We are exiting the year with personal lines price increases above 14% for the account, which moderated slightly from the third quarter, but still high relative to historic levels and current loss trend.
The changes we have made to terms and conditions in our homeowners line are benefiting our CAT results as you would expect. And our updated all peril deductibles, which we implemented across most of our states, have had a positive impact on our ex cat performance as well. As higher deductibles reduced smaller claims, we are benefiting from lower frequency on our ex cat loss ratio. The swift improvement in Personal Lines profitability is enabling us to focus on accelerating growth in additional geographic regions, regions that demonstrate strong potential for sustained profitability such as Wisconsin, Maryland, Pennsylvania and Tennessee.
As planned, we observed a divergence in net written premium growth across regions, with Midwestern states posting an increase of 3.2% in the quarter compared with combined growth of 10.1% for all other states. We are actively pursuing PIF growth in targeted regions to enhance diversification. The greater diversification across our book is enabling us to spread our earnings more broadly than ever, helping to mitigate our exposure to risk and volatility. We're proud of the outstanding work our Personal Lines team did in 2024, and we are very excited about the profitable growth potential for our market-leading account-focused franchise in 2025 and beyond.
Before I conclude my remarks, I'd like to share some broader perspective about our go-forward strategy and our business model. Our strategy remains highly effective supported by a strong operating model and continued technological advancements. In today's rapidly evolving marketplace, ease of use, speed to answer and exceptional customer service are not just desirable, they are essential. With this in mind, we continue to make substantial investments in innovation and the development of proven effective tools, tools that enhance our value proposition in the market improving efficiency and analytical precision.
In 2024, we continued to make progress in tech innovation, complementing capabilities we introduced previously. As a result, today, we have one of the most effective quote buying and rating platforms in the market, TAP sales with versions in our personal, small commercial and relevant specialty segments. We have various application program interfaces that allow us to seamlessly plug into agents platforms. And we have digital workflow automation that allows for simplification of the submission process eliminating the need for manual intervention for submission ingestion and triaging, reducing response times signinly.
Our updated claims system implemented over the past few years has now been built out with additional data elements from third-party sources. Our ongoing investments in data and analytics have produced advanced capabilities like our enhanced jumper severity escalation models which improve our ability to predict and manage claims with escalating severity, enabling timely interventions and better outcomes. Additionally, we are now leveraging virtual appraisals of claims on approximately 80% of our auto physical damage claims, streamlining settlement processes and improving customer satisfaction. We expect other recently added capabilities such as real-time text notifications and status tracking to further enhance efficiency and customer experience.
Looking ahead, we are expanding our AI initiatives such as data extraction, triage models and model training oversight to drive further efficiencies and automation. While we continue to pilot innovative AI tools to enhance underwriting decision-making processes, we are prioritizing capabilities that drive enhanced employee productivity and improved ease of use for agents and customers while we maintain rigorous outsight of model development. Risk mitigation, governance and compliance are essential to our strategic technology and AI initiatives, ensuring our innovations are secure, ethical and compliant with regulations.
As we close out 2024, we are very proud of the performance we delivered for the year. Our diversified franchise with its specialized products and capabilities demonstrated exceptional resilience and growth potential. With our talented and agile team, strong agency partnerships and innovative technological advancements, we are confident in our ability to continue to capitalize on the many opportunities we see in the market and to drive strong, sustainable, profitable results going forward.
Now is our time to take advantage of the opportunities we have created capitalizing our nimble and agile culture and business model, key differentiators for our company. look forward, we are extremely optimistic and we have every confidence we will continue to excel in the year ahead.
With that, I'll turn the call over to Jeff.
Thank you, Jack, and good morning, everyone. Our strong execution in 2024 is demonstrated by our record performance. On a consolidated basis, we reported excellent net and operating income per share for the fourth quarter and the full year with each beating our previous records. We delivered a combined ratio of 94.8% for the full year, our best since 2020. Excluding catastrophes, our combined ratio was 88.4%, beating our original guidance handily and a 2.9 point improvement compared to 2023. Our fourth quarter overall combined rate 89.2% set a new quarterly record and marked a 5-point improvement over the comparable period last year.
