The Hanover Insurance Group, Inc.
Q2 2021 Earnings Call Transcript

Published:

  • Operator:
    Good day and welcome to The Hanover Insurance Group’s Second Quarter Earnings Conference Call. My name Gary and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Oksana Lukasheva. Please go ahead.
  • Oksana Lukasheva:
    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 Bryan Salvatore, President of Specialty Lines; and Dick Lavey, President of Agency Markets.
  • Jack Roche:
    Thank you, Oksana. Good morning, everyone, and thank you for joining us. I will begin by discussing our second quarter financial highlights in the context of the current business and economic environment. I'll then provide a strategic review of each of our segments during the quarter. Jeff will review our financial results in more detail and provide some thoughts on the quarters ahead. And then Bryan, Dick, Jeff and I will be happy to take your questions. We are very pleased to report outstanding second quarter results highlighted by strong growth with net written premium increases of 11.7% or 8.6% on an adjusted basis excluding the impact of 2020 premium returns driven by gains across all segments. Operating income of $104 million or $2.85 per share. Operating return on equity of 14.7% and a combined ratio of 94.4%. Our strong underwriting results are a reflection of our ability to capitalize on evolving market opportunities while navigating the complexities of this dynamic underwriting environment.
  • Jeff Farber:
    Thank you, Jack. Good morning, everyone. For the second quarter we reported net income of $128.5 million or $3.52 per diluted share compared with net income of $115.2 million or $3.01 per diluted share in the second quarter of 2020. After-tax operating income was $104 million or $2.85 per share compared with $62.7 million or $1.63 per share in the prior year quarter. The difference between net and operating income is due to the increase in the fair value of equity securities, Book value per share increased 4.8% in the quarter, driven by earnings and to a lesser extent an increase in unrealized gains in our fixed income portfolio. Before I review our quarterly performance in more detail, I would like to acknowledge that some of the comparisons to the prior year quarter need to be put in context with the very unusual nature of the second quarter of 2020. With the economy largely closed and most of the country placed under stay-at-home orders many lines of business experience historically low frequency of claims last year. In response to the fewer miles driven, we returned some premium store auto policyholders which impacted our reported net written premiums and underwriting ratios. In addition, business exposures, payrolls and receipts were exceptionally low in 2020. As the economy continues to open up and individuals return to the roadways, we believe our more recent growth trajectory and loss experience, as well as our original expectations for 2021 are better barometers by which to assess our performance. We are pleased with our overall combined ratio of 94.4% in the second quarter of 2021 compared to 96.2% in the prior year quarter, which a year ago reflected several large catastrophe events including losses from social unrest. In the second quarter 2021, we incurred catastrophe losses of $76.8 million or 6.5% of net earned premium 40 basis points above our quarterly expectation, primarily reflecting severe wind, torrential rain and hail events throughout the Midwest in June. On the heels of a very light April and May. Michigan, our largest Personal Line state was severely impacted by the rain and flooding events in mid-to-late June, particularly in the homeowners line. Michigan is a very profitable state for us and historically runs at a low 90s combined ratio. However, when adverse weather events occur as expected, we do see losses. We also experienced some favorable catastrophe development in the quarter from prior years, which is a testament to our prudent reserving approach. Prior year reserve development, excluding catastrophes was favorable in the quarter, adding $12.6 million to the bottom line primarily reflecting continued favorability in workers compensation, Personal Auto and several Specialty lines. We continued to be prudent in our reserving and Commercial Auto, where extension of loss patterns and prior bodily injury development warrant a cautious approach. Additionally, in light of the pandemics effect on loss patterns in 2020, we remain vigilant as we assess ultimate loss costs. With the economy regaining momentum, we are also mindful of the potential for reserving uncertainties related to social and economic inflation delayed medical procedures and information as well as ongoing court delays. Over the past several years, we have placed a considerable amount of emphasis on strengthening our balance sheet. It is stronger than it has been in many years coming out of the second quarter. And we believe such prudence will serve us well. Claims activity related to COVID-19 exposures continues to be very manageable and we are holding substantial IBNR in that area. Our expense ratio for the second quarter of 2021 was 31.2%. This was in line with our expectations consistent with the second quarter of 2020 and improvement from the first quarter of this year. We are confident that we can deliver a 30 basis point expense ratio improvement for full