The Hanover Insurance Group - Q4 2025

Transcript

Operator (participant)

Welcome to The Hanover Insurance Group's fourth quarter earnings conference call. My name is Nick, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star and two. Please note, this event is being recorded. I would now like to turn the conference over to Oksana Lukasheva. Please go ahead.

Oksana Lukasheva (Head of Investor Relations)

Thank you, operator. Good morning, and thank you for joining us for our quarterly conference call. We'll 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, Chief Operating Officer and 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 investor section of our website at 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 statements 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 2026 guidance for level of profitability and premium growth, economic conditions and related effects, including economic and social inflation, tariffs, as well as other risks and uncertainties such as severe weather and catastrophes that could impact 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 statement section in our press release, the presentation deck, and 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. With those comments, I will turn the call over to Jack.

Jack Roche (President and CEO)

Thank you, Oksana. Good morning, everyone, and thank you for joining us today. Our outstanding fourth quarter results capped a record year for The Hanover, a year marked by disciplined execution and strong engagement across the enterprise. Our performance in the quarter and in the full year is a testament to our agility and operational excellence, and also to the power of a strategy built to provide resilience, adaptability, and long-term value creation. We delivered excellent margins while growing with intention. In markets where competition intensified, we remained disciplined, prioritizing profitability and quality risk selection. At the same time, we leaned into segments with attractive margins and favorable risk profiles. This balanced, targeted approach enabled us to successfully navigate complex markets with confidence and clarity.

In addition, we continued to invest in a strategy that sets our company apart from our competitors, building out our product and service capabilities, enhancing our technology, strengthening our agency partnerships, and attracting and developing top talent. These investments have sharpened our competitive edge and have positioned us to capitalize on opportunities in any market environment, driving sustainable growth and profitability. From a financial perspective, we achieved one of the best fourth quarters in our 30-year history as a public company, with record quarterly operating earnings per share. For the full year, we delivered an all-time high operating return on equity of 20%, along with a new record for annual operating earnings per share. While we benefited from favorable weather in the fourth quarter and the year, we also generated strong underlying profit.

The improvements in our underlying performance are the result of disciplined portfolio management and underwriting, building on the margin work we've been driving for the last few years, as well as the skilled and thoughtful management of our investment portfolio. Now let's look at our operating performance by segment, beginning with Personal Lines. Our Personal Lines team continued to deliver outstanding profitability during the year, a direct result of the decisive actions we've taken and the strong execution across our business. We've materially elevated the resiliency and performance of our portfolio through pricing, changes in terms and conditions, and targeted deconcentration actions in the Midwest. These actions are driving stronger and more sustainable profitability while positioning us to deliver continued growth, balanced risk exposure, and sustainable long-term returns.

Personal Lines Net Written Premium growth increased to 4.4% in the quarter, with full-year growth of 3.7%, primarily driven by pricing. Retention remained relatively stable, highlighting strong customer loyalty, the differentiated value of our bundled product offering, and the support of our agency partners. While rate is normalizing from historically high levels, we are very confident in our ability to sustain strong margins. Our Personal Lines team continued to advance our diversification strategy, focusing our growth in 11 key states where we have identified compelling, profitable expansion opportunities.... Overall, premiums in these states grew approximately 8% in the fourth quarter, compared to 3% in all other states, with new business seeing strong momentum in these diversification states.

The momentum we have established across the business, coupled with our targeted actions, has also reduced the relative weight of Midwest business in our portfolio, reducing its share of our total premiums by approximately four points since the beginning of 2023. While competition in monoline auto markets seems to be intensifying, differentiated offerings like bundled accounts and our Prestige product create significant opportunities to advance our market penetration and leverage our distribution strategy. As we look ahead, our Personal Lines business is well-positioned to continue to deliver steady, high-quality performance and growth, backed by solid margins, our effective whole account strategy, disciplined execution, and our geographic reach. Moving now to Core Commercial. This business continued to deliver solid profitability for the quarter and the year, supported by active portfolio management and disciplined pricing.

While the market environment has become more competitive in select sectors, we have responded with greater precision and discernment, directing our efforts towards opportunities that meet our return thresholds. Our Small Commercial franchise continued to deliver a strong performance on both top and bottom lines, with net written premiums increased by nearly 5% in the quarter and for the full year. Renewal metrics remain favorable in the business as well, with strong retention and double-digit price increases. New business was very healthy, with double-digit growth, a clear reflection of our market leadership and the strong commitment from our best agents as we pursue more targeted offense.