Quarterly top line growth was 7.4% with a return to normalcy, as we indicated. Consolidated full year top line growth 4.7% and in line with our 2024 mid-single-digit growth guidance. With the vast majority of our targeted underwriting actions in middle market and specialty behind us, we anticipate improved growth across these segments in 2025. Cat losses for the year were 6.4%, including [ 7 ] points of favorable prior year cat development. Our approach to setting catastrophe loads is prudent as we select higher on the probability curve. Prior year development was favorable across each segment in both the fourth quarter and for the year, liability loss experience and trends were largely within expectations and we're continuing to exercise prudence in our picks given the uncertain environment.
Looking at favorability in more detail, specialty was favorable by 3.5 and 7 points for the year and quarter, respectively. Favorability was widespread in several areas notably driven by consistently lower-than-expected losses in our professional and executive liability claims made business. Core commercial favorable development was 80 basis points for the year, and 50 basis points in Q4, with favorability in each major line of business driven primarily by property coverages as we maintain our prudence around liability trends.
We are still benefiting from lower liability frequency relative to long-term historical trends and from generally favorable industry and size mix. Personal Lines development was slightly favorable for the quarter and year. We are observing favorability in auto collision coverages and in homeowners, and we continue to monitor the book for elevated trends in personal umbrella while increasing rates significantly. We believe our strong balance sheet positions us well, which reduced frequency provides a buffer against the legal abuse environment in the industry and we continue to be confident in our ability to sustain our performance and navigate these trends effectively. Our expense ratio was 31.3% for the year and above our expectations.
It is clearly a temporary spike and due to higher variable expenses, such as employee and agency compensation, which are reflective of much better-than-expected performance. The earnings beat relative to our original expectations was especially significant in the fourth quarter, triggering a true-up for the full year in the quarter. Additionally, we continued to make investments in our future profitable growth, particularly in the specialty segment and believe our investments in talent and technology will allow us to further capitalize on profitable growth opportunities. We remain fully committed to our long-term 20 basis point per annum improvement trend and we have clear visibility to a 30.5% expense ratio in 2025.
Our financial plans for staff compensation get reset each year to account for future performance targets. Improving underwriting performance is factored into our agent profit expectations by planning for it every year with some continuing adjustments. We're committed to managing our expenses effectively and appropriately. We are very pleased with the delivery of a much lower combined ratio than we guided to despite the temporary expense ratio elevation.
Turning to our underlying underwriting loss performance. We surpassed our expectations for both the quarter and the year. Our consolidated underlying loss ratio improved 3.3 points to 56.9% in Q4 and 2.9 points to 58.2% for the full year, helped by impressive improvement in Personal Lines, better-than-expected results in specialty and stable loss performance in core commercial.
Diving into Personal Lines, our combined ratio, excluding catastrophes, improved 7.9 points to 85.9% for the fourth quarter and 7.8 points to 88.9% for the full year. The improvement was driven by the benefits of earned pricing in both personal auto and homeowners along with lower frequency, which enhanced our margins. Our personal auto ex-cat current accident loss ratio was better than planned for both the quarter and the year, a result of healthy price increases earning in and a continuing benefit from industry-wide reduced frequency. We expect some additional improvement in 2025 as written rate earns in above loss trend, albeit to a lower degree.
Turning to homeowners. We delivered outstanding ex-cat current accident year loss ratio improvement for the year, down 6.7 points and for the quarter, down 12 points. Higher earned rates were certainly a major driver of the improvement. We believe we have also benefited from a frequency reduction in small-sized claims driven by a gradual introduction of increased deductibles throughout the year. Finally, there was a slight impact from lower-than-usual weather-related claims, primarily in the fourth quarter. This said, we continue to closely monitor activity on our PL umbrella line in order to stay on top of evolving trends. We are achieving healthy price increases up approximately 20% in the fourth quarter. We expect the personal lines loss ratio to further improve from the 2024 actual as increased pricing continues to earn in, and we benefit from terms and condition changes more fully particularly in home.