year 2021. Overall, current accident year combined ratio ex-cat was 89% in the quarter. This very strong underwriting result is a reflection of our diversified book of business, our earning in of rate increases and some lingering frequency benefit in auto lines. Looking at our underlying underwriting results by segment, our commercial lines combined ratio excluding catastrophes was 89.5% up 2.7 points from the second quarter of last year primarily reflecting a comparison to an extraordinarily low level of losses in the second quarter of last year. Our CMP current accident your loss ratio, excluding catastrophes was 57.6% in line with most recent trends, but slightly elevated compared to our expectations driven by a higher incidence of property large losses. We believe that our experience is relatively consistent with that of the industry. Adding to our continued expectation that there is room for additional property rate increases in the marketplace. We achieved substantial CMP property rate increases in the second quarter and we believe this trend will continue. In other commercial lines, the current accident year loss ratio excluding catastrophes was 55.3%. This result reflected the impact of a large loss and reinstatement premium triggered thereon in our highly profitable Hanover Specialty Industrial business. In fact, this particular loss was offset by the overall favorability in our Specialty business within the quarter to bring overall loss amounts generally in line with our expectations. Our Specialty Industrial business runs at a long-term combined ratio in the sub 80s. We are confident in our underwriting capabilities and future strong performance in this business. Our Commercial Auto current accident your loss ratio, excluding catastrophes remains relatively consistent with the recent quarter’s results. We are continuing to take substantial rate increases to address the industry wide multiyear liability issues affecting this line. Turning to workers comp, current accident your loss ratio was 61.5%, which was generally in line with recent historical results. Our second quarter 2020 ratio was unusually low, due to stay-at-home mandates for much of the country. While the underlying trends in this line remain largely favorable. We continue to be very prudent with our loss picks in light of the rate environment and the potential for new risks posed by office re-openings for certain businesses. Commercial Lines net written premiums grew exceptionally well at 11.7% in the second quarter, powered by our small Commercial and Specialty businesses, we achieve strong operating metrics including improved rate meaningful increases in exposures return to strong new business growth and a solid core commercial retention of 84.9%. Overall, despite some minor and expected variability in losses, we are very satisfied with commercial lines trends and underwriting returns in the quarter. Turning to personal lines, our combined ratio excluding catastrophes was quite low at 85.3%, but up from 76.8% in the same period last year reflecting the benefit of COVID-19 related auto claims frequency declines. Our Personal Lines Auto current accident year loss ratio excluding catastrophes was 62.2% below historical trends but up slightly from 60% in the first quarter. While frequency trends industry wide are quickly moving toward historical norms, our business is still benefiting slightly from lower frequency. We believe there may be a modest longer term frequency benefit due to changing driving patterns from work-from-home flexibility of our customer base. So we are observing these trends carefully. And we continue to do an excellent job managing the balance between growth rate and profitability. Current accident year loss ratio and our homeowners line remained relatively consistent with prior results, but was slightly above our expectations. Elevated property loss activity and higher material costs indicate the need for future rate increases. We are seeing a significant push for rate in homeowners in the independent agency space. Personal Lines net written premiums grew 11.6% in the quarter or 5%, adjusted for last year's premium returns. This strong result was driven by meaningful acceleration in new business. We also reestablished momentum in our renewal premiums as a result of lower rate increases in certain areas and improve retention. The strength of our data and analytics team and swift communication of market trends across our businesses, positions us to opportunistically grow when market conditions allow and make well informed adjustments when necessary. We are pleased to see Personal Lines largely rebound to its pre=COVID-19 growth levels. We have full confidence in Personal Lines strong growth and profitability prospects. Moving to investment performance, our net investment income was $75.6 million for the quarter up $17.9 million or 31% from the prior year period. This is largely due to an unusual fluctuation in partnership income from period-to-period. Net investment income in the second quarter of 2020 was adversely affected by a $4.6 million loss on limited partnerships, while partnership income in the second quarter of 2021 was $16 million exceeding our expectations by $9 million. Our partnership results to the first half of 2021 do not change our outlook for investment partnerships or overall net investment income for the balance of the year. New money