Business context and reporting period
The Hanover Insurance Group, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2011. It reports property and casualty insurance through Commercial Lines, Personal Lines and Other Property and Casualty; results include discontinued former life and accident and health businesses.
Financial performance and position
Amounts are in millions of dollars except per-share data and ratios.
| Metric | Q1 2011 | Q1 2010 or comparison |
|---|---|---|
| Total revenue | $833.8 | $746.6 |
| Earned premiums | $761.7 | $666.5 |
| Net investment income | $60.4 | $61.1 |
| Income before tax | $37.5 | $59.3 |
| Income from continuing operations | $27.9 | $42.2 |
| Net income | $29.3 | $41.8 |
| Diluted EPS | $0.64 | $0.87 |
| Operating cash flow | $24.2 provided | $120.0 used |
- Revenue grew 11.7%, largely reflecting premium growth. Net premiums written increased 3.4% according to MD&A; the filing’s comparative written-premium figures vary slightly between tables.
- Net income fell 29.9%. Management attributed the decline principally to increased catastrophe and other weather losses and lower favorable prior-year reserve development, as well as reduced realized investment gains.
- Combined ratio rose to 100.7% from 99.7% (above 100% indicates an underwriting loss). Commercial Lines’ ratio was 103.7%; Personal Lines’ was 97.5%. Total catastrophe losses were $49.7, versus $34.4 a year earlier. Favorable reserve development was $28.5, down from $37.1.
- Segment income before tax was $47.1, down from $57.7: Commercial Lines $18.4 (from $22.8), Personal Lines $30.1 (from $34.5), and Other Property and Casualty loss of $1.4 (versus income of $0.4). Excluding catastrophes and prior-year development, segment income was $68.3, versus $55.0.
- At March 31, total assets were $8,514.9, shareholders’ equity $2,488.7, and debt $561.0, compared with $605.9 at year-end 2010. Cash and cash equivalents were $218.8, down from $290.4. Total liabilities were $6,026.2.
- Fixed maturities totaled $4,826.6 at fair value; approximately 93% were investment grade. Statutory surplus of the combined P&C companies was $1,776.6, up from $1,747.3 at year-end. Hanover Insurance’s RBC ratio was 309% on the industry scale.
Material changes, outlook and management commentary
- Commercial Lines written premiums grew 8.8%, reflecting specialty business, AIX managed programs and OneBeacon renewal rights. Management expected growth to moderate as the OneBeacon comparison benefit rolled off, while earned-premium growth from prior-year expansion was expected to continue through 2011.
- Personal Lines written premiums declined 2.3%, partly reflecting reduced exposure in Louisiana and margin-focused underwriting in core markets. Target growth states represented 30% of Personal Lines written premium, versus 27% a year earlier. Management cited competitive pricing and regulatory conditions as constraints on future growth.
- Management reported increased winter-storm and other weather losses, large fires, and less favorable reserve development. It cautioned that recent favorable reserve development may not recur and that lower development could materially affect results.
- Net investment income declined 1.1%; average fixed-maturity yield fell to 5.28% from 5.48%. Management expected investment yields to continue declining if new-money rates remained low.
- Operating cash flow improved from the prior-year quarter, primarily because the company made a $100 million qualified pension-plan contribution in Q1 2010. Management described the plan as essentially fully funded at March 31, 2011 and did not expect significant contributions for several years, subject to assumptions and experience.
- In February 2011, the company repurchased $48.0 of junior debentures for $50.5, recording a $2.5 loss; debt declined overall during the quarter. It paid a $0.275-per-share dividend ($12.5 total).
- After quarter-end, Hanover announced an offer to acquire Chaucer Holdings PLC for approximately £313 million, or about $510 million including a previously announced dividend; approximately $485 million was expected to be payable by Hanover. Proposed funding was approximately $235 million from cash and a planned $250 million senior unsecured debt issuance. A $180 million, 364-day bridge facility was arranged as committed financing, but management said it intended not to draw it. Closing was expected in Q3 2011, subject to shareholder, court and regulatory approvals. A foreign-exchange forward was entered into to hedge currency movements.
- Other unusual items included $2.5 of debt-retirement loss, $1.4 of net realized investment gains, and a $1.4 after-tax gain from discontinued operations. The company recorded $1.4 of investment impairment losses in earnings.
- Two legal matters—the Durand pension litigation and Louisiana Road Home litigation—had no reasonably estimable potential liability, according to the company. Other proceedings were described as not expected to materially affect financial position, though they could affect a particular period’s results. The company reported no material off-balance-sheet arrangements and no material first-quarter change in market risks.
- The company reported disclosure controls effective at quarter-end and no material change in internal control over financial reporting. It gave no specific consolidated earnings guidance in the supplied filing text.
Important facts for investors to verify
- Reconcile the filing’s slightly different comparative net-premium-written figures and assess the underlying Commercial and Personal Lines growth trends.
- Track catastrophe losses, combined ratios and reserve development; determine whether favorable development continues to diminish.
- Assess the Chaucer offer’s approvals, final purchase cost, financing terms, foreign-exchange exposure and integration risks, including Lloyd’s, catastrophe and regulatory exposures.
- Monitor investment yields, credit quality, impairment exposure and the potential effect of market volatility on investment values and earnings.
- Follow the Durand and Road Home litigation, tax matters and any effect on reserve adequacy, liquidity or capital.