Small commercial has meaningful barriers to entry, and our competitive advantage is well established, anchored in an efficient service model, strong brand recognition with agents, and a robust product offering that blends point-of-sale capabilities with traditional underwriting expertise in the higher end of Small Commercial. During the year, we expanded our distribution capability through strategic and thoughtful new agency appointments and increased engagement with more account managers throughout our existing agency relationships. Our Workers' Compensation Advantage product is now live in 17 states, with a national rollout targeted by the end of 2026, making it even easier for our agent partners to place new business and to transition books of business to us as markets consolidate. Moving on to Middle Market. Despite experiencing some softening property market conditions, underlying growth accelerated sequentially to 2.6% in the fourth quarter.

Our proven strategy in Middle Market centers on managing the business at a granular level, with focus on sectors where we can truly differentiate ourselves. Middle market rate and retention reflected crisp execution in the quarter, with rates and terms aligned to the underlying environment and the desirability of the risk. Renewal pricing decelerated modestly in the fourth quarter, driven primarily by property lines. Even with such pricing moderation, earned pricing continues to meet loss trends. We continued to exercise discipline in this market, walking away from underpriced new business as rate and risk selection remain critical to our success. As we adjust to more dynamic market conditions, we have several levers to accelerate profitable growth in Middle Market. We are doubling down on high-margin, expertise-driven segments such as technology, human services, and manufacturing.

We are deploying our enhanced underwriting workbench, which includes additional automation and pricing tools for underwriters to strengthen decision quality and improve productivity. We are transitioning to an enhanced field underwriting model to ensure that we deploy strong expertise while adjusting to evolving agency operating models. Overall, our Core Commercial business is positioned to deliver top-line improvement in 2026, led by continued growth momentum in Small Commercial, in a market that remains overall rational and stable. Turning to Specialty, this segment continues to deliver consistent and strong profitability through expertise-based underwriting, targeted risk selection, and disciplined execution. We are taking targeted rate actions and deploying margins selectively to retain and grow our high-quality book of business while staying close to loss cost trends. Granular policy design and improved terms and conditions continue to also help offset moderating rate trends.

Premium growth in Specialty moderated to approximately 4% in the fourth quarter, adjusted for reinstatement premium, reflecting heightened competitive pressure across property lines, which impacted our Hanover Specialty Industrial Property and, to a lesser degree, our Marine business. Importantly, market conditions remain very constructive across most other Specialty segments, with nice resiliency in the smaller account space, which represents the vast majority of our book of business. Excess and Surplus Lines continue to deliver strong double-digit growth, and we enter 2026 with a very strong and experienced team in this segment. Our new AI-powered submission triage is delivering nicely. Our risk appetite is expanding in targeted areas, and we are well-positioned to benefit from tightening capacity in parts of the market where we have deep expertise and strong appetite....

Management liability growth accelerated in the fourth quarter, due in large measure to pricing stabilization, strong growth in our Financial Institution segment, and an updated admitted asset manager product launched in the fourth quarter. More broadly, across professional and executive lines, our enhanced operating model is improving quoting speed, responsiveness, and agent engagement, supporting profitable growth as market conditions evolve. Surety delivered robust double-digit growth in the quarter as we benefited from the growth in some Commercial Surety niches and from added tech capability to write E&S bond products. We are also driving meaningful efficiency gains through technology upgrades and process refinements that are speeding decision-making and enhancing underwriting quality decisions. At the same time, we've strengthened risk selection and pricing segmentation, which are important contributors to the margin durability we are seeing across Specialty.

Overall, Specialty remains a powerful lever for growth and ROE expansion, supported by our team's deep expertise, disciplined underwriting, and differentiated earnings across market environments. As we close the books on 2025, ending the year with outstanding results and a solid foundation, we begin 2026 poised to build on that strength and to accelerate our progress. Our portfolio is stronger, our execution is sharper, and we have the operating leverage and discipline needed to continue to deliver attractive returns as we accelerate top-line growth. We've built businesses that are resilient, adaptable, and positioned to win in any market through underwriting excellence and operational discipline. In closing, I want to thank and recognize our employees for their dedication, our agent partners for their collaboration, and our customers and our investors for their trust in us. With that, I'll turn the call over to Jeff.

Jeff Farber (CFO)

Thank you, Jack, and good morning, everyone. We are very pleased with our exceptional performance and strong execution in both the fourth quarter and for the full year, headlined by several records as our momentum continues to build across every major area of the business. We wrapped up the year on a high note with an excellent fourth quarter combined ratio of 89%, as well as operating return on equity of 23.1%, one of our best results ever. Our full-year combined ratio was a strong 91.6%, improving over three points year-over-year. Excluding catastrophes, our combined ratio in 2025 was 87.1%, decisively outperforming our original guidance for the year, and one point three points better when compared to 2024.

