Earnings Call Transcript - THG Q4 2023

Operator, Operator

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. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Oksana Lukasheva. Please go ahead.

Oksana Lukasheva, Vice President

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 John Roche, our President and Chief Executive Officer; and Jeffrey 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 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 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, aside from catastrophes, 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 a 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 issue platform, continue 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, and 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 to 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 increase non-renewals on specific underperforming programs. Excluding program business, specialty net written premium growth was approximately 6% in the quarter, and retention remained stable. Program non-renewals 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 marine franchises in the U.S. specialty market. We are excited about the growth opportunities within our newer offerings, ENS, Wholesale, and Small Specialty. We expect the launch of our new ENS 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 continue 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 and targeted states. We are implementing these deductibles on renewals starting in February in Wisconsin, with multiple states to file in April. As a result of pricing and new business actions, along with increased non-renewals, our growth slowed to 2.1% in the fourth quarter. Our retention and 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 2 to 3 times 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 are 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.

Jeff Farber, 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, with 2.8 points related to fourth quarter events and 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% to 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 year 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 year 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 a more normal level of large losses in our 2024 loss ratio expectations. Turning to Personal Lines. The current accident year ex-CAT combined ratio was 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 1, we successfully completed our multiline 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 reinsurers 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, an 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 net investment income 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 remain 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 and 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 a 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 watermark 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% to 91%, which represents about one 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, Operator

We will now begin the question-and-answer session. Our first question comes from Michael Phillips with Oppenheimer. Please go ahead.

Michael Phillips, Analyst

Thank you. Good morning, everyone. My first question is about the positive developments in Core Commercial, particularly regarding the ongoing benefits in workers' compensation. Is there anything happening behind the scenes that might have partially countered that? Also, could you discuss the industry's perspective on casualty issues related to older accident years and how you believe you might be protected from those challenges? Thank you.

Jeff Farber, 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 years 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, Analyst

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

Jack Roche, President and CEO

Yes, Mike, this is Jack. As a company, we've put in a lot of effort over the past decade to diversify our operations geographically and in terms of business lines. Given the significant weather challenges we faced in 2023, we are even more driven to enhance our property and liability, as well as property and casualty offerings, but we intend to do this thoughtfully. Over time, we will show you that the changes we implement will be positive, though not groundbreaking. We still value our existing business; our core lines are strong, and much of our specialty focus is on lower limits casualty business distributed across selected favorable regions. However, due to the size of the accounts, growth is more gradual than it would be if we were expanding into new categories or handling larger accounts. Moving forward, we will continue to adjust our mix appropriately. I believe that in the next 12 to 18 months, while our mix has been affected by weather patterns and hyperinflation, it will improve even to a position of advantage as certain liability trends emerge. We are keeping this in mind as we refine our book mix.

Michael Phillips, Analyst

Very helpful. Just one more quick question about numbers. Can you give an idea of the size of your personal bill book?

Jack Roche, President and CEO

Personal umbrella.

Jeff Farber, CFO

Yes. It's in the range of $60 million.

Michael Phillips, Analyst

60, you said?

Jeff Farber, CFO

Yes.

Michael Phillips, Analyst

Yes, okay. Thanks guys, appreciate it.

Jeff Farber, CFO

Thanks, Mike.

Operator, Operator

Next question comes from Meyer Shields with KBW. Please go ahead.

Sean Reitenbach, Analyst

Hi, it's Sean for Meyer. Thank you for taking my question. My first question is about Core Commercial reserves. Could you break down the $2.2 million reserve releases between workers' compensation and liabilities?

Jeff Farber, CFO

Yes. 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.

Sean Reitenbach, Analyst

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

Jack Roche, President and CEO

Yes. I would just say a couple of comments and then let Bryan speak very specifically to that. I think as we said in previous calls that 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 are opportunities for improvement, and there are 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 '23 and our trajectory for '24.

Bryan Salvatore, President of Specialty Lines

Yes, sure. And just following what Jack said, really, the activity was focused on two fairly large casualty-oriented programs in which the margins we just felt were no longer acceptable. So we thought it was best to take action. The impact to net written premium from those programs was the most pronounced in Q3 and Q4. As we look towards this year, we see that impact 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 '24.

Sean Reitenbach, Analyst

Thanks for the information. May I ask one more question regarding CAT? Earlier this year, there were some severe convective storms. How does the situation look from your perspective now?

Jack Roche, President and CEO

I'm sorry, you were talking about into Q1?

Jeff Farber, CFO

Yes.

Jack Roche, President and CEO

Yes, we typically do not disclose catastrophe (CAT) data during the quarter. However, based on our observations and discussions within the industry, we believe that the storms we experienced in the first quarter were different from previous ones. The freezing conditions were not as prolonged, and the temperature fluctuations were less extreme compared to winter storm Elliott. Additionally, these storms did not occur over a long holiday weekend, which often catches our customers off guard. Since last year, our business has improved significantly, with many large properties now having temperature and water sensors installed, alongside a strong customer notification protocol. Without specifically addressing first quarter CAT losses, I can say that these storms were distinct, and the preparations we made will be beneficial going forward.