Personal Lines top line growth was solid in the fourth quarter at 6.6% and 4.3% for the year. Net written premium growth was impacted by our deliberate strategy to reduce PIF count in select states to manage our cat exposure, particularly in the Midwest. Importantly, we continue to achieve strong retention in our homeowners line, ending the fourth quarter with retention of 83.2%, which demonstrates the market's ability to absorb continued price increases. Personal Lines pricing is expected to remain healthy in 2025, and as such, the segment remains on track to return to target profitability on an earned basis this year. In core commercial, our current accident year ex cat loss ratio was 58.9% in the quarter and 57.8% for the full year. The loss ratio for the year was approximately 0.5 point higher than in 2023, primarily driven by prudently adding IBNR reserves in commercial umbrella.
Core property continued to perform well. maintaining the profitability levels achieved in 2023. In liability lines, our business continued to benefit from lower than historical frequency because of geographic and industry mix choices we have made in the past. And our actuarial estimates for core liability lines remain consistent with our expectations. However, management increased our view of current accident year loss picks due to uncertainty around claim severities. Overall, we are confident that our approach is thoughtful and prudent and is in keeping with our long-standing track record of maintaining a strong balance sheet. Our prudent view is driving increased middle-market umbrella rates of approximately 14% in the year and double-digit pricing increases in core commercial auto. We expect our liability pricing to accelerate in 2025. And we expect to see some improvement to the core commercial loss ratio in 2025 driven by property. Core commercial net written premium growth was 4.2% for the year, reflecting the profitability improvement actions in middle market previously discussed by Jack. In the fourth quarter, growth accelerated to 7.5%.
Moving on to specialty. This business continued to deliver exceptionally strong results. The specialty current accident year loss ratio, excluding catastrophes, was 49.6% for 2024 and 48.4% in the quarter, coming in better than our expectations and favorable to our low 50s target for this business. All subsegments performed very well with notable outperformance in marine, specialty industrial and E&S. Specialty net written premium growth surged sequentially to 8.8% in the fourth quarter following the substantial completion of our portfolio adjustments to enhance profitability. Looking ahead, we expect continued strong growth, positioning specialty as a significant driver enterprise top line expansion in 2025 and beyond.
Turning to reinsurance. On January 1, we successfully completed our multiline casualty reinsurance renewal process, securing a similar structure to ring agreements. We are comfortable with contracted rates, which increased as we expected, driven by industry casualty pressures. We remain pleased with our robust casualty reinsurance structure attaching at $2.5 million which is one of the drivers of our resilience against the contemporary liability trends facing the industry.
Moving on to investment performance. Net investment income increased 23.4% in the quarter and 12.2% for the year to $372.6 million, ahead of our original guidance for the year of a 10% increase. Growth was propelled by strong fixed maturity income from higher earned yields and partially offset by lower investment partnership income throughout the year. Excluding partnerships, net estimate income was up approximately 16.5% for the year in 2024. We've also benefited from some strategic repositioning within our portfolio. As in the prior quarter, we continued to divest a portion of a lower yielding fixed income securities in consideration of expiring tax carryback capacity against gains from 2021 and 2022.
From an asset allocation perspective, throughout the year, we reduced exposure to CMBS with reinvestment of proceeds into other high-quality subsectors of securitized products, including ABS and RMBS. We also extended duration of our portfolio from 3.9% at year-end 2023 to 4.4 at year-end 2024. Overall, we maintained our weighted average rating of our fixed maturity portfolio at A+ with 95% of the portfolio being investment grade. Against the backdrop of a volatile economic and interest rate environment, tight credit spreads and expectation of somewhat lower short-term rates toward the end of '25, we believe we are well positioned. We are pleased with our investment portfolio allocation and yields. We are also equally excited with strong underwriting profitability that helps to boost our cash flows, enhance our asset base and position us to achieve meaningfully higher net investment income in the future.
Moving on to our equity and capital position. Book value increased 14.9% throughout 2024 ending the year at 79.8%, driven by earnings as well as a slight reduction of the unrealized loss position. Excluding unrealized book value increased 10.4% for the full year, driven by very robust earnings. In December, we raised our quarterly dividend by 5.9% to $0.90 per share, marking 20 consecutive years of annual increases. This milestone underscores our commitment to shareholder value and our confidence in the company's future and financial strength. We reentered the market in Q4, repurchasing 170,000 shares in the quarter. We see repurchases as a good tool for enhancing shareholder value and expect to engage in repurchases in 2025. Our dedication to capital management priorities and responsible stewardship remains unwavering.