Catastrophe losses for the year of 4.5 points came in well below our original guidance, helped by generally benign weather and our property management actions, which continue to contribute positively to our CAT and ex-CAT results. Our expense ratio of 31.1% for the year improved 20 basis points from 2024, but was above our original expectations, driven primarily by higher variable agency and employee compensation, reflecting better-than-expected underwriting results and a much lower level of CATs. Additionally, we continued to make investments across the business to support future profitable growth. We remain committed to managing expenses carefully. Quarterly prior year reserve development, ex-CAT, was favorable across each segment in both the fourth quarter and the full year. In Specialty, favorable prior year reserve development was 5.3 points for the quarter, with widespread favorability across multiple coverages.

In Personal Lines, prior year reserve development was slightly favorable in the quarter. Homeowners coverage continues to be favorable, while we made a minor increase to auto bodily injury in response to higher severity. We also updated our current year assumptions accordingly. In Core Commercial, fourth quarter prior year reserve development was 0.3 points favorable, with very minor adjustments by line. As it relates to commercial and Personal Auto liability, we expect pricing to continue to increase in 2026. In line with our traditional reserving approach, we are being thoughtful and prudent in setting our loss picks in both prior and current accident years to ensure that our balance sheet remains strong. Turning to our underlying underwriting performance, we posted outstanding results and outpaced our expectations in both the quarter and the year.

Our consolidated underlying loss ratio improved 1.1 points to 57.1% in the year, with impressive improvement in Personal Lines, Specialty results that continue to exceed our expectations, and strong underwriting margins in Core Commercial. Now I'll discuss results by segment. Starting with Personal Lines, this business posted an outstanding current accident year ex-CAT combined ratio of 85.3% for the year and 85.4% for the quarter, improving 3.8 points and 0.6 points from the prior year periods, respectively. The improvement in the year was driven by the benefit of earned pricing in both Personal Auto and Homeowners, as well as reduced frequency.

Our Personal Auto ex-CAT current accident year loss ratio was 69.5% for the year, an improvement of 2.2 points compared to the prior year. The result for the fourth quarter of 75.7% was higher year-over-year, but approximated our expectations. Turning to Homeowners, we delivered exceptional ex-CAT current accident year loss ratio improvement, down 6.4 points to 45.8% for the year and down 4.6 points to 36.6% in the fourth quarter. Earned pricing continues to be a benefit as well as favorable weather. We also continue to partially attribute lower claim frequency to deductible changes, leading to fewer small claims, not only in CAT but also in ex-CAT results. Personal lines growth accelerated to 4.4% in the fourth quarter, with the full year at 3.7%.

PIF was relatively stable in the quarter, shrinking 0.6 points sequentially, which is an improvement from the third quarter of 2025. We expect PIF growth in 2026. We achieved Personal Lines renewal price of 9.2% in the quarter, with auto pricing up 6.9% and home pricing up 12.3%. While price increases were lower sequentially, they remain above our long-term loss trend. Umbrella pricing remains strong, holding around 20%. We are pleased with our current Personal Lines rate levels in light of the strong overall profitability we've achieved. Now, turning to our Core Commercial segment.

We posted a current accident year ex-CAT combined ratio of 91.6% for the fourth quarter, improving 2.4 points from the prior year quarter, and achieved 92.6% for the 2025 year. The fourth quarter ex-CAT current accident year loss ratio improved 1.5 points from the prior year quarter to 57.4%, as core property continued to perform well and large loss activity remained within expectations. The full year result of 59.1% was slightly higher compared to 2024, primarily driven by prudently increased loss selections in commercial auto liability and in workers' compensation, partially offset by lower losses in Commercial Multiple Peril.

Core Commercial net written premiums grew 3.6% in the year and 2.5% in the quarter, led by Small Commercial on the back of double-digit new business growth and healthy retention. Core Commercial segment growth was impacted by Middle Market reinstatement premiums, which were receipts in the fourth quarter of 2024 and payments in 2025. Excluding the reinstatement premium impact, the Core Commercial segment delivered fourth quarter growth of 4.1%, inclusive of 2.6% growth in Middle Market. We're very satisfied with what we're seeing in this segment of the market and have confidence in our ability to continue capturing profitable growth opportunities.

