The Hanover Insurance Group - Q4 2023

Transcript

Operator (participant)

Good day, and welcome to The Hanover Insurance Group's fourth quarter earnings conference call. My name is Dave, and I'll be your operator for today's call. At this time, all participants are in 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 then 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 (SVP of Corporate Finance)

Thank you, operator. Good morning, and thank you for joining us for our quarterly conference call. We will begin today's call with prepared remarks from Jack Roche, our President and Chief Executive Officer, and Jeff Farber, our Chief Financial Officer. Available to answer your questions after our prepared remarks are Dick Lavey, President of Agency Markets, and Bryan Salvatore, President of Specialty Lines. Before I turn the call over to Jack, let me note that our earnings press release, financial supplement, and a complete slide presentation for today's call are available in the investor section of our website at www.hanover.com. After the presentation, we will answer questions in the Q&A session. Our prepared remarks and responses to your questions today, other than 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 guidance for 2024, economic conditions and related effects, including economic and social inflation, potential recessionary impacts, as well as other risks and uncertainties, such as severe weather and catastrophes that could affect the company's performance and/or cause actual results to differ materially from those anticipated. We caution you with respect to reliance on forward-looking statements and, in this respect, refer you to the forward-looking 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 ratio, excluding catastrophes, among others.

A reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis can be found in the press release, the slide presentation, or the financial supplement, which are posted on our website, as I mentioned earlier. With those comments, I will turn the call over to Jack.

Jack Roche (President and CEO)

Thank you, Oksana. Good morning, everyone, and thank you for joining us. The fourth quarter represented a strong finish to a very dynamic but productive year for our company. Catastrophes proved to be very challenging for us in the first three quarters of the year. However, cats aside, we achieved all major objectives of our business plan in 2023. Additionally, we made important progress on many fronts, strengthening our company and enhancing our competitive position and prospects moving forward. Importantly, we took significant steps to enhance our catastrophe management, and we advanced our capability to anticipate and address emerging and future trends as an organization. We also repositioned our portfolio to more effectively respond to evolving industry issues. As a result, we now have even more confidence in our ability to rapidly improve our earnings trajectory and to deliver the top-tier returns you expect from us.

On today's call, I'll share my perspective on our fourth quarter and full year results, and I'll put our top-line performance in the context of our margin improvement trajectory. Jeff will review our financial and operating results in more detail, and he will provide annual guidance for 2024. We will then open the line for your questions. Appropriately, our primary focus in 2023 was to drive critical margin recovery. With intense determination, we believe we did just that. We focused on the many areas of our business that were within our control, developing and implementing a multifaceted margin recapture plan, driving significant increases in pricing and policy terms and conditions to address new market realities, taking underwriting actions in our property lines across the enterprise, and mitigating risks by implementing new and proactive loss control and preventative measures.

Our fourth quarter performance reflects the strong progress we've made towards our goals of regaining positive earnings momentum and delivering strong, sustainable, profitable growth. In the quarter, we improved our ex-CAT combined ratio year-over-year by nearly 4 points to 90.2%, driven by great execution across all segments of our business, with improved margins in personal lines, continuing low property large losses in core commercial, and really strong profitability in specialty. Our reserves remain strong, positioning us well as the industry faces emerging liability trends in this dynamic market. We maintained our expense discipline and kept our overall position in check, and we continued to benefit from higher net investment income. Our work continues, but we are very pleased with the progress we have made over the course of the year.

Most importantly, we believe our fourth quarter results represent a critical inflection point to deliver improved returns in 2024 and on a go-forward basis. Looking at our segment highlights, we continue to see the benefits of our margin recapture plan in core commercial. reducing our current accident year ex-CAT loss ratio by about 2 points for the quarter and the year, demonstrating the success of our rate and property exposure initiatives. We posted another quarter of strong renewal pricing gains, with 12.4% increase in core commercial overall and 13.1% in our middle market business. We implemented additional CAT mitigation measures to address evolving weather patterns, including underwriting actions on business with outsized catastrophe exposure, primarily in the middle market segment and some in small commercial as well.

