Earnings Call Transcript - THG Q2 2025

Operator, Operator

Good day, and welcome to The Hanover Insurance Group's Second Quarter Earnings Conference Call. My name is Joe, and I'll be your operator for today's call. Please also note that this event is being recorded today. I would now like to turn the conference over to Oksana Lukasheva. Please go ahead.

Oksana Lukasheva, Investor Relations

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, 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 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 2025, economic conditions and related effects, including economic and social inflation, potential recessionary impacts, tariffs as well as other risks and uncertainties such as severe weather and catastrophes that could affect the company's performance and/or cause actual results to differ materially from those anticipated. We caution you with respect to reliance on forward-looking statements and in this respect, refer you to the forward-looking statements section in our press release, the presentation deck 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, as I mentioned earlier. With those comments, I will turn the call over to Jack.

John Conner Roche, CEO

Thank you, Oksana. Good morning, everyone, and thank you for joining us. Our excellent second quarter results reflect the extraordinary progress we've made as a company. We're proud of our solid execution and consistent discipline. Our team is energized and focused as we step into the next phase of our growth journey at a time that's both exciting and dynamic for our business. At the core of our performance is a deeply experienced and talented team, a team that is fully aligned on our strategy, delivering a specialized and diversified portfolio of products through a select distribution model that targets the best independent agents in the business. What truly sets us apart is not just our product offering. It's the relationships we've built and the way we engage with the top agents in our business. Now more than ever, as agents and brokers across the spectrum are consolidating and actively redefining their business models, our differentiated approach is standing out and demonstrating great value. Today, with strong and broad-based earnings, our balanced and resilient portfolio is enabling us to remain agile and to perform very well through changing market conditions. We are intently focused on the dynamic market environment, which is characterized by significant variability across insurance product lines, industry classes and even geography. We are seeing a divergence between various lines and segments with property competition rising while liability pressures are building and pricing in these lines is starting to firm. Our business outlook remains very positive. With widespread profitability and target level returns across most segments, we're well-positioned to capitalize on emerging opportunities and to continue delivering high-quality results going forward. Turning to our second quarter highlights. Operating ROE was 18.7%, a record for the second quarter. Additionally, we delivered operating earnings of $4.35 per diluted share and earnings growth of approximately 25% on an ex-CAT basis. Top line growth started to accelerate in the second quarter, and we expect that to strengthen as we progress through the second half of the year and into 2026. Our overall combined ratio and ex-CAT combined ratio both outperformed our expectations, improving by approximately 7 points and 3 points, respectively, compared to the second quarter of last year. Our Personal Lines business performed very well in the quarter as we achieved more balanced growth and strong profitability with high-quality execution across the board. Our net written premium growth trajectory continues to build, driven by renewal price increases, improving retention and rising new business activity. Notably, we delivered approximately 8% growth in our targeted diversification states, highlighting the effectiveness of our strategic focus. We're achieving quarter-over-quarter PIF growth in key geographies where we're targeting profitable expansion that aligns with our margin objectives and enhances diversification across our business. We remain encouraged by the quality of Personal Lines new business with nearly all of it concentrated in account business. Our full account strategy continues to serve us well, enabling us to deliver holistic long-term solutions to customers and meet their needs with products that are more resilient to the competitiveness of the monoline auto market. With approximately 89% of our personal lines business written on an account basis, we experienced higher customer retention and loyalty. Additionally, with ongoing challenges and complexities around coverage in many states, homeowners is gradually becoming a lead line, further emphasizing the effectiveness of our account approach. Profitability continues to improve in Personal Lines, supported by rate and terms earning in and lower frequency of auto collision and homeowners’ claims. The cumulative impact of pricing as well as improved terms and conditions have significantly strengthened the underlying economics of our home book of business. That said, we still intend to maintain significant price increases given the higher severity and unpredictable nature of catastrophe losses. In terms of tariffs, while we have not yet seen a material impact, we do anticipate some minor loss cost increases emerging in the back half of the year. For this reason, we're not in a hurry to decelerate auto pricing significantly. We are actively monitoring market conditions for any tariff impacts, and we are ready to adjust pricing