yields continue to put pressure on our overall net investment income although so far, we've been able to meaningfully offset it with robust cash flows from operations. We expect cash generation from our underwriting operations to remain strong. Cash and invested assets at the end of the second quarter were $9.1 billion with fixed income securities in cash representing 85% of the total. Our fixed maturity investment portfolio has a duration of five years and is 96% investment grade. We have a high quality portfolio with a weighted average of A plus. Net unrealized gains on the fixed maturity portfolio at the end of the second quarter 2021 were $357.8 million before taxes. Moving on to our equity and capital position. Our book value per share of $88.23 reflects an increase of 4.8% in the quarter. We continue to be thoughtful stewards of our shareholders capital and deliver on our capital allocation strategy. Through July 26, 2021, we repurchased approximately 10 million of stock, leaving about $395 million of capacity under our stock repurchase authorization that the board expanded in May. In addition during the quarter we paid a regular cash dividend of approximately $25 million. Our capital priorities remain unchanged. First, we strive to maintain our strong capitalization and liquidity. Second, we continue to prioritize organic growth for which we generate plenty of capital. And third, we continue to maintain our policy of returning excess capital to shareholders through cash dividends and share repurchases. We will continue to remain nimble and actively manage our capital with the best interest of shareholders in mind. Looking ahead, we now expect net written premium growth in the mid-to-high single-digits in the second half of the year. Based on our strong results in the first half of the year, we believe upper mid-single-digit growth for the full year is possible. With two quarters of better than expected ex-cat combined ratio performance we are improving our full year 2,021 ex-cat combined ratio outlook from 90% to 91% to 89% to 90%. As noted earlier, we remain on track to reduce our expense ratio by at least 30 basis points in 2021 to 31.3%. And we expect our third quarter cat load to be 5.2%. We are very pleased with our underlying performance and our ability to continue our positive momentum in the quarter. We are well positioned to sustain a robust growth momentum and top quartile profitability delivering value to our agents, customers and shareholders. In addition, we are pleased to announce that we will be hosting a Virtual Investor Day on September 23, in which we will discuss the key aspects of our differentiated strategy go forward growth drivers, and long range financial targets. We will be providing additional details in the coming weeks and look forward to seeing you there. With that we will now open the line for questions. Operator?
  • Operator:
    We will now begin the question and answer session. At this time, we will pause momentarily to assemble our roster. The first question is from Matt Carletti with JMP. Please go ahead.
  • Matt Carletti:
    Hi, thanks. Good morning.
  • Jack Roche:
    Good morning.
  • Matt Carletti:
    Jack I caught your comments on some of the areas of growth within Specialty. And I was hoping that you or Bryan could expand on that a little bit. And specifically, one question I have is, as you look at kind of the type of client or the relationship with growth and some of those lines are coming from. To what extent is it cross-sell, you'd talked in the past about kind of existing Hanover relationships where they buy a Specialty product somewhere else, and the opportunity to consolidate that relationship. Is that a big piece of the growth? Or is that something more yet to come?
  • Jack Roche:
    Yes, thanks, Matt, for the question. And it's a good one. One we're excited to update you on. I'll start with overall Specialty growth. I think that's a direct result of how well the performance of the each of these businesses is in terms of the bottom line where that broad based profitability within the Specialty business is really at its best. And that is allowing I think Bryan and his team to lean into the opportunities that are presenting themselves in the marketplace. So as we said in our prepared remarks, there's several businesses that are generating double-digit growth there's others that are very much in the upper single-digit growth all of our businesses are well positioned. Specific to your point around cross-sell versus kind of individual business growth. It's still very much driven by the individual businesses and lines of business. Although we are definitely seeing an increase in the cross-sell or what we would consider to be coordinated lines of business sale to total accounts. And we've mobilized around that particularly in the small commercial space, all the way into our service centers, where we're I think the only service center that can bring that together for an agent on the smaller accounts. So I think right now what you see is the majority of our Specialty growth is coming from kind of specialized products into specialized agents. Very much from our franchise agents as well as some specialized agents. But increasingly, we are anticipating that more and more of that will come from cross-sell or coordinated business. Bryan, do you want to just maybe add one or two pieces of color there?
