Business context and reporting period
The Hanover Insurance Group, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The property and casualty insurer reports Commercial Lines, Personal Lines, Chaucer (international specialty insurance) and Other segments. Unless noted, amounts are in millions of U.S. dollars.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total revenues | $1,297.1 | $1,273.0 | $2,595.8 | $2,516.9 |
| Net income | $120.7 | $82.6 | $175.6 | $137.2 |
| Diluted EPS | $2.68 | $1.84 | $3.90 | $3.06 |
| Operating income before interest and taxes | $119.4 | $102.2 | $219.6 | $187.2 |
| Net premiums earned | $1,205.8 | $1,174.7 | $2,416.8 | $2,337.7 |
| Net investment income | $70.7 | $67.0 | $140.8 | $134.0 |
| Combined ratio | 95.7% | 96.8% | 96.4% | 97.5% |
- Q2 net income increased $38.1, primarily reflecting the after-tax $40.3 gain on the U.K. motor business disposal. Operating income before interest and taxes also improved, supported by a lower expense ratio, fewer catastrophe losses and higher investment income, partly offset by higher non-catastrophe current-year losses.
- For the first half, operating income before interest and taxes rose $32.4. Favorable prior-year reserve development was $53.8, versus $48.9 in 2014; catastrophe losses were $108.8, versus $113.6.
- Net premiums written were $1,156.0 in Q2 and $2,371.1 for the first half, down from $1,276.2 and $2,448.5, respectively. The U.K. motor transfer reduced written premiums by $137.4; excluding the transaction, management reported growth of $17.2 in Q2 and $60.0 in the first half.
- At June 30, total assets were $14,144.7, shareholders’ equity $2,908.5 and debt $835.1, compared with $13,759.7, $2,844.0 and $903.5 at December 31, 2014. Cash and cash equivalents were $583.7, including $106.1 restricted cash. Fixed maturities were $6,835.0.
- First-half operating cash flow was $102.7, down from $167.4. Investing activities provided $243.1, versus $22.9 used in 2014; financing activities used $137.2, versus $33.0. The filing attributes the lower operating cash flow primarily to a slight increase in loss and LAE payments.
Material changes, outlook and risks
- Effective June 30, the company transferred its U.K. motor business through a 100% reinsurance arrangement for prior liabilities and in-force policies, and sale of two related entities. The transaction produced a $37.7 pretax gain ($40.3 net of tax); Chaucer will no longer include U.K. motor results after that date.
- The company repurchased senior debt with a net carrying value of $68.0 for $86.5, recognizing an $18.5 loss. Debt fell from $903.5 at year-end to $835.1. It also paid $36.3 in shareholder dividends and repurchased $23.5 of common stock in the first half.
- Management said Commercial and Personal Lines pricing remained favorable and cited rate increases, retention and underwriting actions. Chaucer faced competitive rate pressure amid high industry capacity and few major market losses; large energy losses weighed on its current-year underwriting results. Management provided no specific full-year earnings or premium guidance in the supplied filing text.
- Investment income increased, but management expects fixed-maturity yields to continue declining as new-money yields remain below embedded book yields. Net unrealized appreciation on fixed maturities declined $68.4 in the first half, primarily due to wider credit spreads and, to a lesser extent, higher interest rates. Management considered unrealized losses temporary, while noting market, credit and liquidity risks could lead to further losses.
- U.S. insurance subsidiaries’ statutory capital and surplus was $2,126.6, up $69.5; Hanover Insurance’s RBC ratio was 284% on the industry scale. The company reported compliance with debt and credit covenants and Lloyd’s capital requirements. Holding-company assets of fixed maturities and cash totaled $154.3; Chaucer paid $86.0 in dividends to the holding company during Q2, while no U.S. insurance subsidiary dividend was paid in Q2.
- The Durand pension-plan class action remained unresolved; the company said it could not reasonably estimate potential liability. Other legal and regulatory matters were not expected to materially affect financial position, but could affect results in a particular period. Residual-market participation, reserve estimates, reinsurance recoverability, catastrophe exposure, competition, interest rates, currency movements and investment defaults are identified risks.
Important facts for investors to verify
- How much of earnings growth reflects the one-time U.K. motor disposal gain versus recurring underwriting and investment performance.
- Whether favorable reserve development and catastrophe experience persist, and how commercial automobile and general liability adverse development develops.
- The impact of the U.K. motor transfer on future premiums, Chaucer’s mix and earnings, including the transaction’s reinsurance and transferred-liability terms.
- Future investment yields, credit-spread movements, realized or impairment losses, and the availability of operating cash to meet claims and capital needs.
- Potential exposure and timing in the Durand litigation and any material changes in regulatory, residual-market or reinsurance conditions.