Additionally, we accelerated risk prevention and mitigation actions in our middle market segment, resulting in 60% of the targeted 600 middle market accounts, either mitigating risks by joining our IoT sensor program or non-renewing their coverage with us. The early results of these efforts are very encouraging. During the latter half of 2023, we believe the sensor program resulted in more than 100 instances of successful damage prevention. While growth in our middle market segment was intentionally restrained in 2023, we are confident we made the right trade-offs, positioning our business for strong performance in 2024 and beyond.

Small commercial growth was approximately 6% in the fourth quarter and just over 7% for the year, and we expect this business to drive overall growth in core commercial in 2024, despite continuing our targeted property underwriting actions in middle market. Our small commercial business production indicators remain robust, with increased new business, double-digit renewal pricing, and retention within historical norms. TAP Sales, our industry-leading quote-and-issue platform, continues to generate strong new business momentum as we continue the rollout in the remaining states. This state-of-the-art point-of-sale system represents a significant competitive advantage in the marketplace and positions us well as more agents consolidate small commercial business with strategic partners. We plan to expand our TAP Sales platform to include workers' comp this year.

Turning to Specialty, we achieved excellent profitability in the quarter, beating our low 50s target for ex-CAT current accident year loss ratio again, while implementing healthy rate increases and delivering lower than usual large losses. In 2023, Specialty increased earnings for the fourth consecutive year while delivering its highest-ever pre-tax operating income results. This business achieved especially strong performance in management liability, Marine, and Excess and Surplus Lines, with Combined Ratios in the high 70s-low 80s for the year. Renewal price increases for the quarter totaled 11.6%, primarily attributable to specialty property lines. Specialty net written premiums declined modestly quarter-over-quarter, and retention declined slightly, the result of strategic underwriting actions as we increased nonrenewals on specific underperforming programs. Excluding program business, specialty net written premium growth was approximately 6% in the quarter, and retention remained stable.

Program nonrenewals were largely completed during 2023. We expect net written premiums growth in the Specialty segment to ramp up throughout 2024, with a return to mid-single-digit growth in the first quarter and upper single-digit growth for the year. As we look ahead, we have visibility to improve growth opportunities in Executive Lines, in particular in our management, liability, and healthcare lines. We are well-positioned to continue to capitalize on market opportunities in Marine, enabling us to build on what today already is one of the largest in the Marine franchises in the U.S. specialty market. We are excited about the growth opportunities within our newer offerings, E&S, Wholesale, and Small Specialty.

We expect the launch of our new E&S policy administration platform in April of this year will enable us to more efficiently capture increasing opportunities with our agents and brokers at attractive rates and profitability profiles. Specialty continues to represent a powerful growth engine, one that we anticipate will serve to profitably strengthen our consolidated top line while providing important diversification to our overall mix of business. Looking now at our Personal Lines business, we improved profitability in this segment by more than 5 points in the quarter, due in large part to the effectiveness of our margin recapture plan. We continued to achieve higher renewal price increases in both auto and home, up approximately 15% and 29% respectively.

We also intentionally narrowed our new business appetite, in particular in areas of higher concentration, which, given the current market disruption, is the best way for us to ensure the underlying profitability of our coveted high-quality Personal Lines portfolio. Additionally, we continued to execute on other levers of our margin recapture and catastrophe resiliency plan in Personal Lines as we strive for further diversification of our property exposures. For example, we are rolling out all peril, wind and hail deductibles on new business in targeted states. We are implementing these deductibles on renewals starting in February in Wisconsin, with multiple states to follow in April.

As a result of pricing and new business actions, along with increased nonrenewals, our growth slowed to 2.1% in the fourth quarter. Our retention in PIF levels also declined as expected in the fourth quarter, in particular in our Midwest region, as we address areas of micro-concentrations. PIF in the Midwest shrunk approximately 2x-3x the rate of PIF reductions in other regions. We are comfortable with this trade-off, which we expect will enable us to improve our overall business mix and catastrophe resiliency. That said, we are already starting to make adjustments to our new business funnel in select states, and we are positioning ourselves to take advantage of growth opportunities in geographies where pricing is adequate.