  • Bryan Salvatore:
    Yes, sure. So, Matt, yes, thanks for the question, very much agree with what Jack said. What I would add is that what we've been really working towards for the last couple of years, is a strategy that we refer to as total Hanover. And I view that as a really sort of consistent process, where we connect at the local level with our agents across businesses. And so Jacks said is point on it, we're just in a very good place and our ability to grow across our lines of business, we are seeing some of that from the benefit of working very closely in that coordinated way in a process driven, coordinated way. And so that yields better production generation from our agents that have great relationships with our core commercial . And a piece of that is cross-sell as well. So we're getting a lift from a number of things including that.
  • Matt Carletti:
    Great, thanks. And then if I can just one other question, kind of shifting gears a little bit. The Jeff, you made a few comments on Commercial Auto and I heard everything you said about cautious reserving and cautious accident, your picks and all that what I'm hoping to ask is if you could just peel the onion back a little bit. And like you said, it's been a good act in your last pick stable for the first half of the year, can you help us understand, what, if any impact there, there might be from kind of continued frequency favorability or loss costs favorability from the pandemic, versus maybe how much of that is just obviously, you've been hitting this line with rate for a very long time, and just settling into somewhat of a new norm of kind of where the line of business should hopefully run.
  • Jeff Farber:
    Matt, we've been going after Commercial Auto for at least three years now with double-digit rates. And I think it's hard for anyone in the industry to say when we're there yet, right, because we've all been focused on it for nearly a decade now in terms of getting it right. 2020 provided an opportunity to be very, very prudent and comfortable with that particular year. And then in 2021, in the first two quarters, we've seen some continuing frequency benefit, not quite as much as Personal Auto, and it's been waning throughout the period. You notice the unfavorable development in that particular line. And I would point out, we show about seven different lines. So occasionally, you'll see one with some unfavorable development. It was not related to the 20 year and it was clearly related to the earlier years. And there was nothing that particularly showed itself. But we just want to make sure that we're conservative and have appropriate loss picks for all the years and it was a good opportunity to do that.
  • Matt Carletti:
    Great, thank you very much.
  • Jack Roche:
    Thank you, Matt.
  • Operator:
    The next question is from Derek Han with KBW. Please go ahead.
  • Derek Han:
    Good morning. Thanks. Just going back to your mid-to-high single-digit growth guide for the second half. Can you just talk about how much of that is exposure growth versus rates? The reason why I'm asking is because I saw that the commercial rate increases accelerated sequentially while retention drops, which I assume is partly due to non-renewals?
  • Jeff Farber:
    So overall, obviously, you can see a rate increase in the second quarter was relatively consistent with the first quarter and even slightly up. We're seeing exposures bounce back sequentially. And our assumption is retention will be relatively flat, where we'd like it to be about 85%. I know it looks like it has come down a little bit from the 87% or so it was really over the last year, but a lot of that is a bit wind aided, so to speak in that you had moratoriums and you had agents that were unable to remark it and some other unusual things. I think if you look at the retention for the first six months of the year, you'll see a better barometer for that. So I think all factors will contribute. It'll be strong retention, good new business, a fair bit of rate and continuing bounce back on exposures.
  • Derek Han:
    Okay, that's helpful. And then just a second question, numbers question. Can you describe the size of the large property losses that you saw in the commercial segment?
  • Jeff Farber:
    So in the commercial segment, there were a few extra property losses, which were not terribly large losses in core commercial, but they showed themselves largely fires. And it's essentially been a continuation for a number of quarters across the commercial segment. We did mention that there was one meaningfully larger loss in Hanover Specialty Industrial. And fortunately, we have reinsurance and we dealt with the reinstatement premium. But importantly, if you look across other commercial lines, which is essentially our Specialty business, there were other businesses such as Marine and even other areas, earlier period performance along Hanover Specialty Industrial, which offset that loss. So I would call it just a couple of fire losses that seemed to be elevated and that was really it.
  • Derek Han:
    Okay, that's helpful. And then just a second question, a numbers question. Can you describe the size of the large property losses that you saw in the Commercial segment?
  • Jeff Farber:
    It's hard to say because if you always do exactly what to expect, then you could look at the Delta goes, there's lots of things going on, but certainly less than a handful type of meaningful losses, and they weren't other than the Hanover Specialty Industrial, they weren't particularly outsized routine losses just a couple extra.