Overall retention in core continues to be solid at 85.3%, up nearly a point from Q3, while price increases, including exposure changes, moderated only slightly to 9.4%. Price levels remained elevated compared to historical averages, and overall rate continues to be above loss trend. Moving on to Specialty. The business continues to perform extremely well, posting a current accident year combined ratio ex-CAT of 87.4% for the year and 89.5% for the quarter. The current accident year loss ratio, ex-CAT, of 50.1% for the year and 51.4% for the quarter, were both within our long-term expectation of low fifties for this business. Fourth quarter loss experience was largely in line with expectations, while the year saw favorability driven by large property losses, which can fluctuate period to period.

Liability continued to remain within expectations. We are very pleased with the consistent execution and profitability in our Specialty book and remain confident in our positioning to further capture attractive growth opportunities in our markets. Turning to reinsurance, we successfully completed our multi-line casualty reinsurance renewal on January one. The program was placed in a similar manner to last year, including the same $2.5 million per risk retention at rate levels slightly below our expectations. As a reminder, our property per risk and catastrophe reinsurance treaties will renew on July one. Moving on to a discussion of our investment portfolio. Net investment income increased an impressive 24.9% in the fourth quarter and 22% for the year to $454.4 million.

This performance reflects growth in our asset base from strong earnings, the benefit of higher reinvestment yields, improving partnership income, and the success of our portfolio repositioning efforts. As we mentioned last quarter, fourth quarter NII also included a benefit of approximately $4 million from the investment of funds from our $500 million debt issuance in August 2025. This benefit is offset by a higher interest expense on our debt. The debt level was temporarily elevated following our issuance, but will normalize in the first quarter. We repaid approximately $62 million of senior notes that matured in October 2025, and also called $375 million of senior notes at par, which were retired in January, originally set to mature in April. Our investment portfolio continues to be a key pillar of our diversified earnings stream.

It is conservatively positioned, broadly diversified across sectors, and is not overexposed to any single asset class or industry sector. Our limited exposure to variable rate instruments also continues to provide stability in our investment income and reduces reinvestment risk as short-term rates decline. Our fixed maturity portfolio continues to carry a weighted average rating of A plus, with 95% of holdings investment grade. Portfolio duration, excluding cash, remained relatively stable at approximately four point three years, consistent with our long-term asset liability alignment approach. Moving on to our equity and capital position. Our book value increased approximately 27% in 2025, ending the year at $100.90, driven by strong earnings in the year and an improved unrealized loss position on invested assets. Excluding unrealized, book value increased approximately 15% for the year to $104.21.

In December, we raised our quarterly dividend by 5.6% to $0.95 per share, marking the 21st consecutive year we have increased our dividend, underscoring the durability of our enterprise, our commitment to delivering shareholder value, and the confidence we have in the company's future. We also continue to be active in share buybacks, repurchasing approximately 307,000 shares, totaling $55 million in the fourth quarter, and approximately 754,000 shares, totaling $130 million during 2025. Additionally, we repurchased approximately $44 million worth of shares through January 30. We remain dedicated to responsible capital management and prioritizing shareholder value. Turning to our annual guidance for 2026, we expect overall consolidated net written premium growth to accelerate in 2026 to mid-single-digit growth.

We expect net investment income growth in the mid to upper single digits compared to 2025. Our expense ratio for 2026 is expected to be 30.3%. However, we want to let you know we will not be giving specific expense ratio guidance in future years. We will continue to be disciplined financial managers, but we believe the combined ratio overall should really be the focus that we guide to. The combined ratio, excluding catastrophes, should be in the range of 88%-89%, an improvement from our 2025 guidance. Our CAT load for the year is 6.5%, consistent with our guidance for 2025.

Although CAT losses for 2025 came in below our expectations, and we continue to observe benefits from our deductible and terms and conditions changes, we believe holding our CAT load consistent for now is prudent, given the volatility of this income statement line and evolving weather patterns. Our CAT load for the first quarter is 6.1%. To wrap up, we are beginning 2026 in a position of strength and are extremely well-positioned to deliver on our goals. Our broad and resilient portfolio, diversified earning stream, and talented team are the foundation that will allow us to sustain this performance in 2026 and beyond. The combination of underwriting performance and the strong investment portfolio puts The Hanover in a terrific place. With that, we are ready to open the line for questions. Operator?

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question today will come from Michael Phillips with Oppenheimer. Please go ahead.

Michael Phillips (MD and Senior Analyst)

Thank you. Good morning, and congrats on a nice year and quarter. Jeff, your opening comments, you talked about adjusting the current year for auto BI severity. I assume you were referring to personal auto there, given what we see in the quarter. So I guess... And you also, of course, mentioned the Core Commercial actual loss ratio up a bit, given the activity you took earlier in the year. We didn't see that activity for Core Commercial this quarter. I don't think we did. And I guess, does that mean that the pressure you felt from those casualty lines in Core Commercial, that you felt less of a need to do so and maybe things are kind of easy there?