We anticipate measured price-driven growth and a meaningful profit recovery in Personal Lines this year, and we expect to achieve our target Personal Lines ROE in 2025. Overall, we're encouraged by our strong fourth quarter performance, and we are pleased to begin the new year with positive operational and financial momentum. Through the introduction of enhanced products and technology, disciplined pricing, and risk prevention measures, we further strengthened our business in 2023, adapting to the rapidly changing dynamics of our industry, as well as the economic, social, and weather changes that impacted the broader marketplace. We begin 2024 with a renewed sense of optimism, a determined focus and confidence, knowing we have a proven strategy, the capabilities, the distribution distinctiveness, and the talented and committed team necessary to deliver strong, sustainable, longer-term value for our shareholders and all of our stakeholders.

With that, let me turn the call over to Jeff.

Jeffrey Farber (EVP and CFO)

Thank you, Jack, and good morning, everyone. I'll begin with an overview of our fourth quarter results. Then I'll discuss our segment results and our investment performance and share our consolidated 2024 guidance. We closed out 2023 with a strong and very profitable fourth quarter, reporting an all-in combined ratio of 94.2%, outperforming our original expectations. With the accelerating momentum of our margin recapture plan, year-over-year margins improved in each segment in the quarter. Our CAT loss experience in Q4 was comparatively benign, resulting in 4% of net earned premium, 2.8 points related to fourth quarter events, with 1.2 points representing prior quarter catastrophe true-ups. We delivered a combined ratio excluding cats of 90.2% in the fourth quarter, 3.9 points better than the prior year period.

On a full year basis, our ex-CAT combined ratio of 91.3% is consistent with our original guidance of 91%-92%. Our consolidated current accident year loss ratio, excluding catastrophes, improved by approximately 3 points in the quarter to 60.2%, reflecting the earning in of our pricing increases and execution of profitability measures we introduced in 2022 and 2023. At 30.5% for the full year, the expense ratio was better than expectations and our full-year guidance of 30.8%. The improvements were attributable primarily to reduced variable compensation items in 2023. Prior year development was slightly favorable for the quarter. In Specialty, we saw continued favorability in our claims made professional and executive lines, primarily management liability.

Prior year development in Personal Lines was unfavorable, driven by umbrella coverages reported in home and other, as we increased our prior year loss expectations on auto-related umbrella losses. We increased current year umbrella picks to address the trend. Now I'll review our segment results. starting with our core commercial segment, we delivered a current accident ex-CAT combined ratio of 91.4%, a 1.7-point improvement over the fourth quarter of 2022. The core commercial current accident year loss ratio, excluding catastrophes, improved 2.4 points to 57.8%. Strong improvement in commercial multi-peril was partially offset by prudent loss picks in workers' comp and commercial auto.

The key takeaway here is the success of our commercial property margin improvement initiatives, as evidenced by a more consistent pattern of lower large loss activity in middle market and small commercial multiple peril lines. Looking ahead, we expect the loss ratio in core commercial to remain stable as we continue our property work, take rate, and address potential increases in liability trends, including increased medical costs and social inflation. Our specialty segment reported another exceptionally strong quarter as the current accident ex-CAT combined ratio improved 1.4 points compared to the fourth quarter of 2022 to 85.9%, driven by lower large loss activity in property lines. The underlying loss ratio improved 2 points to 49.5%, which was below our expectation for the quarter.

Although we expect to continue to benefit from rate increases in the specialty book, we are embedding more conservatism for loss inflation in liability lines, as well as a return to more normal level of large losses in our 2024 loss ratio expectations. Turning to personal lines, the current accident year ex-CAT combined ratio is 93% for the fourth quarter, improving nearly 6 points from the same period of 2022. Auto current accident year loss ratio, excluding catastrophes, of 78.5% in the fourth quarter, improved 7.1 points year-over-year. This result reflected the benefit of earned rates and milder than normal weather in the Northeast and Midwest, which favorably impacted claims frequency. Additionally, although collision loss severity remains elevated compared to our original expectations, our data indicates that severity is easing, in particular, used car prices.