  • Derek Han:
    Got you. Thank you for all the answers.
  • Jack Roche:
    Thank you.
  • Jeff Farber:
    Thank you.
  • Operator:
    The next question is from Paul Newsome with Piper Sandler. Please go ahead.
  • Paul Newsome:
    Good morning, congratulations on the quarter. I was looking at your guide and apologies if my math is not the best, but it would suggest I think that the core combined ratio for the second half would be higher than the first half. Is there any reason for that in particular actually think of your seasonality is being a little bit more of a second quarter, heavy weather kind of core issue. But maybe you could talk to that?
  • Jack Roche:
    Yes, I have to look at that. Paul, I don't believe that's the case, there's nothing that we see going on in the second half, that would cause the core commercial ratio to increase. If I were to get underneath it for you a bit. Over time, I expect Commercial Auto to go up a little bit as the remaining frequency benefit. abated or disappeared. And then some of the larger loss activity both in core commercial as well as to some degree that one large loss in Specialty and the reinstatement premium will be lower. So I would have to go back and check that maybe we're being conservative.
  • Paul Newsome:
    It wouldn't be the first time I . And my second question, I was hoping to get your further thoughts on how you folks think about sort of the underlying inflationary trend for commercial sort of excluding workers' comp. I think the concern of the day is that companies like Chubb are talking about essentially one point or two of uptick in inflation. And given -- I mean, 6.5% is a great number for commercial price increases, but if the inflationary levels are the 5.5% that Chubb was talking about this morning, then that margin expansion is looking smaller than it was before. So maybe you could talk to sort of just broadly those kind of concerns.
  • Jack Roche:
    Hey, Paul, this is Jack. Thanks for that question. I'll get started and if Jeff or others want to jump in. I think I would just start with the fact that net-net we have a fair level of confidence in our ability to monitor the various aspects of inflation and the complexion of that inflation in terms of how it hits our business and react accordingly. Our -- as we said in our prepared remarks, our competitive -- comparatively short duration, reserve position and even our risk profile overall, doesn't make us immune from inflation. But it certainly makes the impact on particularly the casualty lines, more muted or less impactful than others that write very large limit business or have longer tail casualty business. that clearly not only affects their go forward picks, but to some degree their reserves as you said. So -- but there's also some natural offsets, including wages and receipts and the exposure basis by which we get to collect premiums. So in addition to adjusting our rates to reflect that increased cost of goods sold, if you will, we will have some uptick on the Commercial Line side, naturally through the exposure basis, which will elevate. And then obviously, the interest rate environment over time, should help improve our net investment income, but we have to let that play out. So, listen, this is an important topic for property casualty business. So it's the right question of the day. But I think for us, you should know that we've got our fingers on the dials, we've got great monitoring going on. And we feel on a relative basis, well positioned to deal with any inflationary .
  • Paul Newsome:
    Okay. I'd like to squeeze in one more, if I can. So I'm breaking my two question rule. But is there much of a difference now that we've seen basically a year or so of the frequency pandemic benefits in private passenger auto between a company with your business mix versus the national writers. And just maybe you can talk to that maybe if there is any regional differences that ended up being meaningful for you versus maybe what the rest of the industry has seen.
  • Jack Roche:
    We're glad to take that third question, Paul, because it's an important one for us. And I think we've worked hard over the last really eight or nine years to really build a differentiated strategy in Personal Lines. We have migrated from trying to be the next carrier that was trying to win monoline auto, often low limits auto through a multivariate pricing, and we realized that was a losing strategy for us. So with our strategy to be an account writer to over time move up the coverage A curve to really be there with agents for the kind of customer that would value trusted advice. We repositioned our pricing models and our entire delivery system. And we think we're -- this is paying huge dividends. We think the persistency in our pricing has proven out really over the last several quarters. I think at the end of last year, people were talking about how competitive it was and it was. But I think we were able to show that we didn't have to be as responsive with our pricing and our loss trends and the frequency are just more stable, frankly, because of the customer base we have and the geographies that we play in. So let me just ask Dick to kind of add a little color there because I think this is a really important part of our strategy, and we're pretty darn proud of where we are in that evolution.