Jeff Farber (CFO)

So your first question, yes, it was PL auto liability that we were raising picks, in the fourth quarter. With respect to Core Commercial, auto, yeah, we didn't see a whole heck of a lot this particular quarter. It's been a relatively quiet quarter there, but we've been mentioning it all year long, and we've been increasing our IBNR reserves for auto, largely for, solely really for 2023 and 2024 and 2025. Years before that are quite mature, and I think we leave 2025 with the strongest balance sheet that we've ever had.

Michael Phillips (MD and Senior Analyst)

Yep. Okay, good. Thanks, Jeff. Appreciate that. Maybe it was more of a higher level question, maybe for Jack. As we kind of get into a phase for the overall industry where pricing starts to come off a little bit, and maybe more so as the year progresses. Can Jeff, or maybe Jack or Dick, can you talk about any changes that you might make to how you approach your agency partners? I guess, specifically, do you talk to them more from management teams? Do they hear from you more? Do they hear from you less? Does your message, what you say to them, change as we get into a softer environment?

Jack Roche (President and CEO)

Mike, this is Jack. Thanks for the question. I'll say a few words here, and I'm sure Dick can chime in also. I think the dialogue that we're having with the top agents in the country is accelerating for a number of reasons. They're obviously becoming more strategic and operationally focused, and they're increasingly trying to work with carriers that can help them with their evolving operating model. So there's a lot of dialogue going on across our franchise, and as you know, our partner strategy really lends itself to this type of dialogue, including some great analytical tools that help agents as they're trying to become more efficient and more effective. So from a pricing standpoint, I wouldn't say that that alone is changing our dialogue at the top of the house.

What becomes really important is that our field teams and our underwriters are very proactive about which accounts are coming up when, and how we want to approach those things. So we're being respectful of the client relationships that they have, but also at the same time, not acquiescing to an overall market condition. Each account needs to be looked at one account at a time. So, Dick, you want to supplement that?

Dick Lavey (COO and President of Agency Markets)

I like the way you came at this question, Mike, 'cause it, you know, are we doing anything differently or do we have to lean in more or differently? And I'd say, yeah, we adjust kind of our activity and specifically our talk track with our agents. More time spent on helping them understand their economics and their behaviors in this kind of marketplace, watching the trends, the kind of the leading indicators. Really focused on the benefits of keeping accounts stitched together, right, in a bundled way, because when you separate those out and you have perhaps two shopping opportunities, that creates issues for them in the future with potential risk to retention. So we spend a lot of time talking about that.

You know, the benefits of not only bundled accounts, but then in our case, we have a common effective date, which is really powerful, 'cause both of those policies renew on the same date. So we, we try to put data in front of them for their own book and for the industry, and our team. You've heard me say this before, it's a, it's a superpower of ours, that we bring data, and we help agents understand their own situation. So that's, that's probably what I'd add to Jack's response.

Michael Phillips (MD and Senior Analyst)

Yep. Okay, good. Thank you, guys, folks. Thank you once again.

Dick Lavey (COO and President of Agency Markets)

Thank you.

Operator (participant)

The next question will come from Mike Zaremski with BMO. Please go ahead.

Mike Zaremski (MD and Senior Equity Research Analyst)

Hi, great. Good morning. Maybe on personal line specifically, if you can kind of just tease out directionally, what the non-CAT property benefit was in home. I, I think there was a benefit for the year, just so we kind of can better understand the the run rate. You guys all have obviously done an excellent job improving margins there and, and just maybe higher level overall Personal Lines, kind of like, I, I saw - I see the comment in your deck about expecting, you know, policy count to grow a bit. But, you know, I guess, what's kind of the North Star in in the current competitive environment? Would, would it, would would it be kind of very low single-digit PIF growth or any, any commentary helpful? Thanks.

Jack Roche (President and CEO)

Thanks, Mike. It's Jeff. I'll start on the loss ratio. You know, a lot of moving pieces with respect to home. You know, first off, we're getting price above loss trend, which is really earning in and being very, you know, powerful for us. But you also have issues like the benefit of the deductibles and even some consumer behavior. Clearly, favorable weather in 2025, and even particularly in the fourth quarter, is having a healthy benefit. So it's... I'm reluctant to single that out, even though we've tried to estimate it, because it's just, it's too raw. I don't have enough confidence in it. But I think it would be wise to assume that the 47.5 that we did for the year will need to come up a little bit because of that particular benefit.

