Hanover Insurance Posts Record ROE, Targets Profitable 2026

The Hanover Insurance ((THG)) has held its Q4 earnings call. Read on for the main highlights of the call.

The Hanover Insurance earnings call painted a decidedly upbeat picture, with management underscoring record profitability, stronger underwriting performance, and outsized investment income gains. Executives framed 2025 as a year of major execution, marked by lower combined ratios, disciplined pricing, and healthy capital returns, even as they acknowledged ongoing headwinds from competitive pressure in select lines, rising auto liability severity, and the ever-present uncertainty of catastrophe losses. Overall, the tone was confident and forward-leaning, emphasizing that the company is investing from a position of strength to sustain profitable growth into 2026.

Record Earnings and Standout Returns on Equity

The company delivered record quarterly operating earnings per share and its best-ever annual operating return on equity, with full-year ROE reaching about 20% and an exceptional 23.1% in the fourth quarter. Management highlighted these results as evidence that underwriting and portfolio actions over the past several years are translating into tangible shareholder value. The record profitability sets a high bar going into 2026 and supports the company’s narrative that its business mix and risk selection are properly calibrated for the current market conditions.

Improved Combined Ratios and Underlying Profitability

Underwriting performance improved sharply, with a fourth quarter combined ratio of 89.0% and a full-year combined ratio of 91.6%. Excluding catastrophes, the full-year combined ratio fell to 87.1%, 1.3 points better than the prior year, while the Q4 underlying consolidated loss ratio improved by 1.1 points to 57.1%. Management stressed that these gains were broad-based and driven by better risk selection, rate adequacy, and portfolio pruning. The lower ex‑catastrophe ratios signal that core profitability is strengthening even before investment income is factored in.

Personal Lines: Strong Margins, Firm Pricing

Personal Lines remained a key earnings engine, pairing growth with strong margins. Net written premiums grew 4.4% in the fourth quarter and 3.7% for the full year, while the current accident year combined ratio excluding catastrophes came in at about 85.3% for the year and 85.4% in Q4. Pricing remained robust, with renewal increases averaging 9.2% in the quarter, including 6.9% in auto, 12.3% in home, and roughly 20% in umbrella. The standout performer was homeowners, where the ex‑cat loss ratio improved 6.4 points to 45.8% for the year and dropped to 36.6% in Q4, reflecting both rate and underwriting discipline.

Core Commercial: Profitability Gains with Modest Growth

Core Commercial showed improved profitability alongside modest top-line growth. Net written premiums grew 3.6% for the year and 2.5% in the quarter, or 4.1% in Q4 when adjusted for reinstatement premium impacts. The ex‑cat current accident year combined ratio improved 2.4 points year over year to 91.6% in the quarter, with the ex‑cat loss ratio falling to 57.4%, down 1.5 points. Retention remained strong at 85.3%, up about one point from the third quarter, indicating the company is holding onto desirable accounts even as it tightens underwriting in select areas.

Small Commercial Outperformance and Expansion

Small Commercial continued to outpace the broader business with nearly 5% net written premium growth in both the quarter and the full year, supported by double‑digit new business and double‑digit renewal price increases. Management emphasized momentum from expanded distribution and product rollouts, particularly the Workers’ Compensation Advantage product now in 17 states, with a national rollout targeted by the end of 2026. This segment is positioned as a key growth driver, benefiting from scale, technology investments, and relatively favorable competitive conditions compared with some other commercial markets.

Specialty Segment Strength and Select Moderation

The Specialty segment delivered attractive profitability with a degree of growth moderation late in the year. The current accident year combined ratio ex‑catastrophe was 87.4% for the year and 89.5% in Q4, and the ex‑cat loss ratio of about 50.1% landed in the low‑50s range that management targets. Specialty saw robust double‑digit growth in excess & surplus (E&S) lines and surety, along with accelerating management liability business. At the same time, premium growth cooled to roughly 4% in the fourth quarter (adjusted for reinstatement premium) as heightened competition in property lines, particularly Hanover Specialty Industrial Property and to a lesser extent Marine, pressured volumes. Q4 also benefited from 5.3 points of favorable prior‑year reserve development in Specialty.

Investment Income Surge and Conservative Portfolio

Investment income was a major tailwind, rising 22% for the year to $454.4 million and 24.9% in the fourth quarter. The increase was driven by higher reinvestment yields, stronger partnership income, and deliberate portfolio repositioning to take advantage of higher interest rates. The fixed maturity portfolio remains conservatively structured, with a weighted average rating of A+, 95% investment grade holdings, and a duration of about 4.3 years. Management framed this as a balanced approach that boosts earnings while maintaining a high-quality balance sheet.

Capital Returns and Strengthened Book Value

The company continued to return capital while growing equity. Book value climbed about 27% in 2025 to $100.90, and book value excluding unrealized gains rose 15% to $104.21. The board approved a 5.6% increase in the quarterly dividend to $0.95, marking the 21st consecutive annual dividend raise. Share repurchases totaled roughly 754,000 shares for $130 million in 2025, including 307,000 shares for $55 million in the fourth quarter, with another approximately $44 million repurchased through late January. Management highlighted these actions as evidence of confidence in the earnings power and balance sheet resilience.