  • Dick Lavey:
    Yes. Yes, absolutely. And we're watching these trends really closely, Paul. But to your specific question, we do think there are sustained advantages to having a frequency benefit based on the geographic profile and the customer mix profile. If you think about our book being Northern Hemisphere kind of oriented Mass, New York, Connecticut, Illinois, Michigan, those economies have come back more slowly than the southern states. So we see some persistency and frequency there. Of course, that likely goes away over time. But then you have the customer mix, as Jack said. We skew older, we skew multicar, we skew higher liability limits. These folks likely have a longer sustained work-from-home type pattern. And so we think that the community patterns will look differently. And that likely is a longer-term benefit for us.
  • Paul Newsome:
    Thanks. Appreciate it.
  • Jack Roche:
    Thanks, Paul.
  • Operator:
    The next question is from Grace Carter with Bank of America. Please go ahead.
  • Grace Carter:
    Hi, how are you all today?
  • Jack Roche:
    Excellent.
  • Jeff Farber:
    Good morning.
  • Grace Carter:
    I was wondering if we could talk a little bit more about workers comp. The core loss ratio was a little bit higher than the past couple of quarters. So I was just wondering how loss costs are progressing as reopening progresses, and where you see loss costs going from here and also pricing?
  • Jack Roche:
    Yes, this is Jack Grace. Thanks for that question. I'll get us started and I'm sure my colleagues will jump in. Overall, we are definitely seeing some frequency move back to more normal levels as expected and we're certainly also seeing pricing flatten off and flatten up and we've been kind of in the black If you will on pricing. What's still moving through the loss costs, I think at this time is kind of the change and types of losses. What you saw the last six or seven years is that we had a meaningful change in terms of the types of losses that we experienced and how much of that was really about work change and automation and new ways in which risk management was being applied. We think that's worked through the system, and it will start to move back in a more positive way. But the last thing I would say on this is that we still -- I think, our -- we see this as more of an opportunity than a than a challenge given our relatively low percentage of workers comp in our total portfolio. So if those trends start to become more normal they'll impact this little less severely. But it'll also drive, I think, a different pricing dynamic, which we look forward to because as we see some enhanced pricing come into the workers comp line, we believe we can take advantage of that row that line of business that is very profitable for us and become even more total account or account centric particularly in the middle market space. So we're kind of on our toes waiting for the pricing trends to catch up eventually to what the longer term trends in -- and the loss trends will be and we'll be ready to step up.
  • Jeff Farber:
    Grace, I think, if you're looking year-over-year, it's a very tough comparison because of all the shutdown orders. So as an unusually low percentage even though we were quite conservative, and how we established our picks in the second quarter of last year for the longer tail lines. It's up maybe a point sequentially. And I don't think there's anything particularly going on there with either trends or whatnot, the exposures are coming back nicely, the rate is starting to increase a little bit, we're feeling good about it. And I would just remind you overall, it's a pretty low percentage of our book and where we tend to write is the lower risks and we have a fairly tight risk appetite there.
  • Dick Lavey:
    Yes, Grace. This is Dick just to put an exclamation point, I'm what Jeff just said, our book is about 60%, small commercial work comp, which performs that are significantly better than in the middle market space. And it's the space where pricing comes back. When pricing does come back, it comes back more quickly. So we're positioned well as these as the loss costs return.
  • Grace Carter:
    Okay, thank you. And then I'm switching to Personal Auto, you had mentioned more consistent pricing over the past year relative to some competitors. So I was just wondering, as you look forward, where you see pricing going trying to balance of potential longer term frequency benefit versus industry wide severity challenges. And to the extent that you all are able to take lower pricing than peers how -- to what extent you think that that might impact your growth rates in Personal Lines.
  • Jeff Farber:
    Grace, we're feeling really good about Personal Auto. And being in that business and Personal Line in general, you heard Jack talk earlier about our position and Dick amplified that a little bit. Right now it's happening, we're seeing some lingering benefit in terms of frequency. In the marketplace the level of competition is starting to return to essentially a normal opportunity. Many of the major players have talked about needing to get rate you're starting to see some rate filings there. So we're feeling really optimistic. And the last point, I guess, I would make is, we also were quite conservative in how we set loss picks throughout 2020 and into 2021. So to the extent there's a temporary bit of margin pressure, I think the balance sheet has been prepared for prudently for sort of a worst case scenario. So I'm feeling very good about our ability to grow our retention, the actions that our team has made in the late third quarter and fourth quarter.