swiftly and precisely if and when tariff-related pressures materialize. Overall, our Personal Lines book is exceptionally strong, and the progress we've made puts us in an opportune position to capitalize on a complex and dynamic marketplace. We believe we are well equipped to sustain profit margins while executing on our targeted growth strategy. Turning to Core Commercial. We're pleased with our overall performance, having diligently maintained healthy margins in the second quarter despite an evolving market environment. Core Commercial profitability remains solid and our sub-90s ex-CAT combined ratio underscores the effectiveness of our strategic portfolio actions in prior quarters. Net written premium growth improved sequentially in Q2, fueled by accelerated top line momentum in Small Commercial, where our more targeted pricing strategy is beginning to produce the desired results. We're encouraged by the growth acceleration we achieved in the quarter, and we have visibility for improved growth through the year as we grow new business and as we strike the proper balance between pricing and retention in our renewal book. We have multiple small commercial initiatives underway to drive even stronger new business activity, including expansion of our TAP Sales platform into workers' compensation, bringing our business owners' advantage offering to life sciences organizations and multiple other sales initiatives. We also appointed new agents, further expanding distribution to improve our relevancy and access to additional market opportunities. We are pleased with our improved performance and continued stability of our middle market business, particularly in the property-oriented segments. This progress reflects the significant underwriting actions we've taken over the past several quarters. Most recently, we have witnessed some elevated competition in some areas of the middle market sector, and we have selectively passed on certain new business opportunities where pricing was below our thresholds or where terms and conditions did not meet our underwriting guidelines. At the same time, we're sharpening our focus on high-opportunity middle market sectors like technology, life sciences and professional services and positioning for future opportunities as the liability market shows signs of firming. In these targeted industry segments, we are benefiting from strong brand recognition with our agents and a steady flow of submissions. Moving on to Specialty. Net written premium growth was 4.6%, and we achieved an impressive mid-80s combined ratio. Importantly, our continued exceptional profitability allows us the flexibility to adjust pricing strategically to support our growth objectives. We continue to remain conservative on programs business, and we're not chasing underpriced accounts in certain property-focused lines. At the same time, we delivered upper single-digit to double-digit growth across E&S, which grew 22%, surety up 13% and healthcare, which increased 8%. In E&S, the environment is favorable in the lower mid-market and smaller-sized account space, which is our sweet spot, and we continue to gain momentum in this area. We have also delivered a solid 7% growth in our industry-leading marine business. We're especially pleased with the growth we are achieving in these lines as they are among our most profitable. Looking forward, we continue to see many opportunities across specialty, particularly in the smaller-sized retail agency market, where pricing remains solid and growth is achievable at target or above target returns. Before I close, I want to highlight a critical pillar of our overall strategy, our investments in data and analytics and technology for the future. We're making deliberate strategic investments that are fueling smarter, more scalable growth. These investments are positioning us to win in a rapidly evolving industry landscape. For example, while we continue to focus on point-of-sale platforms to support business generation, we are also leveraging generative AI and AI capabilities to automate account submission ingestion, build triage functionality and streamline workflow automation. These technologies are unlocking broader value creation across the enterprise. For instance, in E&S, we are developing workflow automation and AI-powered triage functions intended to double throughput on high-quality submissions and speed up the quote turnaround with our best agents. Workflow transformation in underwriting, claims and service functions is a top priority, and we are excited about the value creation that comes from operational efficiency, enhanced decision-making and a more seamless customer experience across these functions. Our underwriting claims and service professionals are very excited about the ways in which these technologies can enhance their effectiveness and their job satisfaction. We remain highly disciplined in our investment approach, directing resources toward the areas with the greatest potential impact. Notably, more than 40% of our employees interact with customers and agents daily, processing millions of calls, emails and transactions. This underscores the significant opportunity we have to streamline and elevate these critical touch points. Ultimately, our focus is on empowering our people and partners with tools that make us faster, sharper and more connected, charting a course for long-term success. We delivered outstanding second quarter results, surpassing our target returns and accelerating growth, which demonstrate the strong positive momentum we are carrying into the second half of the year. We couldn't be more excited about our prospects moving forward. With that, I will now turn the call over to Jeff.