We are also experiencing some deceleration in the cost of parts, as well as rental costs due to shorter repair cycle times. At the same time, we remain cautious about liability coverages in auto and reflected an elevated loss expectation in both prior and current accident year picks in bodily injury. However, as the benefit of rate continues to earn in and property loss trends ease, we expect this will drive significant loss ratio improvement for auto in 2024. Home and other current accident year loss ratio, excluding catastrophes, improved 0.7 points to 53.2%, driven by rate and exposure adjustments earning in, partially offset by prudently increased 2023 loss ratio expectations for umbrella coverage in response to prior year development.

Looking ahead, we expect the benefit of earned pricing building in and moderating property loss trend to drive a meaningfully improved personal lines current accident year ex-CAT loss ratio in 2024. Furthermore, we anticipate some additional improvements as the result of increased home inspections and new business rigor in homeowners implemented in 2023. We expect significant margin improvement in auto and home to pace a return to target profitability by the end of this year on a written basis and in 2025 on an earned basis. Turning to reinsurance. On January first, we successfully completed our multi-line casualty reinsurance renewals, securing a similar structure to expiring agreements with reduced co-participation and a slightly lower-than-expected price increase. As a reminder, for most casualty risks, our per-loss reinsurance attaches at $2.5 million.

We've worked to establish robust relationships with our reinsurers, who recognize the strength of our recent liability rates, very selective umbrella appetite, and prudent casualty and umbrella rating structures. Additionally, our insurers appreciate our diversified, state-specific casualty growth strategy. Moving on to investment performance. Net Investment Income increased $5.7 million to $81.6 million for the fourth quarter, primarily driven by strong fixed income results from higher bond investment rates. Net Investment Income came in slightly below our expectations, in part due to lower investment partnership income, which is on a one-quarter lag and can be lumpy. However, Net Investment Income annual growth of 12.1% for 2023 exceeded our original guidance, and we believe that the current rate environment will continue to provide an accumulating benefit to NII next year and over the next few years.

Book value per share increased 16.4% in the fourth quarter to $68.93, driven by an improvement in unrealized loss position on the fixed income portfolio and strong earnings. With continued volatility in interest rates and weather uncertainty, we remained on the sidelines for repurchases this quarter. However, we have a long history of returning capital to shareholders through dividends and share repurchases. Our philosophy hasn't changed, and we expect both levers to remain key tools for our future. Now I'll turn to our catastrophe ratio guidance. To provide some context, we recently completed a comprehensive reevaluation of our model catastrophe losses, our historical experience, and non-modeled risks. Our reevaluation this year augmented the detailed modeling and risk analysis process that we conduct each year. As we usually do, we use the prevailing hurricane and other peril models.

Additionally, the reevaluation of our view of catastrophe risk includes the results from the recently updated severe convective storm and winter storm models. We also expanded our assumptions for non-modeled CAT perils and allowed for additional prudence to account for items not fully contemplated in CAT models, including recent experience, social inflationary impacts in contractor behavior, demographic trends, and risks associated with an aging public infrastructure. Candidly, this year we picked higher on the probability curve. There is a page in our earnings presentation deck that outlines the changes.

As a result of this comprehensive analysis, we have determined the CAT load to be 7% in 2024, with an expectation for it to decrease in 2025. The nearly 2-point increase in CAT load, combined with 15% property earned price in 2024, amounts to an increase of approximately 60% in CAT loss dollars between 2023 and 2024, excluding growth. The process for 2024 did not meaningfully contemplate the impact of homeowners' deductibles or other changes in terms and conditions. We expect these factors to have a more substantial impact beyond 2024 and be contemplated in CAT loads for 2025 and future years.

We also expect that property exposure reductions in certain geographic concentrations in the Midwest, as well as a gradual change in business mix toward profitable liability lines, will reduce CAT loads over time. Accordingly, we believe that the 2024 CAT load will be the high water mark for our planned cat percentage. Turning to the rest of guidance. Based on current and anticipated business conditions, we expect operating return on equity to be strong in 2024 and consistent with our long-term targets in 2025. Net written premium growth is expected to be in the mid-single digits, with Specialty in the upper single digits. We anticipate that targeted underwriting actions will reduce Personal Lines growth to the lower single digits.