Conservative Reserving and Prior-Year Favorability

Reserving remained a point of emphasis, with favorable prior‑year reserve development excluding catastrophes across all segments in both the quarter and the full year. Management underscored a conservative stance, pointing to additional reserves booked for personal auto bodily injury severity and prudently elevated incurred but not reported (IBNR) reserves for recent accident years. These moves, along with strengthened loss selections in commercial auto and workers’ compensation, are intended to support long‑term balance sheet strength even if they weigh on near‑term segment comparisons.

Competitive Pressure and Specialty Property Headwinds

Despite the strong overall performance, management acknowledged growing competitive pressure in certain pockets. Monoline auto markets are seeing intensifying competition, while some Specialty property lines and middle‑market property schedules are experiencing heightened pricing pressure. In Specialty, these dynamics contributed to moderated premium growth in the fourth quarter, particularly in industrial property and some marine business. Executives signaled they are willing to sacrifice some top‑line growth rather than chase underpriced risks, reinforcing their focus on underwriting margins over volume.

Expense Ratio and Investments in Technology and Talent

The full-year expense ratio landed at 31.1%, an improvement of 20 basis points versus the prior year but still above internal expectations. The overshoot was largely driven by higher variable compensation for agents and employees, reflecting stronger underwriting performance and lower catastrophe losses, and by continued investments in technology and talent. Management argued these spending levels are intentional and aimed at supporting future profitable growth. They also indicated they will stop giving specific expense ratio guidance in future years, suggesting more flexibility in how they allocate operating expenses as opportunities arise.

Auto Liability Severity and Reserve Actions

Auto liability severity trends were a key area of caution. The company increased loss picks for personal auto bodily injury to reflect higher claim severity, and similarly made more conservative loss selections in commercial auto liability and workers’ compensation. These adjustments pressured Core Commercial results year over year but are designed to keep reserves ahead of emerging trends. Management framed these actions as consistent with a conservative reserving philosophy and noted that they are continuously updating assumptions as data on severity and social inflation evolves.

Reinstatement Premium Timing and Reported Growth

Reported Core Commercial growth figures were partially distorted by the timing and accounting of reinstatement premiums, with some receipts recorded in late 2024 and related payments booked in 2025. This mismatch dampened the apparent growth rate in the reported numbers; excluding these effects, Core Commercial net written premiums would have grown 4.1% in the fourth quarter instead of 2.5%. Management highlighted this to reassure investors that underlying demand and pricing remain solid, even if headline growth was temporarily compressed by technical accounting effects.

Catastrophe Uncertainty and Conservative CAT Load

While catastrophe losses were favorable in 2025 at 4.5 points of the combined ratio, the company is not counting on such benign conditions to persist. Severe convective storm exposure continues to be a meaningful source of volatility, and management is maintaining a conservative catastrophe load assumption of 6.5% for 2026. This stance effectively builds a buffer into guidance, acknowledging weather uncertainty while providing investors with a realistic baseline for future results.

Reinsurance Pricing and Market Conditions

The company recently renewed its multiline casualty reinsurance program on terms similar to the prior year, but at rate levels that were slightly below management’s expectations. While the structure remains sound, the lower-than-hoped pricing could modestly impact reinsurance economics going forward. Management did not flag any capacity concerns but noted that they will continue to assess how reinsurance costs and availability factor into their broader risk and capital management decisions.

Policy Count Trends and New Business Dynamics

Policy in force was essentially stable but slipped by 0.6 points sequentially in the fourth quarter, reflecting a blend of disciplined underwriting and normal competitive churn. Management expects policy count to grow in 2026 but warned that near-term new business may face headwinds as industry pricing normalizes and competition intensifies in certain lines. The company plans to lean on product expansion, improved agency partnerships, and distribution initiatives—especially in Small Commercial and Specialty—to offset these pressures.

Forward-Looking Guidance Anchored in Profitable Growth

Looking ahead to 2026, Hanover guided to consolidated net written premium growth in the mid‑single digits and net investment income growth in the mid‑ to upper‑single digits compared with 2025. Management is targeting an accident‑year combined ratio excluding catastrophes of 88%–89%, an improvement over prior guidance, while assuming a full‑year catastrophe load of 6.5% and a first‑quarter CAT load of 6.1%. The company expects an expense ratio around 30.3% for 2026 but plans to discontinue issuing specific expense-ratio guidance in future years. Overall, the outlook combines modest growth expectations with a continued focus on underwriting discipline and capital efficiency.

In sum, The Hanover Insurance used its earnings call to showcase a year of record profitability, tighter underwriting, and growing investment income, all underpinned by a solid balance sheet and active capital returns. While management was candid about competitive pressures, rising auto liability severity, and catastrophe risk, the overarching message was one of confidence in the company’s ability to sustain high‑quality earnings. For investors, the story is of a carrier prioritizing margin over volume, investing to support long-term growth, and entering 2026 with clear financial targets and a disciplined approach to risk.