Dick Lavey (COO and President of Agency Markets)

All right, I'll take the question on the North Star personal line, so thanks for that. We've really been maniacally focused on our North Star in Personal Lines, which is to be the best market in the IA channel for preferred accounts. So I do think of our future as, like, strengthening that strength, growing thoughtfully while achieving our diversification objectives, not only across states, but even within states where we have a lot of market share. Pushing ourselves continuously upstream into that Prestige account space, you know, the $750-$3 million space. And then, as you've seen, importantly, continue to invest in that account solution, so classic cars, schedule items, and things like that. So we continue to be focused on that.

I like a mid-single-digit growth objective kind of into the future. I think that's a good place to be, and as prices come down to more rational levels, that's always been our objective.

Mike Zaremski (MD and Senior Equity Research Analyst)

Okay, sounds good. My follow-up, Jeff, a lot of commentary helpful on the reinstatement premiums. Can you just remind us what drove the reinstatement premiums? Is that CAT or casualty?

Jeff Farber (CFO)

...So again, with reinstatement premium, we had some incoming reinstatement premium on reserve takedown in 2024 quarter and some outgoing on an increased reserve for reinsurance. It was not CAT, it was, you know, generally, property, you know, large property loss exposure.

Mike Zaremski (MD and Senior Equity Research Analyst)

Okay.

Jeff Farber (CFO)

In the property per risk program.

Mike Zaremski (MD and Senior Equity Research Analyst)

Okay, great. And I guess lastly, just thinking, you know, higher level about lawsuit inflation in the United States and, you know, cognizant of the comments you made on personal auto, but and it looks like you guys have been adding some conservatism to your loss picks throughout the year and in commercial. I guess we'll see some data, the stat data in a month or so. But any changes in your view of what you're seeing or maybe industry trend-wise, in terms of lawsuit inflation? Is it stabilizing at high levels, still maybe increasing, decreasing? Thanks.

Jack Roche (President and CEO)

Yeah, thanks, Mike. This is Jack. I think overall, what we're witnessing now is that the liability severity trends are presenting themselves in a pretty mature way. Will the severity levels continue to go up over time? Possible. But I think maturing might be a good word right now because there's not too many severe injuries that don't include a lawyer and lawyer representation, and the courts are obviously in full gear. So I think there is a little bit of a leveling out in terms of the environment itself, and I think the way we've tried to deal with it, as you referenced, is to make sure that we have the right claim strategies, and we're going at each individual claim in an appropriate way, but also to continue to be very prudent with our reserving.

I think we have done our best to add to IBNR levels, to look at the individual trends by subline, and make sure that we're not one of the companies that gets behind. And so, I have a high level of confidence, as does Jeff, in our reserve position, but also our claim strategies to... in this litigious environment.

Mike Zaremski (MD and Senior Equity Research Analyst)

Thank you.

Operator (participant)

The next question will come from Paul Newsome with Piper Sandler. Please go ahead.

Paul Newsome (MD and Senior Research Analyst)

Thanks. Good morning. I was hoping you could give us maybe a little bit more elaboration on the competitive environment in Middle Market commercial, which seems to be heating up, and, you know, I hope your investor fears that what we've seen in the large account pushes back in, down into the Middle Market. What's your perspective today on that?

Jack Roche (President and CEO)

Yeah. Thanks, Paul. This is Jack. I'll get us started here. I would say that there's no doubt that on the larger property schedules, and in certain sectors, there has been some heightened competition. But I would tell you at the same time, there are particular areas, and I would single out something like the human services sector, where they have some real challenges in terms of market access, particularly in the professional liability, and the sexual abuse and molestation lines and getting excess limits. So there's parts of the Middle Market sector, particularly on the liability side, that are definitely on the front end of a firming market. And if I had a crystal ball, I would probably say that that will continue.

That, at some point in time, the property market will level off, and the liability pricing will steal the headlines. But in the meantime, being a good account player, primarily playing on the, you know, low to mid-size accounts and not staying out of the upper Middle Market, is serving us extremely well, and I think we're poised eventually to be even more, you know, assertive as the market starts to firm, hopefully, sometime this year.

Paul Newsome (MD and Senior Research Analyst)

Then maybe a different question. Longer term, I think, catastrophe management has been an effort. The six point five looks a lot like a CAT load prediction, looks a lot like it has been in the past, maybe more of a stable number. Are you thinking about, you know, trying to move your property exposure to have less CAT in the future, or is it kind of the right level sort of in broadly thought way?