Our full year combined ratio, excluding catastrophes, is expected to be in the range of 90%-91%, which represents about 1 point of improvement from 2023 investor guidance. We expect to achieve an expense ratio of 30.7%, equating to 10 basis points of improvement from the 2023 ratio when normalized for variable compensation payouts commensurate with target profitability. Recall, 2023 target was 30.8%. Again, our CAT load is 7% for the full year 2024, and 6.5% for the first quarter. Net investment income is expected to increase by approximately 10% for the year, driven by higher fixed maturity yields and higher cash flows. We expect an operating tax rate to approximate the statutory rate of 21%.

To sum up, we continue to make excellent progress on our margin recapture initiatives as we focus on delivering sustained, profitable growth for our shareholders, and we have a healthy balance sheet that allows us to deliver on our strategic priorities in the year ahead. We are very optimistic about our positioning as we head into the next few years. Operator, please open the line for questions.

Operator (participant)

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. Our first question comes from Michael Phillips with Oppenheimer. Please go ahead.

Michael Phillips (Managing Director and Senior Analysts)

Hey, thanks. Good morning, everybody. I guess first question is on the favorable development in core commercial, where you had some community benefits and workers' comp. I guess, was there anything behind the scenes there that maybe offset that a bit? And then, talk about—if you could talk about, you know, what we're seeing from the industry in terms of the casualty issues for the older accident years and how you think you might be immune from that? Thanks.

Jeffrey Farber (EVP and CFO)

Thanks, Mike. We did have favorable development in core commercial, and that consisted of workers' comp favorability, offset by a relatively small amount of liability unfavorability between commercial auto and some umbrella. And that's been a relatively consistent pattern across the year as we have done our best to be proactive in addressing the liability trends as we see them, and as we've been worried about them. We've been talking about it all year and also last year.

Michael Phillips (Managing Director and Senior Analysts)

Okay, thank you. You mentioned in your presentation, I think it was on the CAT load, a shift to a more liability lines. Can you maybe kind of put up some timeframe around that and maybe the magnitude of that?

Jack Roche (President and CEO)

Yeah, Mike, this is Jack. Listen, I think, you know, as a company, we've worked hard over the last decade to try to diversify the firm, both geographically and from a line of business mix standpoint. As the weather challenges really were pronounced in 2023, we're even more motivated to accelerate the property and liability, property and casualty mix, but do so in a very thoughtful manner. So I think way we'll lay this out for you over time is that it, it'll be something north of incremental, but it won't be seismic, right? We still like our book of business. We have a great package approach in the core lines. Much of our specialty business is kind of lower limits casualty business that's pretty distributed across some targeted, you know, favorable areas.

But because of the nature of the account size, you know, it is, the growth rates are more measured than they would be if you were going into brand-new categories or writing larger accounts. So I think what I would say to you is that we're going to continue to move our mix in the right direction, but I suspect what you'll see over the next 12-18 months is that our book mix, which has clearly been challenged by the weather patterns and hyperinflation, will become a little less disadvantaged and maybe even advantaged as some of the liability trends present themselves. So, so we're trying to, you know, keep that in mind as we move our book mix forward.

Michael Phillips (Managing Director and Senior Analysts)

Great. Thanks. Very helpful. Thanks, Jack. Just last one real quick, I guess, maybe a quick numbers question. Can you just give a sense of the size of your personal umbrella book?

Jack Roche (President and CEO)

Personal umbrella.

Jeffrey Farber (EVP and CFO)

Yeah, it's in the range of $60-ish million.

Michael Phillips (Managing Director and Senior Analysts)

$60 million, you said?

Jeffrey Farber (EVP and CFO)

Six, yes.

Jack Roche (President and CEO)

Yeah.

Michael Phillips (Managing Director and Senior Analysts)

Yeah. Okay, cool. Thank you, guys. Appreciate it.

Jeffrey Farber (EVP and CFO)

Thanks, Mike.

Operator (participant)

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

Speaker 10

Hi, it's Jean from Meyer. Thank you for taking my question. My first question is on core commercial reserves. Just a follow-up on that. Can you guys, like, break down the numbers for the 2.2 reserve releases between workers' comp and liabilities?

Jeffrey Farber (EVP and CFO)

Yeah, we don't have all that detail right in front of us, but at year-end, we'll obviously publish those, but they weren't very significant. There was no piece that was particularly large there.