Turning to our annual guidance for 2025. We expect overall consolidated net written premium growth to be in the 6% to 7% range. Specialty and small commercial growth are expected to exceed this range while personal lines and middle market growth are projected to be below it. We expect net investment income to increase by 12% to 14% from 2024. Our expense ratio expected to return to its traditional pacing and decreased to 30.5%. We have confidence given the reasons outlined earlier. The combined ratio, excluding catastrophes, should be in the range of 88.5% to 89.5% and which reflects an anticipated improvement from the 90% to 91% guide we provided a year ago. And we expect an effective tax rate to approximate the statutory rate, which is 21%. Our cat load for the year is 6.5%, and our first quarter cat load is 6%.
The financial impact of natural catastrophe kings in January 2025 and is expected to be less than $10 million above the January monthly cat plan of $30 million. California wildfires represents the overwhelming majority of January cat. To wrap up, we are beginning the year extremely well positioned for enhanced meter performance supported by our diversified franchise, which not only strengthens our resilience against market fluctuations but also positions us to capitalize on emerging opportunities. As we continue to focus on delivering value, our robust financial foundation and innovative approach will drive long-term success and shareholder returns.
With that, we will now open the line for questions. Operator. Operator, are you looking for questions?
[Operator Instructions] And our first question for today will come from Bob Huang with Morgan Stanley.
So my first question is around the core commercial. I understand that the growth is going to come from the small market. But you also mentioned that it seems like you're better positioned in the middle market for business in 2025 as well. Going forward, are there any lines of business within the middle market that you feel that could be a great opportunity for growth. Maybe if you can unpack what are the things you're more optimistic about in the middle market as well.
Sure. Bob, this is Jack. I'll say a few comments about that and then let Dick Lavey chime in. But we're really excited, frankly, heading into 2025 that not only are we continuing to have tremendous momentum with our small commercial business, both in terms of top line and bottom line but also that a lot of hard work in the middle market area, both in terms of addressing ex cat volatility and also cat loads are substantially behind us, and we really are in the best position we've been in some time.
That said, we will watch the environment throughout the year to see how much we are able to elevate our growth in middle market. We believe that small commercial continue to drive high single-digit growth but we're going to keep middle market more in the mid-single-digit area until we get that next level of confidence that the external environment kind of requires or allows us to kind of take that growth up a level. And that is our Inevitably, what where we'd like to do is get middle market to participate substantially in our growth. So Dick, maybe you want to be more specific?
Yes, sure. Bob, I think we're a package player. So when we think about growth, we think about the account, we have one of the strongest account is in the market. But that said, we're -- we continue to be excited about work comp in the near term. Outlook for that and long-term outlook. So we'll lean in even for some [ monoline ] work comp, particularly in all, but definitely as part of a package in the middle market space. So that's -- those would be my comments on the line side. For the industry side, we pride ourselves on being a great underwriting company. So we think about some of your classic main street industries, manufacturing, professional services. But we also are very excited and continue in some of our more specialized areas like Tech and Life Sciences being at the top of that list, but also human services, which is an area where we have some distinctive offerings in the market. .
Okay. Got it. No, that's very helpful. So my second question roles around reserving. I understand that you're adding a little bit to the IBNR specifically on the commercial umbrella side. Can you maybe help us think about the rationale behind that a little bit more obviously, social inflation and being just a little bit more conservative on reserving. But just are there things trend wise, are you seeing things that could potentially be a cause of concern, either on the severity side or maybe claim frequency things of that nature?
Bob, it's Jeff. Just to put it in perspective, we've seen favorability in all our segments for reserving. We've seen favorability in all major core lines of business. And we've been steadily increasing our current accident year picks over the last few years, largely with IBNR and I think we're well prepared for those casualty trends. I would remind you that we've seen substantial claims frequency since the pre-COVID levels and it's been very helpful along with rate and prudent reserving. But I don't think it's a state secret that casualty trends have been more severe. And so people are more likely to involve a lawyer and lawyers are more aggressive. But there's nothing in the specific terms in our current accident year that we're really seeing, we just want to be prudent and prepared.
Got it. So it's more conservatism than anything else?
Correct.
