The Hanover Insurance Group, Inc. — Q1 2016 Form 10-Q
Business context and period. Unaudited consolidated results for the three months ended March 31, 2016, compared with Q1 2015. Hanover is a property and casualty insurer with Commercial Lines, Personal Lines, Chaucer (specialty insurance through Lloyd’s) and Other segments. Amounts are in U.S. dollars; financial figures are in millions except per-share data.
Key financial results
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue | $1,227.6 | $1,298.7; down 5.5% |
| Net premiums earned | $1,151.3 | $1,211.0 |
| Net premiums written | $1,144.3 | $1,215.1; down $70.8 |
| Income before tax | $108.1 | $77.0 |
| Net income | $78.2 | $54.9 |
| Diluted EPS | $1.80 | $1.22 |
| Operating income before interest and tax | $120.4 | $100.4 |
| Combined ratio | 95.0% | 97.1% |
| Operating cash flow | $77.0 | $84.2 |
Net income from continuing operations was $78.1 million; discontinued operations contributed a $0.1 million net gain. Net investment income declined 2.6% to $68.3 million. Total losses and expenses were $1,119.5 million, including $699.6 million of losses and loss adjustment expenses. The filing reports a 34.2% consolidated operating expense ratio for the quarter.
Financial position and liquidity
- At March 31, 2016, total assets were $14,027.7 million, total liabilities $11,070.7 million and shareholders’ equity $2,957.0 million, up from $2,844.4 million at year-end 2015.
- Cash and cash equivalents were $406.7 million, versus $338.8 million at December 31, 2015. Cash and investments totaled $8,416.6 million.
- Debt was $803.4 million carrying value, versus $803.1 million at year-end; estimated fair value was $942.5 million. The company reported compliance with debt and credit covenants.
- Net cash from investing activities was $61.0 million; financing activities used $70.0 million. The company paid $19.8 million in dividends and repurchased $48.4 million of common stock during the quarter.
- U.S. insurance subsidiaries’ statutory capital and surplus was $2,276.7 million, up $83.9 million. Hanover Insurance’s RBC ratio was 301% on the Industry Scale and 603% on the Regulatory Scale.
Changes and segment performance
- Commercial Lines operating income increased to $42.7 million from $31.2 million. Net premiums written rose 3.8% to $604.3 million; the combined ratio improved to 99.2% from 101.0%.
- Personal Lines operating income increased to $47.1 million from $22.3 million. Net premiums written rose to $337.0 million; the combined ratio improved to 91.4% from 98.4%. Policies in force declined 3.2% in personal auto and 1.7% in homeowners year over year, with rate increases supporting premium growth.
- Chaucer operating income fell to $33.7 million from $49.2 million. Excluding the U.K. motor business transferred in June 2015, net premiums written fell 20.2%, reflecting increased ceded reinsurance and lower energy premiums. Underwriting results were affected by large political risk and trade credit losses.
- Pre-tax catastrophe losses were $31.2 million, down from $62.3 million. Favorable development on prior-year loss reserves was $18.7 million, versus $28.4 million. The lower catastrophe burden helped offset reduced favorable reserve development and higher expense ratio.
- Consolidated results also benefited from the absence of the $16.7 million debt-repurchase loss recorded in Q1 2015. Net realized investment gains declined to $1.5 million from $9.4 million, partly due to higher impairment charges.
Outlook, risks and unusual items
- Management said pricing remained positive in domestic lines and described continued rate increases, business-mix actions and underwriting discipline. It noted more competitive pricing in Commercial Lines and challenging rates and underwriting conditions at Chaucer.
- Management expects average fixed-maturity yields to continue declining as new-money rates remain below embedded portfolio yields. Q1 fixed-maturity average earned yield was 3.57%, versus 3.64% a year earlier.
- Q1 included $20.9 million of other-than-temporary impairment losses recognized in earnings, primarily related to energy-sector securities. The company identified continued weakness and volatility in energy and metals and mining as investment risks.
- Foreign exchange losses reduced pre-tax segment income by approximately $12 million, compared with approximately $3 million of gains in Q1 2015; management cited significant sterling weakness and continuing currency exposure.
- After quarter-end, the company issued $375 million of 4.50% senior debentures due 2026, receiving approximately $370.7 million net proceeds. Proceeds and cash on hand were designated to redeem higher-coupon notes; the planned May 21, 2016 redemption was expected to cause an approximately $58 million after-tax loss, primarily from make-whole provisions.
- The Durand litigation concerns alleged underpayments of cash-balance pension lump sums. The company said it could not reasonably estimate the potential liability. Other proceedings were not expected to materially affect financial position, though a particular period’s results could be affected.
- Key risks include reserve-estimation uncertainty, catastrophe and weather losses, reinsurance recoverability and cost, investment-market volatility and defaults, low interest rates, Chaucer energy exposure and competitive pressure. The filing provides no specific full-year earnings or premium guidance.
Important facts for investors to verify
- Whether improved loss performance and the 95.0% combined ratio persist, particularly given reserve development and catastrophe variability.
- Chaucer’s premium trends, energy and marine loss experience, foreign-exchange exposure, and the effect of the prior U.K. motor transfer.
- The final debt-redemption accounting and actual after-tax loss compared with the estimated $58 million, as well as post-transaction debt and interest expense.
- Investment impairments and exposure to energy and other stressed sectors, alongside the portfolio’s unrealized losses and interest-rate sensitivity.
- Developments in the Durand litigation and any resulting pension-plan funding obligations.
- Availability of insurer-subsidiary dividends and regulatory capital after the $218.8 million dividend declared by Hanover Insurance on April 20, 2016.