Speaker 10

Okay, got it. Thanks. My second question is on the specialty growth. Can you please provide, like, more details on the non-renewal of certain programs?

Jack Roche (President and CEO)

Yeah, I will just say a couple comments and then let Bryan speak very specifically to that. I think, as we said in previous calls, that, you know, I asked Dick and Bryan to accelerate our profit improvement really across the enterprise. And even though that we have really outstanding margins in the specialty business, like any book of business, there's opportunity for improvement, and there's areas where a little bit of addition by subtraction makes sense. So I have a lot of confidence in our ability to restore our growth, but Bryan can speak to you a little bit more about what we did in 2023 and our trajectory for 2024.

Bryan Salvatore (President of Specialty)

Yeah, sure. And just following what Jack said, really, the activity was really focused on two fairly large casualty-oriented programs, in which the margins we just felt was no longer acceptable, so we thought it was best to take action. The impact to Net Written Premium from those programs was most pronounced in Q3 and Q4. And so, you know, as we look towards, you know, this year, we see that impact really, moderating. We don't see it having a significant effect, and we actually see ourselves returning to growth this quarter and frankly, delivering upper single-digit growth for 2024.

Speaker 10

Got it. Thanks. Can I ask you one more question, if I can? Just on, on cat, I know, like, part of this beginning of this year, there are some severe convective storms. So how, how is it looking from what you guys are seeing right now?

Jack Roche (President and CEO)

I'm sorry, Jean, you were talking about,

Bryan Salvatore (President of Specialty)

Q1.

Jack Roche (President and CEO)

Q1?

Yeah, we-

Speaker 10

Yeah.

Jack Roche (President and CEO)

So we usually don't disclose, you know, CATs intra-quarter. That said, we do believe, you know, based on what we observed, and I think what the industry has observed, talking to others, that these were a different set of storms that came upon us in the first quarter, not as prolonged, in terms of the freeze. The temperature swings were a little bit less dramatic in terms of intense up and down, you know, particularly against the Winter Storm Elliott. And obviously, it didn't happen over a holiday, long weekend when many of our customers were caught off guard timing-wise. So even since last year, we believe that our book of business is much better positioned.

Many large properties are now equipped with temperature and water sensors, and we have a robust customer notification protocol in place. So I think the way I would, you know, without specifically answering first quarter-oriented CAT losses, I can tell you that these were different types of storms and the work we did, I think, will serve us well in the first quarter.

Speaker 10

Got it. Thank you so much. Appreciate it.

Operator (participant)

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

Michael Zaremski (Senior Equity Research Analyst and Managing Director)

Hey, Craig. Good morning. Back to personal lines, you know, obviously good to see the progress on the pricing increases and, you know, when you said you expect to achieve target ROEs in 2025, just wanted to make sure you don't mean by, like, the run rate by the end of the year, you mean the full year. And I guess, you know, when we think about ROE, should we think about kind of your historical combined ratio over long periods of time, kind of in the high nineties? Because you'd have more operating leverage.

I don't know if there's any kind of guidance, you know, or math you can help us with on what the implied combined ratio is or any. If you don't want to give the explicit to some kind of, triangulation, that might help.

Jack Roche (President and CEO)

So we leave 2024 at target profitability and written basis, and for the full year 2025 on an earned basis, I think you should think mid-90s combined ratio for personal lines as being what we think about our long-term investment, ROE targets, Mike.

Michael Zaremski (Senior Equity Research Analyst and Managing Director)

Okay, got it. That's helpful. And, on the investment income, I might, you know, give a lot of good disclosure in the prepared remarks, so maybe I remove or miss some of it. But, can you remind us what your new money rate is? And I believe, you know, I don't believe I can see that you have a larger gap between your new money rate and your current fixed maturity yield, because I believe you had less floaters than many of your peers. So what is your new money rate?

I don't know if you're able to give what your assumption is on your portfolio yield on the fixed income portfolio within your guidance for 2024, because I think there's maybe some upside to 2025 too, for if I'm thinking about the dynamics correctly.