And our next question will come from Michael Phillips with Oppenheimer.
Last quarter, you guys mentioned how for core commercial lines, the core loss ratio could improve somewhat from 2024 levels given what you're seeing in pricing and loss trend. I guess, does the action that you just talked about, albeit a small action. Does that give you any pause for those comments?
I don't think so. We're still very comfortable with them. We expect our liability pricing to accelerate in 2025, and we expect to see some improvement in the core commercial loss ratio in '25, largely driven by property.
Jeff, I heard opening comments on personal umbrella a couple of times how you're mining loss trends there. And then I think on commercial umbrella, I think you said 14% rate. So I heard -- but our commercial umbrella book, I believe, is about 1/3 of your GL book. So not small. And I guess we know you don't write stand-alone basis, but I'm wondering if you could share any kind of more quantitative comments or maybe [indiscernible], that'd be nice, what you see on that book for commercial umbrella or maybe other quantitative comments like the rate standing business that could help us ease concerns that tough times could be ahead for the commercial umbrella.
Yes, Mike, this is Dick. Yes. So you hit and I'll start with that. We no longer write any monoline umbrella. We manage our limits very tightly. As you know, our limits are low relative to the industry. Our umbrella -- our commercial umbrella is about 7% of our overall commercial portfolio. So that gives you some quantitative view. And yes, pricing is a critical lever. We're at 14% in the quarter, but pushing that number up northward throughout '25.
I think it's been several years, if not longer, since we've written any model in umbrella, just to be clear not a new phenomenon. We've been talking about it since 2018.
And to be clear, sorry, [indiscernible] the numbers. I said 30%. I was referring just to your deal book versus your 7%.
And our next question will come from Paul Newsome with Piper Sandler.
I wanted to ask a big picture question on personalized. Now that you've kind of gone through, I think, from a functional perspective, the recovery, are there some lessons urge or maybe some strategy changes that you're thinking about as you know that the book is open sort of back to profitability? And I'm just thinking about whether or not you've got the right geography, that kind of things now that you've sort of gotten through the process.
Yes, Paul, this is Jack. Thanks for that question. There's no question that as the world evolves, and as our portfolio develops, we're thinking hard about what the future state of that next level of diversification looks like. And we have the proper humility and experience coming out of the back half of '22 and '23 that as much progress as we were making both property and casualty personal lines versus commercial lines, geography, we needed to accelerate that diversification. And while we have a huge successful business in Michigan and the Midwest relative to personal lines, it's outsized and so we needed to address that.
And the silver lining of 2023 is that we're getting to move that diversification and that portfolio improvement much faster than we ever could have but for the pain that we kind of took on in '23 in particular. So the answer is yes. I do think about diversification, though, as an enterprise. We have opportunities to grow specialty, commercial, our small commercial business even subsegments of our middle market business and not think about diversification for personal lines exclusively. And one other thought I would say about that, Paul, is that we're -- there's a lot of the states that we're not in, in personal lines are frankly not that desirable to us. So expanding our footprint in personal lines substantially in the short to mid range is not one of the levers that we want to pull. Longer term, we'll see how things play out. But we are dramatically changing our property aggregations in particular, across the enterprise with the work we've done. And I think we're really making progress in that diversification effort more broadly.
That's great. I apologize ahead of time. I'm going to beat the casualty reserve horse one more time because we're getting a lot of questions [indiscernible] lot of questions on -- could you talk about sort of the trade-off of sort of these small increases in the IBR for some of these casualty lines versus sort of trying to -- taken a more aggressive view kind, what would be the things that would trigger a change in how you are increasing conservativeness with respect to casualty?
Well, we're very comfortable with our reserve position, and we have established ample conservatism in our loss picks over the last several years. What we were talking about earlier in the call we're increasing our current loss pick by a relatively nominal amount to increase IBNR. Overall, I think we're very comfortable. And as I said, we've had a very substantial frequency benefit over the last 4 to 5 years, which has offset a meaningful amount of the increased severity. So I don't think you should think about it as nibbling away at an issue. I think it's minor amounts of additional prudence in the current accident year to make sure that there's nothing going on going forward that gives us pause or concern.
Congratulations on the quarter, guys.
And our next question will come from Michael Zaremski with BMO.