Jack Roche (President and CEO)

Well, I think our objective is to really focus on earnings volatility. And so I go there because the more we can of you know, address any micro concentrations and then look at the pricing and terms and conditions across the portfolio, then I don't think there's a magic number that we're shooting for. I think all of that adds up to us over time trying to drive the CAT load of the organization down, but you know, the environment will dictate some of that. And as you've seen, the Severe Convective Storms have driven some CAT loads up in some of our competitors.

So we're trying to be very thoughtful about making continued meaningful progress in our CAT management in our property aggregate management, but you know to be still relatively conservative in terms of how we model that out and choose our CAT loads. Yeah, Paul, severe convective storm is the area that has given us some issue over the last several years with that volatility.

And we've done a tremendous amount of work on thinning out the aggregations, putting in place the deductibles and, for the terms and conditions, and making it so those matters are less severe, getting lots of rate, and then also, particularly in the commercial space, putting in place new technology that is having a tremendously beneficial impact on limiting those CATs, where people can have devices that'll let them know if there's either excessive cold temperatures or some water issues with pipes, and that's a real benefit for us.

Paul Newsome (MD and Senior Research Analyst)

Thank you. Appreciate the help.

Jack Roche (President and CEO)

Our pleasure.

Operator (participant)

The next question comes from Roland Mayer with RBC Capital Markets. Please go ahead.

Roland Mayer (Financial Services Analyst)

Good morning, and thank you for the time. I wanted to quickly get ahead of no longer getting expense ratio guide in 2027. Is the long-term goal there still to show year-over-year improvement? I guess on top of that, the tech investments, are those neutral to the expense ratio right now as efficiency gains come in, or is that still adding some pressure?

Jack Roche (President and CEO)

This is Jack. Listen, I think what you should know is that we intend to be very disciplined from an expense standpoint and that we believe we have expense leverage as we grow the organization. And so, you know, I'll let Jeff speak to kind of our rationale going forward on guidance, but I think you should expect us to scale each of our businesses. But obviously, the mix, our expense quotient is different across each of those businesses. And I would say from an investment standpoint in technology and data and analytics, the philosophy of the firm is that we are spending more, but we tend to do that by reducing some expenses other areas, as opposed to trying to drag that out of earnings.

And I think the team has been very disciplined in that regard to find savings to fund the additional investments that are required, you know, for our future. Yeah, I don't think that you should interpret our moving away from guidances in any way lacking financial or expense management discipline. To the contrary, we're still every bit as disciplined as we always have. But a year like we've had this year, where the loss ratio is, or the overall combined ratio is much lower than we had guided to, with or without CAT, it causes us to have an expense ratio elevation and, just didn't really want to be slavish toward, you know, reporting against it or being held to it. Having said all that, there's an awful lot going on with expenses.

We have expense needs and demands to make investments in technology and data and analytics, in AI, in a variety of different places, and we're making those investments in a way that will spend a little bit of money before we'll get the benefits of that, which will come. But we're funding that, and so we have a very active process of looking at our expenses across the organization and creating the capacity that's needed to be able to make those investments.

Roland Mayer (Financial Services Analyst)

That's super helpful. I wanted to quickly then ask on the repurchase volumes, and they've been steadily walking up the past few quarters, and even the January number looked, you know, I think it was the biggest probably month you've had in a very long time. Can you walk through the approach there and just how we should be thinking about your ability to buy back stock and maybe capital needed for growth needs?

Jack Roche (President and CEO)

Yeah, we bought back, as you said, $100 million of stock in the last four months, which is a healthy dose. With growth being a little bit lower in the last 12 months and the earnings and profits being super strong, we're building a lot of capital. As you can imagine, it ends up being a high-class problem. We've always been good stewards of capital. We've got choices. You know, growth is always at the top of the list. Continuing buybacks, of course, dividends. We can consider things around reinsurance, perhaps even small inorganic or renewal rights deals, but we'll, we'll be balanced, Roland, as to how we use capital, and I suspect the stock buyback will continue to play a meaningful role.

Roland Mayer (Financial Services Analyst)

Thank you for the answers.

Operator (participant)

The next question will come from Meyer Shields with KBW. Please go ahead.

Meyer Shields (MD)

Thanks. Two quick questions on the Personal Lines, if I can. First, at least this third quarter of this year, we're seeing most Personal Lines coverages, claim frequency decline. I'm wondering whether that broad picture matches what you're seeing in your preferred market.