Jack Roche (President and CEO)

So we've been buying fixed income in recent days or recent weeks at 5% or so on, you know, AA, high quality, you know, seven-year type fixed income. So we're very comfortable. There's a. As you said, there's a very large spread between either the yield in the portfolio on an NII basis or what's expiring on a daily basis. And that bodes very well for 2024 growth and even better, candidly, for 2025.

Michael Zaremski (Senior Equity Research Analyst and Managing Director)

But, is the 2024 growth hindered by just the lack of cash flow this past year? And I guess you get more—there's maybe more upside in 2025. I guess we can do the math with using the curve. Just, I wanna just, you know, I guess you give specific guidance. Just wanna make sure we're not missing anything beyond 2024, given the gap. Thanks.

Jack Roche (President and CEO)

Yeah, so 2023 was clearly hindered. As much as we grew 12%, it was hindered by the lack of cash flow, because up until this quarter, we hadn't made money for the last four quarters, so we would've benefited greatly from that extra cash flow. That does have some impact on 2024, but by the time you get to 2025, much, much less, and we really could come out of it with a mature level of cash flow.

Michael Zaremski (Senior Equity Research Analyst and Managing Director)

Okay, got it. And I'll sneak one last one in. You know, specialty, you know, you've had excellent results, you know, over time there. I believe you kind of talked about taking some more conservative loss picks on, I believe, were you alluding to on a go-forward basis? So we should be, you know, making sure we think about our, the loss ratio, embedding some forward-looking conservatism. I don't know if you want to give any further color or unpack that comment. Thanks.

Jack Roche (President and CEO)

Even with conservative liability loss picks, we're guiding toward a low 50s loss ratio for specialty over a long-term basis, notwithstanding the 2023 being better than that.

Michael Zaremski (Senior Equity Research Analyst and Managing Director)

Okay, that's clear. Thank you.

Operator (participant)

The next question comes from Grace Carter with Bank of America. Please go ahead.

Grace Carter (VP of Equity Research)

Hi, everyone.

Jack Roche (President and CEO)

Morning.

Grace Carter (VP of Equity Research)

I think you've mentioned that the 7% CAT load for this year should be a high watermark. I'm just curious about kind of the magnitude of the incremental benefit that you're expecting in 2025, just from the additional actions that you're not really fully contemplating in this 7% number. And if we should think about the 2025 CAT load as being pretty set over a long-term basis, or if just given the ongoing mix shift efforts that you've mentioned, if we should expect kind of a downward drift from those levels as well.

Jeffrey Farber (EVP and CFO)

Grace, I know you have to model 2025 as your customers expect it, but we're really not prepared to give a 2025 guidance at this point. Having said that, I think the amount of written rate that we've been getting in late 2023 and into 2024, and the impact that that earned rate has on 2024 and even 2025, is meaningful and will be helpful beyond loss trend. That, coupled with all of the terms and conditions changes that we articulated in the prepared remarks, I think will have a decent impact on that. But it's a little early to a little early for us to declare a sizing.

Grace Carter (VP of Equity Research)

Thanks. And I guess back to the specialty book. I mean, you've obviously called out that results are a little bit favorable versus expectations this year. But I guess taking into account, the non-renewals in the book, as well as ongoing strength and pricing, how should we think about any potential incremental sort of margin benefits versus original expectations for this year, for that book going forward? And I guess just the trade-off between the unit growth opportunities in that business versus reaching these, these margin expectations that you have.

Jack Roche (President and CEO)

Hey, Grace, this is Jack. You know, I think anybody that's in this business right now has a newfound respect for the changes in loss trends and the level of uncertainty that we have to adjust to. So the way I think about it, and I think the way we are operating, is we're trying to get double-digit growth and better in the businesses that not only are producing good margins, but that we have the most confidence in. And that is accentuated by where we think social inflation and litigation trends are likely to be least pronounced or impactful.

On the other end of the spectrum, as Bryan articulated with a couple of the programs, when we have, you know, areas of the portfolio that are not meeting our hurdle rates and pose potentially an outsized exposure to those same trends, we're not afraid to take some pretty aggressive action. So Jeff guided you on some low fifties loss ratios overall, which I think kind of is where we'd prefer to stay in terms of our guidance and upper single-digit growth for next year. And frankly, if we see the environment prove beneficial, we'll push harder than that. But right now, based on our outlook, that feels like the right guidance.