[indiscernible] for Mike. Maybe just on Personal Lines, specifically homeowners. What percentage of your loss ratio is maybe hail or SCS related? And just how much do you think the average deductible has gone up throughout the remediation cycle or throughout March and just taking back the deductibles have had to your go-forward expectation on the loss ratio?
Yes, I don't have the specific hail component at our fingertips, but well, Dick is very familiar with the deduction.
On the deductible side, we're seeing those go up between 3 -- 3.5 to 5x depending on the state. So the state differences as to where we've seen it, but it's significant. So it's having a meaningful effect on, as you've heard us say, some of the frequency of the smaller claims underneath those.
Yes. This is Jack. Just to remind you, we have really imposed the minimum apparels deductible in most states at around $2,500 and then a 1% or 1.5% wind and hail deductible in the Midwest in conjunction with some of the coastal stuff, although we're not really a big coastal writer. So when you think of hail and win losses in severe convective storm territories, we've made a major improvement in terms of the self-insurance that is part of our proposition to a customer. So major, major differences. In many cases, damaged roof would be really half cut by the customer in terms of their retention.
That's helpful. And then maybe just a similar thing with that, just pit in the Midwest overall. How strategically is Hanover thinking about PIF there. Is there like a target number for Midwest as a percent of its personalized portfolio? Or is it kind of just treating loss ratio needle or back into something like that?
Yes. I think the growth is really one of the levers that we're using to get our property aggregation, we're comfortable. And again, that's on an enterprise base because we write commercial lines in the Midwest also. So we have what we think is an industry-leading approach to not only measuring our property aggregations and micro concentrations but modeling them relative to the various perils. And so our guardrails that we've imposed are really more about micro concentrations against an earnings volatility measure versus just some magical PIF count. That bad, what you're seeing is that we are shrinking PIF mostly through less new business in the Midwest for a 2-year period to get us to where we want to get in conjunction with pricing terms and conditions and overall micro concentration reevaluations in certain sub territories.
So we're well on our way to a much more balanced position. And it's my hope and expectation that as we get to '26, we're going to be thinking about growth in a more balanced way and less defensive in the Midwest.
And our next question will come from Meyer Shields with KBW.
I had one minor question and one big picture question. But starting with the minor. I guess, we saw net written premium growth in specialty for professional and executive lines up with the highest growth rate we've seen in a while. And I guess the sense we have is that pricing has been getting better for a lot of the line there. I was hoping if you could talk to what just -- what drove the growth in the quarter?
So this is Jack. Real quickly. I think one of the things I always remind folks, and I don't have to remind you, Meyer, that our specialty book is broad-based, but it's also tend to be retail-driven and on the lower end. And so some of the pricing, I think, that you're hearing about in the marketplace is kind of one [ octave ] or 2 octaves above where we play in terms of some of the pressure, that said, I'll let Bryan speak to our growth patterns and kind of our overall thought around pricing and growth.
Yes. So thanks for the question, Meyer. I would start by saying I think what Jack said is important, right? Where we play is important to us. We continue to get really nice pricing, 9.5% in the quarter. And I would add, if I look across the portfolio, right, 5 years of rate in excess of trend. So that's positioning us quite well. And so now as looking at that growth in the professional and executive lines as well as out of our key lines like marine, like health care, right? There we see the margin here.
We see the opportunity to be going after this business. And so we are planning for them to grow, and we're investing in them growing. And a nice component of that is new business. We had our highest new business year in 5 years in 2024.
Okay. That's very helpful. And then I apologize, this is going to sound like a softball, but I really want to understand the mechanics of it. So we've seen sort of across the industry, maybe pressure on agency incentive compensation because of reserve strengthening to casualty lines. And obviously, that didn't happen at Hanover. And in the real world, how does that impact your ability to grow with agents?
So let me just make sure I heard you clearly. You're saying that you're observing pressure on agency comp because of the loss trend environment. And since we haven't experienced that, how are we thinking about our compensation with agents or how that affects our P&L? What -- can you help me?
How it affects their willingness to grow with Hanover? I would assume [indiscernible] but I don't know that.