Jeffrey Mark Farber, CFO

Thank you, Jack, and good morning, everyone. We are very pleased with our outstanding results in the second quarter, which reflect continued momentum in our earnings trajectory and an improving top line. Each segment of our business performed very well, further validating the strength and resilience of our diversified portfolio. In Personal Lines, we achieved significant margin improvement, supported by our targeted actions and strong pricing. Our Specialty segment outperformed our expectations, and in Core Commercial, as we anticipated, a few anomalous large property losses we experienced in Q1 subsided and performance in this book remains very strong. In the second quarter, we delivered a combined ratio of 92.5%, an improvement of 6.7 points year-over-year. Excluding catastrophes, our combined ratio of 85.5% improved 3 points compared to last year's second quarter. Our current accident year loss ratio, excluding catastrophes, was 56.1%, improving 2.8 points from the prior year quarter, led by strong improvement in personal lines and in specialty. Despite a relatively active quarter for severe convective storms, catastrophe losses of 7 points came in below our second quarter assumption, highlighting the effectiveness of our catastrophe management actions. This was inclusive of 0.4 points of prior year favorable cat development. Our expense ratio of 30.6% was consistent with our expectations for the quarter and was 20 basis points better than a year ago. We continue to maintain a thoughtful approach to expense management, keeping costs aligned with our financial goals. Net investment income increased 16.7% to $105.5 million and remains a significant contributor to our overall financial performance. Second quarter favorable ex-cat prior year reserve development of $18.2 million included favorability across each segment. We are experiencing favorability in property and at the same time, are exercising vigilance in liability lines. We continue to take a prudent and data-driven approach to reserving to stay ahead of the trends. In Specialty, favorable development was $12.5 million or 3.5 points with favorability in professional and executive lines claims made business and marine. In Personal Lines, favorable prior year reserve development was $2.6 million or 0.4 points with favorability in both auto and home. And in Core Commercial, favorable prior year reserve development was $3 million or 0.5 points. Favorability in CMP and to a lesser extent, workers' comp was partially offset by increased reserving in commercial auto in response to rising severity and litigation activity. Our commercial liability portfolio is thoughtfully constructed to mitigate volatility with lower policy limits, virtually no monoline or long-haul trucking in auto, no exposure to public company D&O and no stand-alone or unsupported umbrella business. We maintain a strong reserve position, reflecting the disciplined and prudent approach we've taken over time to ensure reserve adequacy and resilience. Now I'll further discuss each segment's current accident year results, starting with Personal Lines. This business generated a very strong current accident year ex-CAT combined ratio of 84.8% for the second quarter, reflecting 5.4 points of improvement from the prior year period. This was driven by the benefit of earned pricing above loss trends and favorable property frequency. Our personal auto ex-CAT current accident year loss ratio was 66.2%, an improvement of 3.9 points compared to the prior year quarter, driven by earned pricing and a continued loss frequency benefit. We're seeing favorable frequency trends across all coverages, particularly in collision, while remaining prudent on elevated bodily injury severity driven by larger catastrophic type claims. We are also closely monitoring auto property severity for signs of tariff impact. But to date, we have not observed much of an effect. Turning to homeowners. We posted substantial ex-CAT current accident year loss ratio enhancement, improving 6.4 points. This was favorable relative to our expectations, driven by strong earned pricing, some impact of benign weather and lower attritional loss frequency, which we partially attribute to deductible changes leading to fewer small claims. Similar to Q1, Personal lines umbrella was quieter in the quarter. We continue to vigilantly monitor umbrella to stay ahead of evolving industry trends while achieving healthy price increases of approximately 23% in Q2. Both auto and home posted strong pricing gains in the second quarter. Auto pricing at 9.8% was slightly lower than in the first quarter, but still above long-term loss trend. Home pricing ticked up sequentially to 15.7%. Our homeowner’s book is fully transitioned to new terms and conditions in targeted states with overall home exposures back to positive levels and consistent with longer-term historical averages. We expect overall pricing to remain strong through the remainder of the year. Our pricing remains ahead of loss trends, positioning us to continue to achieve target profitability for 2025 in Personal Lines. Personal Lines growth was 3.7%, an increase from the first quarter. New business momentum is especially evident in our target diversification states with double-digit growth both sequentially and year-over-year. We are nearing the completion of planned exposure reductions. And while the geographic rebalancing of our