Speaker 10

Thank you.

Jack Roche (President and CEO)

Thank you, Grace.

Operator (participant)

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

Paul Newsome (Managing Director and Senior Resarch Analyst)

Good morning. Thanks for the help, as always. First question, I was hoping you could just give us a little bit more details on the, or even reminders on the swings in the expense ratio. You know, it obviously looks like it's going up this year versus last, but there were some pieces in there that were probably not sustainable. If you could unpack that a little bit, just to give us a better understanding of what's, you know, what's a return to normal and what is even potentially new investments?

Jeffrey Farber (EVP and CFO)

Thank you, Paul. So 30.5% was the actual 2023 expense ratio. 30.8% was our original guidance for 2023. And if you normalize for the agent reduced agent comp and to some degree, reduced employee variable compensation for essentially CATs during the year, you'd get right back to the 30.8%. So going forward, we've guided to 30.7%, and this is the first time that we've guided to only a 10-point reduction. So I think what we're doing is asking for your patience for this one year to only go down 10 points, 10 basis points. And what we're really trying to do is we've had some expense pressures, largely around and including doing everything we can on margin recovery.

We're focused on the loss ratio, which is hundreds of basis points versus the 10 basis points, and we're focused overall on the combined ratio.

Paul Newsome (Managing Director and Senior Resarch Analyst)

Great. That's great. Thank you. And a separate question, maybe a few additional thoughts on the PIF growth, or lack thereof, the shrinkage in Personal Lines. It seems to be the thing that I'm getting the most questions about this morning from investors, is if, you know, this is—I mean, to me, it seems quite logical from what you're trying to do, but, I guess there's some concerns out there that it, you know, never stops. So any thoughts on sort of, you know, when you think that might, just sort of how the waterfall would work for PIF movement and changes on the Personal Lines side as you work your way through the recovery?

Jack Roche (President and CEO)

Yeah, Paul, this is Jack. I really appreciate that question because we want to be able to express kind of where we are in that journey. And first off, I would start off by saying that we are really right on our targeted outcomes that we put in front of ourselves when we realized that we needed to show tremendous agility in terms of adjusting our pricing, looking at our CAT exposures more assertively. And so I couldn't be happier with where we are coming out of the year in terms of adjusting our growth, slowing down new business, particularly where we have the most concentrations, and allowing the earned pricing to catch up and for us to start initiating our deductible approaches into the renewal book.

So I'll turn it over to Dick, but I have a lot of confidence that the personal lines team is not only performing well in this very dynamic environment, but has all the right levers and controls in place to optimize in 2024.

Dick Lavey (President of Agency Markets)

Yeah. Great. Thanks, Jack. So just maybe a couple other comments, and then I'll get to your question of just sort of what's the future look like in terms of PIF shrinkage. So, yeah, we couldn't be happier with the way our results came through in the fourth quarter, based on what we had architected as our plan, specifically shrinking in the Midwest 3x as much as the rest of the country. That was a really important outcome for us, but also keeping profitable business.

We have sophisticated segmentation, so keeping the tenured business, the customers that have been with us longer versus those that just came on the books most recently. So very kind of complex set of, you know, KPIs and trade-offs that we make. We put guardrails in place. To your point, we want to make sure we continue to achieve those targeted outcomes. And we're already sort of tweaking the dial, so to speak, and turning either new business guidelines off that we might have turned on, adjusting new business rates, adjusting renewal rates to accomplish the kind of, you know, growth in the right places. There isn't a single answer. You know, there's a very nuanced response that we're seeing from competitors.

We're all using the same levers, but to different degrees, with either rate or terms and conditions. So we're, you know, really happy with the outcomes. We're gonna watch it carefully, but we will see PIF shrinkage throughout 2024 as we execute this plan.

Paul Newsome (Managing Director and Senior Resarch Analyst)

Great. Thank you. Appreciate the help, as always.

Jeffrey Farber (EVP and CFO)

Thanks, Paul.

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 (SVP of Corporate Finance)

Thank you, and appreciate your participation today. We're looking forward to talking to you next quarter.