Sean Reitenbach, Analyst

Got it. Thank you so much, appreciate it.

Operator, Operator

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

Mike Zaremski, Analyst

Good morning everyone. Regarding Personal Lines, it's great to see the advancements and the pricing increases, along with the successful implementation of changes to terms and conditions. However, when you mentioned that you anticipate reaching your target return on equity in 2025, I wanted to clarify that you are referring to the full year and not just the run rate by the year's end. Additionally, as we consider return on equity, should we think about your historical combined ratio hovering in the high 90s, considering you may have more operating leverage? If you could provide any guidance or calculations on the implied combined ratio, or any triangulation that might assist us, that would be helpful.

Jeff Farber, CFO

So we leave 2024 at target profitability on a written basis and for the full year '25 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.

Mike Zaremski, Analyst

Okay, I understand. That's useful. Regarding the investment income, you provided a lot of good information in the prepared remarks, so I may have overlooked some details. Can you remind us what your new money rate is? I'm not sure if you can share what your assumption is on your portfolio yield for the fixed income portfolio within your guidance for 2024, as I believe there might be some potential for upside in the fourth quarter of 2025 if I am considering the dynamics correctly.

Jeff Farber, CFO

We have been purchasing high-quality, seven-year fixed income at around 5% in recent days or weeks. We feel very confident about this since there is a significant spread between the yield in the portfolio based on net interest income and what's maturing daily, which is promising for our growth in 2024 and even more so for 2025.

Mike Zaremski, Analyst

If the '24 growth is limited by the lack of cash flow this past year, and there could be more potential in '25, we can assess that using the curve. I just want to ensure that we’re not overlooking anything beyond '24, considering the gap.

Jeff Farber, CFO

Yes. So '23 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 have 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 come out of it with a mature level of cash flow.

Mike Zaremski, Analyst

Okay, I understand. I might add one more question. In the specialty segment, you've achieved outstanding results consistently. I believe you mentioned adopting a more conservative approach to loss picks moving forward. It would be helpful to consider this when evaluating our loss ratio with some forward-looking conservatism. Could you provide any additional insights on that comment?

Jeff Farber, CFO

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

Mike Zaremski, Analyst

That's clear. Thank you.

Operator, Operator

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

Grace Carter, Analyst

Hi, everyone. I think that 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 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 just given the ongoing mixed shift efforts that you've mentioned, if we should expect kind of a downward drift from those levels as well?

Jeff Farber, CFO

Grace, I understand you need to forecast 2025 based on your customers' expectations, but we're not in a position to provide guidance for that year at this stage. However, I believe the rate increases we've observed in late 2023 and into 2024, along with the effect of that earned rate on 2024 and even 2025, are significant and will offer benefits beyond the loss trend. Additionally, the changes to terms and conditions that we discussed in our prepared remarks should also have a positive impact. Nevertheless, it's a bit premature for us to determine a specific projection.

Grace Carter, Analyst

And I guess back to the Specialty book, I mean, you've obviously called out that results were 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 in 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 margin expectations that you have?

Jack Roche, President and CEO

Grace, this is Jack. 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 where we are 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 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-50s loss ratios overall, which I think kind of is where we 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.

Grace Carter, Analyst

Thank you.

Jack Roche, President and CEO

Thank you, Grace.

Operator, Operator

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

Paul Newsome, 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 swings in the expense ratio. It's 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 the return to normal? And what is even potentially new investments?

Jeff Farber, CFO

Thank you, Paul. The actual expense ratio for 2023 was 30.5%, while our original guidance was 30.8%. If you adjust for the decrease in agent compensation and, to some extent, the reduced employee variable compensation due to catastrophes during the year, the ratio would return to 30.8%. Looking ahead, we've set a guidance of 30.7%, marking the first instance where we are only anticipating a 10-point reduction. We appreciate your patience as we aim for just a 10 basis point decrease this year. Our primary focus remains on the loss ratio, which is substantially higher than the 10 basis points, and we are also concentrating on the overall combined ratio.

Paul Newsome, Analyst

That's great. And I have a separate question regarding the growth or decline in policies in force, especially in Personal Lines. I'm receiving a lot of inquiries from investors this morning about whether this is expected. It seems reasonable based on your strategy, but I understand there may be concerns about catastrophic events that could affect this. Can you share your thoughts on when you anticipate seeing improvements in the policies in force as you navigate through the recovery?

Jack Roche, President and CEO

Yes, 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 '24.

Dick Lavey, President of Agency Markets

Great. Thanks, Jack. So just maybe a couple of 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 yes, 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 three times 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 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. 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 growth in the right places. There isn't a single answer. 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 I'm really happy with the outcomes. We're going to watch it carefully, but we will see tip shrinkage throughout 2024 as we execute this plan.

Paul Newsome, Analyst

Thank you. Appreciate the help as always.

Dick Lavey, President of Agency Markets

Thanks, Paul.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Oksana Lukasheva for any closing remarks.

Oksana Lukasheva, Vice President

Thank you and appreciate your participation today. We are 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.