The Hanover Insurance Group (NYSE: THG) demonstrated the success of its strategic repositioning in its third quarter 2024 results, posting significant improvements across all business segments while effectively managing liability exposure in an increasingly challenging legal environment. The Worcester-based insurer reported operating income of $3.05 per diluted share and a 14.4% operating return on equity, validating its 18-month strategic transformation.
Year-Over-Year Performance Shows Remarkable Turnaround
The scale of Hanover’s improvement becomes particularly evident when comparing Q3 2024 to Q3 2023. The company’s ex-catastrophe combined ratio of 88.3% in Q3 2024 represented a significant 2.4-point improvement over the prior-year quarter, marking one of its strongest performances in recent years.
Key year-over-year improvements include:
- Operating income reaching $3.05 per diluted share in Q3 2024
- Personal Lines ex-catastrophe combined ratio improving by 7.2 points to 89.2%
- Personal auto accident year loss ratio dropping 7.7 points to 69.8%
- Home and other lines loss ratio improving by 7.3 points to 55.7%
- Net investment income increasing 9% to $91.8 million
Net income for the quarter demonstrated a dramatic improvement, with Hanover reporting $102.1 million in Q3 2024 compared to $8.6 million in Q3 2023. This extraordinary increase reflects both the success of the company’s strategic initiatives and a more favorable catastrophe loss environment in 2024. On a per diluted share basis, net income rose to $2.80 from $0.24 in the prior year quarter, while operating income showed even more dramatic improvement, increasing to $3.05 per diluted share from $0.19 year over year.
“The significant profitability improvements we delivered in the third quarter are the direct result of the strategic initiatives we have been discussing for the past 18 months,” noted CEO Roche during the earnings call. These initiatives, including enhanced pricing, insurance-to-value adjustments, and targeted underwriting actions, have transformed the company’s risk profile and profitability metrics in just twelve months.
Additional Geographic Market Details
During the earnings call, management provided granular detail about geographic performance. “Despite PIF reductions, we generated net written premium growth of approximately 3.5% in the Midwest states and over 10% in the rest of our Personal Lines footprint,” noted Roche. The company’s geographic diversification strategy for four broad regions was:
- Midwest: Focused on exposure management with enhanced deductibles and selective underwriting
- Southeast: Limited exposure in Florida and coastal Carolinas paying off in recent hurricane seasons
- Northeast/Mid-Atlantic: Strong growth markets with attractive profitability profiles
- Western states: Targeted expansion in select markets showing promising returns
Executive Commentary on the Turnaround
The Q&A portion of the earnings call revealed management’s confidence in the sustainability of improvements. Richard (Dick) Lavey, President of Agency Markets, elaborated on the execution strategy: “We segment [our 20 states] based on profitability and how they contribute to our CAT profile. We already have a handful of states where PIF has earned positive and where we feel the new business engine can be – has been turned on more aggressively.”
CFO Jeff Farber provided specific insight into the auto line improvement: “Collision severity has normalized, which should drive further margin improvement. Additionally, we continue to experience lower-than-expected frequency of losses, which might be attributable to multiple factors like the impact of crash prevention technology in cars and changing customer behavior.”
Personal Lines Shows Dramatic Improvement
The company’s Personal Lines transformation stands out as particularly successful, with an ex-catastrophe combined ratio of 89.2%, a dramatic 7.2-point improvement from Q3 2023. In the earnings call, Dick Lavey outlined the segment’s strategic progress:
“We’ve created a blueprint for bringing our Personal Lines portfolio back to target returns while simultaneously improving geographic diversification,” Lavey explained. “Our 20 states are segmented based on profitability and catastrophe profile, with several states already showing positive policy-in-force growth.”
Key Personal Lines metrics include:
- Auto’s current accident year loss ratio improved 7.7 points to 69.8%
- Home and other lines improved by 7.3 points to 55.7%
- Premium growth accelerated to 6.8%, driven by pricing and improving retention
- New deductible structures now cover more than half the portfolio
Strategic Catastrophe Management Proves Effective
Hanover’s approach to catastrophe exposure demonstrated foresight in Q3. The company reported $40 million in losses from Hurricane Helene, primarily affecting Georgia and the Carolinas, while maintaining minimal exposure to Florida storms. CFO Jeffrey Farber highlighted the company’s strategic geographic positioning: “The Hanover has strategically limited its exposure in Florida and the Carolinas, opting not to over-participate in the Gulf Coast wind markets.”
The company’s catastrophe mitigation strategy includes:
- Enhanced deductibles in Midwest regions prone to severe convective storms
- Strategic reduction in Florida exposure
- Implementation of percentage-based wind and hail deductibles
- Improved property insurance-to-value adjustments
Core Commercial Shows Strength While Managing Liability Risk
The Core Commercial segment demonstrated resilience with an ex-catastrophe combined ratio of 91.1%. During the earnings call, CEO John C. “Jack” Roche provided important context about the company’s liability exposure management:
“Since 2016, we’ve been monitoring loss trends and refining our underwriting appetite accordingly,” Roche noted. “We’ve reduced exposure in high-risk areas such as industry sectors prone to slip and fall and premises liability losses, particularly in major urban centers.”
Notable Core Commercial developments include:
- Small Commercial growth of approximately 6%
- Contractors represent only 10-15% of the portfolio
- Liability pricing increases, particularly in umbrella coverage at 12.7%
- New workers’ compensation integration into TAP Sales platform planned for 2024
Specialty Lines Excellence Continues
The Specialty segment posted an impressive 82.6% ex-catastrophe combined ratio. Bryan Salvatore, President of Specialty Lines, detailed growth variations across the portfolio during the earnings call:
“In some environments, like professional lines, it’s pretty competitive,” Salvatore explained. “That said, we’ve been getting very good rate on that business for years. In other areas, like E&S, we continue to see the need for and are achieving increased rates.”
Investment Strategy and Capital Management
The company reported a 9% increase in net investment income to $91.8 million. CFO Farber outlined the investment strategy:
- 4.1-year duration positioning
- 150 basis point positive gap between new money and expiring yields
- Strategic repositioning of lower-yielding fixed-income securities
- A potential return to share repurchases post-wind season
Looking Ahead
Hanover expects to exceed its original 2024 ex-catastrophe combined ratio guidance of 90-91%. The company projects fourth-quarter premium growth exceeding 6% and anticipates an expense ratio improvement to 30.5% in 2025.
“Our performance reflects the successful implementation of key strategies we’ve been executing over the past two years,” Roche emphasized. “We’re particularly encouraged by our ability to navigate social inflation trends while maintaining strong underwriting discipline.”
The company’s book value per share increased 12.6% from Q2 to $79.90, positioning Hanover for continued momentum into 2025 as its strategic initiatives continue to yield results across all business segments.