personal lines portfolio will continue, we expect to return to positive PIF expansion in the fourth quarter of this year. Now turning to our Core Commercial segment. We delivered a combined ratio of 93% and a combined ratio excluding catastrophes of 88.9%. We posted a strong underlying loss ratio of 56.5%. This was 80 basis points above Q2 last year, which was a low watermark for the 2024 year. As expected, our second quarter 2025 loss ratio is an improvement over the full year 2024. We're seeing favorability in CMP as pricing above loss trend has earned in and large loss activity normalized from elevated levels last quarter. In commercial auto, we remain cautious in our current accident year picks. We expect pricing to elevate, seeking double-digit increases in this line. Net written premiums grew 4.4%, led by 5.6% growth in Small Commercial, driven by double-digit new business growth and strong stable retention. Middle Market grew 2.4%, reflecting disciplined execution in a more competitive environment. Moving on to Specialty. Our current accident year loss ratio ex-CAT was 49.0%, favorable to both expectations and the prior year quarter, primarily driven by excellent property results in Marine and Hanover Specialty Industrial, while liability coverages are tracking within expectations. We continue to expect go-forward results to be in line with our low 50s long-term target. Specialty renewal pricing was 7.8%, while at the same time, retention improved sequentially to 81.8%, underscoring the continued appetite for our offerings. Pricing remains strong and in line with loss trends. We are very pleased with the performance in our specialty book and remain confident in our positioning to further capture attractive growth opportunities in our markets. Turning to reinsurance. We completed a successful renewal of our property treaties on July 1. The market response was very favorable, reflecting the effectiveness of our property and catastrophe management initiatives. The highlights of our current property reinsurance program are as follows: We renewed both treaties, our property per risk and cat occurrence, maintaining or enhancing structures relative to prior year. We issued our third and largest cat bond with expanded coverage. Positive investor interest allowed us to upsize this bond to $200 million at the low end of price guidance. We also added a new $100 million traditional reinsurance layer on top of our existing reinsurance tower. Taken together, these changes have resulted in a $150 million increase in reinsurance limits in our cat occurrence program that now exhausts at $2.05 billion while maintaining our $200 million retention. We achieved better-than-expected financial outcomes, highlighted by a double-digit reduction in risk-adjusted reinsurance costs on our loss-free cat program. The property per risk maintained the attachment point and was priced at better than original expectations. Moving on to investment performance. Net investment income increased 16.7% in the quarter, driven by higher earned yields in our fixed income portfolio, reflecting both the favorable rate environment and continued growth in operating cash flows. And at the same time, our underwriting profitability is generating solid cash flows and reinforces the financial foundation of our business. Together with attractive yields, these elements not only support the continued growth and resilience of our asset base but also position us to achieve meaningfully higher net investment income over time, further contributing to the overall earnings power of the company. We're very pleased with the positioning and performance of our investment portfolio. Moving on to our equity and capital position. Our book value increased 6% sequentially and 13.2% year-to-date. We continue to participate in share buybacks in Q2, demonstrating our commitment to returning capital to shareholders as a key component of our capital management strategy. From the beginning of April through July 28, the company repurchased approximately 295,000 shares of common stock totaling $48.2 million, of which approximately 170,000 were purchased during the second quarter of 2025 for $27.6 million, with the remaining balance purchased through a 10b5-1 plan during July. We have approximately $244 million of remaining capacity under our existing share repurchase program. Our third quarter cat load is expected to be 6.8%. Now that our aggregation initiatives in personal lines and the underwriting initiatives in middle market are mostly complete, we are well positioned to profitably grow these portfolios along with Small Commercial and Specialty. Accordingly, we expect growth of net written premiums to be in the 6% to 7% range for the second half of 2025. Through the first 6 months of the year, we've delivered strong results that highlight the momentum we've built across the business, demonstrated by year-to-date operating return on equity of 18%, with both our underwriting and investment performance contributing. The momentum we've built gives us great confidence in our ability to continue delivering outstanding results in the second half of the year. We are very optimistic about our future with the fundamentals of our business strong, and we remain intently focused on executing our strategy. In this dynamic environment, we are well positioned to deliver success this year and beyond. With that, we are ready to open the line for questions.