  • Grace Carter:
    Thank you.
  • Jack Roche:
    Thanks, Grace.
  • Operator:
    Our next question is from Bob Farnam with Boenning & Scattergood. Please go ahead.
  • Bob Farnam:
    Hey there and good morning. I've got a couple questions on the TAP Sales platform. And the first one is, I understand that benefits you're going to be getting from the top line as the agents to direct more business your way but I was curious whether there's an underwriting component to that as well. Maybe more granular in terms of are you expecting a bottom line improvement as well? And two, is -- I imagine you've got some tech savvy competitors that have similar products in the agencies. So how does the Hanover’s product differentiate itself?
  • Jack Roche:
    Yes. Thanks, Bob. This is Jack. I'm just going to kind of really address the latter part of your question there and then ask Dick to talk to you about to really answer the first part of your question, which is in absolute, yes. But I would tell you that our small commercial offering, in addition to the overall enterprise approach that we use with agents is very distinctive, right? We are -- we have an underwriting risk appetite for BOP accounts, as well as package accounts. We are -- we have a kind of world-class service center. We have great proprietary pricing, but we've been able to make sure that it's not so volatile that the agency managers and CSRs are constantly happen to deal with pricing volatility coming out of the -- particularly the BOP business that they see from some other carriers. We're really one of the best prepared markets to help agents when they consolidate markets, which oftentimes they're doing in this day and age. So I think it's important to say that we are really excited about the new TAP sales platform and experience that we're creating that is multifaceted, but in the context of all the other things we do that we think make us distinctive in the small commercial space.
  • Dick Lavey:
    So to your specific question about improved underwriting results. Absolute yes on multiple dimensions. One of the elements of this broad-based platform is the pricing efficacy that comes along with a new rollout, where we've moved to a much more refined pricing segmentation, upwards of hundreds of cells in which we can slot customers. And that's informed by third-party data now, so are the chassis that this is built upon, can integrate the third-party data which makes our pricing again, more refined, also, improved underwriting knockout rules on the way in and also on the renewal side. So when a piece of business renews, we pull in third-party data, we asked ourselves, how is that risk changed? And we can make appropriate adjustments. So there's multiple dimensions at which were we believe that going forward, it's going to improve the loss ratio.
  • Bob Farnam:
    Dick maybe a comment on how this fits with others in the industry and the reaction agents so far?
  • Dick Lavey:
    Yes, we're getting a fabulous reaction from the frontline account managers and CSRs that use this to price and issue policies. As Jack said, in his, his commentary, really are getting sort of best-in-class commentary. It's 50% more efficient than our prior system and we believe that sort of the fastest system that's out there in the marketplace today.
  • Jack Roche:
    So we're thrilled. This has been a multiyear and multimillion dollar investment, and we couldn't be happier with the way that's being received in the marketplace.
  • Bob Farnam:
    And you're still continuing to roll up products. I mean, you're talking about your broad product capabilities, but not all your products are on this system at this point. So what -- I know, you just put the small business numbers the platform out. So what's coming up next in terms of what you're trying to push out there?
  • Jack Roche:
    Bob this is Jack. We're throughout the rest of this year, we will get the business owners advantage product in every office of every agency that we have. And then we'll work on the ancillary lines, which frankly are already very much a part of our account offering, they'll just be further refine. The product differentiation, Bob lives in the core package. So that's why we lead with it. At the end of the day, where we differentiate ourselves in terms of coverage and pricing. sophistication is in the package. And then it's supported by auto and workers comp and umbrella. So I would tell you that that we're really excited about the impact that this will make in the second half of this year and then heading into 2022.
  • Bob Farnam:
    Great, thanks for the color.
  • Jack Roche:
    Thank you, Bob.
  • Operator:
    This concludes our question and answer session. I would like to turn the conference back over to Oksana Lukasheva for any closing remarks.
  • Oksana Lukasheva:
    Thank you everybody for your participation today. And we're looking forward to talk to you in our Investor Day.
  • Operator:
    The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.