Yes. I'll say a couple of things on this, and if Bryan or Dick want to add in. We manage our decency relationships. I think more proactively than anybody, I think, that we compete against. We have tremendous local relationships that are regional vice presidents drive. And we have a pretty focused national approach to the agents that are consolidating and growing. And what we're observing is that agency compensation now is one strategic element of our partnership model. Many of those agents, as you know, are looking for a little bit more stability in there, compensation. So we're able to model and negotiate something that allows them to get a little bit more predictability, but also take some of the volatility out of the payments.
In aggregate, over time, frankly, that has been a tailwind for us. And so -- but we are as well positioned as we've ever been from an agency incentive perspective and compensation is part of that, but I think some of it has to do with how hard we work to help them improve their economics operationally and more broadly than compensation. So really couldn't be more pleased with the way this is playing out and really a consolidating time in the business on the agency side.
Yes. The only thing I'd say, Meyer, is that if you ask an agent of that question, they would say it begins with the customer and what's right for the customer, placing them with the right care with the right coverages but naturally, the state of the partnership comes into play, I think is what Jack is getting out there. Their desire to grow with certain markets based on all the elements of the value proposition that they bring to the table for that agent. So it's -- I wouldn't say they look at specifically about the way the mechanics of a profit-sharing plan works to then go right to giving a carrier, one piece of business or not. .
Our next question here will come from Bob Farnam with [ Janney ]. .
A couple of questions. First for Bryan. I just want to talk about the excess and surplus lines business specifically, just how submission trends are looking there? And in 2025, you -- are you looking -- are you leaning more towards property risks or case derisks or it doesn't matter?
Yes. Thank you for the question. So first off, our E&S activity, the submission activity, the quote activity remained very high and growing increasing throughout '24. I would call out that we do have E&S across our portfolio. So it's not just the traditional property and casualty that you might think of, but it's across our lines in E&S, it is -- the activity is growing and so are the books of business. In terms of that mix, what I would share with you is that our portfolio is pretty close to it in terms of property and casualty.
And we like that balance, right? Given what we're seeing in the casualty environment right now, having that balance of property and casualty, the way we have it is attractive to us. And we very sort of diligently managed to not getting overweighted on either side.
And I would also say what's also attractive about that property and casualty mix is our property and E&S, as you would expect, is a little less cat sensitive so that kind of helps us in the enterprise view of bringing in some property business that doesn't really materially add to our property aggregations.
Actually, one more thing. I would just ask that we keep in mind that our portfolio also always skews towards the middle market and lower type of risks. So our limit profiles are a little bit different than others. And so we like the way that portfolio is building for us.
Great. Okay. Second question is -- all right, so how do you respond to investors that may just take a look at the P&C sector overall and say, "Hey, look, rate increases are decelerating. We're kind of past the hard market peak. Maybe the story has played out." If they're kind of getting down in the market, how do you respond to that? Because obviously, you have a lot of things going, but you're trying to have to convince investors to continue to look at the stock.
Yes. Bob, this is Jack. I would tell you, if you look long term or even midrange, I think of this as a time in our business where the world is getting increasingly risky and loss trends are stable to up. And so I don't see that as being a stage in the market where we're going to have peak pricing. I think tomorrow's pricing has everything to do with how these loss trends play out. And from my perspective, the liability trends are deteriorating within the industry. The weather is continuing to be challenging. So I don't share the view that we're somehow at the top of the cycle and about the way to go down. .
It depends on what sectors you play in. And so what I would leave you with is what makes me so excited about heading into '25 is that we have the most balanced portfolio we've ever had across our 4 major businesses, all now producing double-digit ROEs and allowing to anticipating our growth. And that's what gives us resilience and the ability to be opportunistic in the areas at the right time and then where appropriate, has some defense. And I think that's the recipe for good probable growth going forward.
More tactical level, Bob, I think about articulating a view where Personal Lines has additional margin improvement coming in 2025. The core loss ratio is likely to improve on property improvement. NII has dramatic improvement going forward and even some marginal expense ratio improvement. So Jack did a nice job explaining the whole industry. But I think in terms of our value proposition, there's a lot of opportunity for strong investor returns.
And this concludes our question-and-answer session. I'd like to turn the conference back over to Oksana Lukasheva for any closing remarks.
We appreciate everyone's time today and your support and looking forward to talking to you next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.