Operator, Operator

Our first question will come from Michael Phillips with Oppenheimer.

Michael Wayne Phillips, Analyst

I wanted to start with the Specialty segment. I kind of want to ask about the kind of decelerating rate environment there. And at what point does your current book kind of bump up against loss trends there, even though you're still getting phenomenal results. But maybe, Jack, your opening comments are part of the answer to that. In fact, I kind of want to see if that's the case because you're really focused on the E&S and the small retail accounts there. And maybe the answer is over time, that specialty segment starts to see a bit of a mix change than what your current book has. Anyway, that's the question.

John Conner Roche, CEO

Thanks for the question, Mike. I'm really proud that over the past decade, we've built a highly diversified and high-performing specialty business that enables us to capitalize on market opportunities while also understanding how to navigate the competitive landscape. Bryan, you can elaborate on how you're managing in this competitive environment.

Bryan James Salvatore, President of Specialty Lines

Yes, sure. Mike, many of your comments align closely with our thinking. First, I'd like to emphasize that the pricing remains strong and aligns with our loss trend. Additionally, the ongoing profitability of our portfolio is looking very promising. You brought up a point that Jack mentioned as well, highlighting that we have increasingly set ourselves apart in our ability to operate in the lower middle market and the small business sector, where there tends to be less volatility, allowing for more stable pricing. As we continue to invest in these areas and drive growth in the smaller segments of our portfolio, we are creating significant differentiation for our agents who are focusing on streamlining placements for this type of business. Overall, we feel very well positioned.

Michael Wayne Phillips, Analyst

Okay. I hate to bring this up because it seems like a small number, but regarding the commercial auto charge, it's not a major part of your business. However, we've observed a trend with several companies where one quarter influences the next two or three quarters. I just want to express my confidence that this won't be the case for you and that this could be the beginning of a trend in commercial auto.

Jeffrey Mark Farber, CFO

Thank you, Mike. We are favorable development in all segments. There's $3 million favorable in core. And as we said, CMP and workers' comp had some favorability in the commercial auto, we added to reserves. All of those items in core commercial were single-digit nonmaterial amounts. For us, the commercial auto is a relatively small line. It's about $400 million of premium. We've actually had PIF shrinking over the last several years. And we've got a fairly small risk profile and the increase in reserves is IBNR. In fact, our case reserve levels are down and IBNR is up significantly.

Michael Wayne Phillips, Analyst

Okay. And last one, a quick small one, Jeff. You mentioned in your comments on personal auto, bodily injury severity. Are you seeing more of those kind of higher type claims happen in this quarter that might suggest some more insights there? Or is there anything kind of anomalous this quarter?

Jeffrey Mark Farber, CFO

Largely just prudence there. With the frequency benefit that we're seeing, it's just appropriate what we're hearing in the market and worrying about liability and lawyer involvement.

Operator, Operator

And our next question will come from Mike Zaremski with BMO.

Michael David Zaremski, Analyst

On the catastrophe load guidance for the third quarter, I believe I heard a number in the high 6s. Can you clarify if that's primarily an improvement in personal lines or if there's some impact from commercial lines as well? Additionally, is there still a possibility for the catastrophe load to improve in future years depending on how the homeowners market reshapes, or is that already factored into the portfolio adjustments?

Jeffrey Mark Farber, CFO

Yes, 6.8% is the number that we gave for the third quarter. And again, that's an average annual load for the quarter versus a tail type of measurement. Over the last several years, we've done a lot of work in personal lines, as you know, with deductibles, and that's helped home a lot. And so personal lines will see some improvement, but also commercial lines in terms of thinning the larger PML items of cat risk. As far as future years, we continue to work on it. We're getting a fair bit of rate, and we're optimistic. But I think, Mike, it's a little too early for us to be giving you a view of 2026.

Michael David Zaremski, Analyst

Okay. That's helpful. Pivoting to the Commercial Lines competitive environment, all commercial, not just core commercial. When we saw pricing this quarter, I think pricing held up a lot better than peers. I'm guessing that is mostly because you're a bit underweight property versus peers. I don't know if you have any thoughts on that. But I guess we're seeing signs of increased competition. Would you expect the pricing environment to subside a bit on a go-forward basis at a macro level? Or I guess a lot of investors also asked us about whether Small Commercial can enter a soft market.