Jack Roche (President and CEO)

Yes, yes, definitely. We're seeing the frequency on the property coverages, the auto and the homeowner side of things. And certainly, you know, some of that's related to customer behavior. We believe some of it's related to the terms and conditions that we've put in place, certainly on the home side and the weather, ex-CAT weather. And then, of course, as you know, on the auto side, the safety technology that is being implemented in cars as they roll off the conveyor belt and more and more of those on the streets and highways, is definitely having an impact on the number of accidents or frequency down.

Meyer Shields (MD)

Okay, perfect. That's very helpful. When we look forward to the growth in the new states, I'm assuming that the 11 states that Jack called out, you're going to continue to pursue growth there. Should we anticipate some level of new business penalty just or higher initial loss ratios, however you want to frame it, from the fact that there's going to be hopefully not take a new business?

Jack Roche (President and CEO)

This is Jack. I'll say a couple of words in that, you know, these are existing states that we believe are reaching a level of maturity and benefiting from the hard market that we came out, that accelerated growth can come through at a very accretive level. So I would not think about it in a traditional way with new business penalty. Frankly, we've been through an era, where new business pricing was matching renewal pricing for some time. So we're not still at a traditional gap of new to renewal pricing. So, Dick, I don't know.

Dick Lavey (COO and President of Agency Markets)

No, we've never been at a more adequate price level in our well, as we look across all of our states into business, so we feel good about it.

Jack Roche (President and CEO)

Needless to say, as we diversify, you know, from a capital allocation perspective and just an overall performance, we think it will, it'll help us because we have had to adjust CAT loads, and we've had to think about weather differently, and so spreading that risk better, particularly on the homeowner side, is having an additional positive impact.

Meyer Shields (MD)

Okay, perfect. Thank you very much.

Jack Roche (President and CEO)

Thanks, Meyer.

Operator (participant)

The next question will come from Mike Zaremski with BMO. Please go ahead.

Mike Zaremski (MD and Senior Equity Research Analyst)

Great. Just quick follow-up. Does the winter storm recently in 1Q, is that big enough to, we should talk about it, and is it, if so, is it in the guide for 2026? Thanks.

Jack Roche (President and CEO)

Fern represented most of our January CATs, this winter storm, Fern. Based on what we're seeing, there's no reason to modify our first quarter CAT estimate of 6.1%, Mike.

Mike Zaremski (MD and Senior Equity Research Analyst)

Thanks.

Jack Roche (President and CEO)

You're welcome.

Operator (participant)

The next question will come from Daniel Lee with Morgan Stanley. Please go ahead.

Daniel Lee (Analyst)

Hi, good morning. Thank you for taking my question. My first question is on the Specialty segment. I was just kind of curious to hear just some more details on, like, competitive dynamics. I know you guys mentioned just competitive pressure across the property lines, but yeah, maybe with management liability and pricing stabilization across for professional and executive lines, how are you guys thinking about the competitive dynamics going forward for that sub-segment?

Bryan Salvatore (President of Specialty Lines)

Yeah, thank you, Daniel. I'll take that. It's Bryan Salvatore. And yes, to your point, we do see increased competition across the property lines, and we are reacting to that. We're really fortunate to have a very diversified portfolio. And the things that you mentioned, for example, management liability, really, with the progress we saw in the fourth quarter, right? Yes, the market is stabilized. That, along with the investments we've made in operating model efficiency, improving turnaround, we saw double-digit growth in the fourth quarter. For management liability, we see that continuing. And we also saw improvement in professional liability from the investments we've made there. So that diversified portfolio for us gives us a lot of confidence in our ability to appropriately grow in 2026, even in this environment.

Daniel Lee (Analyst)

Thank you, Bryan. Yeah, so I guess my follow-up is, I'm also kind of curious on just the overall E&S demand that you guys are seeing out there. Is there still more robust submission flows that are coming in for E&S, or do you guys kind of see that subsiding as a little bit of the admitted markets start to open up? Just curious on-

Bryan Salvatore (President of Specialty Lines)

Yeah. So I'll react to that, too. Sorry, I'll react to that, too. We have not seen any abatement in the activity in our E&S book. It grew double digits throughout the year. It grew double digits in the fourth quarter. The submission volume is quite high, and we do have a couple of benefits. One is where we're positioned, which is middle to smaller E&S, and so the competition there isn't as severe as you might see in some other places. Also, we have a real nice mix now of retail-play E&S business, and wholesale play. So we have different avenues, different access to opportunities, and so we continue to see that business growing for us in a nice, healthy way.

Daniel Lee (Analyst)

Thank you.

Operator (participant)

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 (Head of Investor Relations)

Thank you, everyone, for dialing in today. We're looking forward to talking to you next quarter.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.