John Conner Roche, CEO

Yes, Mike, this is Jack. I'll say a few words here and then let Dick Lavey chime in. I think this is a point at which the real diversification of our portfolio plays to our advantage, right? Not only personal lines to commercial lines, but also within commercial lines across core commercial and specialty. We still have a healthy percentage of our business in property, but we tend to play on the lower side of the spectrum. We're not getting caught up in the layered property or some of the dynamics that are particularly challenging in the middle market space or the higher end of specialty. But I think what we see is we're probably in a transitionary period where while there's some competitive pressure coming on property because the margins are improving so quickly, that the liability pricing is still building. And my guess is that if you're a balanced portfolio like we are, where you have a healthy amount of property and casualty that will create a different level of pricing stability than if you're, for example, an E&S property shop or somebody that's really overweighted in that part of the cycle. Dick, do you want to add on?

Richard William Lavey, COO

I think you expressed that well. Our strength lies in the segments we focus on. The pressure on pricing is less evident in our small account segment compared to higher-end properties. There are various factors at play. Property rates are decreasing somewhat, while we view liability rates as continuing to strengthen. The commercial auto sector needs to keep improving and drive higher rates, and workers' compensation may stabilize and potentially rise in the future. We believe that our positioning within these dynamics will allow us to maintain some resilience. Regarding your point about small commercial experiencing softness, we are very confident in our value proposition and the offerings we bring to the market, which include a broad range of products, ease of doing business, local presence, a strong distribution strategy, and a customer service center that enhances retention. All these factors contribute to our optimism about sustaining strong performance in our Small Commercial segment.

Michael David Zaremski, Analyst

Got it. That's helpful. Lastly, I'd like to ask about investment income. The trend seems to be favorable for you and your investors, and we use the forward curve for our projections. You have more data than we do, but it appears there might be some conservatism in your current guidance, which we also consider for our forward projections. Are there any nuances in your investment income guidance that could indicate some level of conservatism? Or perhaps we should discuss this in more detail offline to understand the reasons behind our significantly higher projections.

John Conner Roche, CEO

Yes. Thank you, Mike. We released our guidance at the start of the year, and we feel confident about it. At the beginning of the year, it's hard to predict what will happen with interest rates. We have been fortunate that interest rates have stayed high. Every week, we have maturing investments with low coupon rates that we are replacing with higher coupon rates. This has resulted in strong performance, which is consistent and driven by robust cash flows and strong reinvestment rates, and I expect this trend to continue.

Michael David Zaremski, Analyst

Jeff, could you share your reinvestment rate?

Jeffrey Mark Farber, CFO

It varies day-to-day depending on spreads and rates. But generally, in around the 5% or low 5% level. And that's certainly accretive. It depends on each particular week what's rolling off, which tends to be lower than what the current portfolio yield is. So there's still quite a bit of pickup between the reinvestment level and what's rolling off on a daily, weekly, monthly basis.

Operator, Operator

And our next question will come from Paul Newsome with Piper Sandler.

Jon Paul Newsome, Analyst

I was hoping you could touch on a couple of broader issues. One is, could you talk a little bit more about what's going on with the distribution side of your personal lines business? I know you've been shifting around from a regional perspective, but are you in an active position to add a lot of states prospectively? And what are you thinking about with that over time?

John Conner Roche, CEO

Yes, Paul, this is Jack. I'll start this off and see if Dick has something to add. I think overall, we're comfortable with our geographic footprint as it is today. While we have the ability to move into additional states at the right time, we're really not moving swiftly in that direction. What we are doing, though, is further diversifying our business across the PL footprint that we have. And part of that accelerated growth in some of the states where we're less penetrated is coming from adding additional agents on top of just penetrating the ones that we have. So as you might imagine, being the best account writer in the independent agency space attracts a lot of attention. We have an awful lot of agents that are coming to us versus us going to them saying, we'd love to have the Hanover Platinum and Prestige capability at a time when people are struggling, particularly on the home side of the business. So we're leaning into that opportunity, and we're doing that without compromising our select distribution approach. But there's no doubt that adding more agents in the right territories to help us grow and diversify is a deliberate part of our strategy.

Jon Paul Newsome, Analyst

And then a very different question. You spent a lot of time in the opening remarks talking about your efforts on technology and segmentation, which all sound great. But as an outsider, we have a devil of a time trying to figure out which company is doing a better job than others. Do you have thoughts on sort of where we should look specifically that we can say, listen, here Hanover has definitely got something that's different and unique than others. I think in the past, you had sort of an interesting way you help brokers evaluate their own businesses. But just curious if there's something that we can point to as outsiders that we can say, listen, this is really where we can see the difference.

John Conner Roche, CEO

Yes, Paul, that's a very important question. I want to mention a few points and then let Dick add his insights. Earlier this year, we enhanced Dick's role to Chief Operating Officer, with a primary focus on managing the businesses he oversees and collaborating with our Chief Information Officer on tech-driven investments aimed at improving our operating models and efficiency. We're quite excited about these initiatives. Dick, along with Will Lee and other business leaders, is working on a more coordinated approach to determine where our efforts are aligned across the enterprise versus targeted towards specific parts of the organization, whether a business unit or operating area. Dick, would you like to add something?

Richard William Lavey, COO

I'll add a few points and address your question, Paul. It's a very insightful question. It can be challenging for someone outside to recognize the impact or benefits, but I encourage you to keep asking carriers where they are investing and what benefits they are seeing from it. I could delve deeper into this topic, and we could spend more time discussing it. We are indeed focusing our efforts on transformation work, viewing it as a growth enabler to help us scale the company. It's about scalability, which involves examining our operating models and improving processes across various domains such as underwriting, operations, and claims, as well as in horizontal areas like submission, triage, and call synthesis. When these elements are fully implemented, you will see significant impact and benefits. It will take time, but we are excited about it. One advantage we have is our size; it allows me to align all business and functional leaders on these priorities, which larger companies struggle to achieve. Regarding your initial question, our ease of doing business and our TAP Sales platforms are among the best in the industry, though it may be hard to see clear differentiation at the top level. However, our agency insight tools and capabilities are truly unmatched, which enhances our consolidation capabilities, increasingly important as agents acquire other agencies and seek to consolidate their markets. I consider this a top priority. We will provide more updates as we progress in our development. I emphasized this aspect in this quarter's call because we are starting to see movement and progress that will illustrate that value. In future calls, we will aim to share more specific details about what that entails.

Operator, Operator

And our next question will come from Meyer Shields with KBW.

Meyer Shields, Analyst

I just had a couple of quick modeling questions. First, did the reserve adjustment in commercial auto translate into any changes to the accident year '25 loss pick for that line?

Jeffrey Mark Farber, CFO

We did increase our loss pick in commercial auto in core commercial in the current year. So while overall, it was a sequential meaningful decline by a few points, it was probably 80 basis points or so higher than year-over-year, but largely just prudence to reflect what we were doing in the prior years.

Meyer Shields, Analyst

Okay. So that's embedded in the quarterly loss ratio?

Jeffrey Mark Farber, CFO

Correct.

Meyer Shields, Analyst

And these are 2 separate points. But when we look at, I guess, reinsurance pricing on the one hand and the expected inflection in homeowners’ policy count going forward, is there any change in the underlying loss or underlying combined ratio trajectory from either of those 2 factors?

Jeffrey Mark Farber, CFO

Reinsurance itself, as we spoke about during our prepared remarks, the cost of reinsurance, while it goes up in total, on a risk-adjusted basis, it comes down. So it should be on the margin, helpful to the overall economics of the homeowner’s line.

Meyer Shields, Analyst

Okay. And then is there something analogous to the personal auto new business penalty when you start growing homeowners?

John Conner Roche, CEO

Yes, this is Jack. Generally, new business penalties in our industry arise from two main areas: you are less familiar with new business compared to your existing accounts, and you typically set more aggressive prices to attract it before adjusting those prices over time. Currently, we find ourselves in a unique situation where the pricing for new business and renewals is notably similar, especially in the home sector, where we are maintaining strong discipline and face limited competition. Therefore, in the short term, we are in a distinct position with home pricing, and I am very confident in the quality of the business we are acquiring.

Operator, Operator

And this concludes our question-and-answer session. I'd like to turn the conference back over to Oksana Lukasheva for any closing remarks.

Oksana Lukasheva, Investor Relations

Thank you, everybody, for your participation today, and we're looking forward to talking to you next quarter.

Operator, Operator

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