The Hanover Insurance Group, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. Amounts are in millions of dollars except per-share data and ratios. The company operates Commercial Lines, Personal Lines, Chaucer and Other businesses.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net premiums written | $1,076.7 | $1,016.8 |
| Premiums earned | $1,094.3 | $1,035.6 |
| Total revenue | $1,180.3 | $1,121.8 |
| Net investment income | $67.3 | $68.8 |
| Income before tax | $88.9 | $70.8 |
| Income from continuing operations | $66.4 | $50.7 |
| Net income | $66.2 | $49.7 |
| Diluted EPS | $1.46 | $1.09 |
| Operating income before interest and tax | $102.2 | $85.7 |
| Combined ratio | 96.1% | 98.1% |
| Operating cash flow | $(17.5) | $12.7 |
Net income improved mainly on better underwriting results, particularly lower catastrophe losses. Pre-tax catastrophe losses were $21.7 million versus $40.6 million; favorable prior-year reserve development was $6.9 million versus $17.2 million. Excluding catastrophe activity, operating earnings declined $2.4 million, chiefly because prior-year reserve development was less favorable.
Segment operating income before interest and tax: Commercial Lines $33.0 million (prior year $33.9 million); Personal Lines $30.5 million ($27.5 million); Chaucer $40.9 million ($25.5 million); Other $(2.2) million ($(1.2) million). Commercial Lines’ underwriting loss was $3.1 million, while Personal Lines and Chaucer reported underwriting income of $10.1 million and $33.0 million, respectively.
At March 31, 2013, total assets were $13,442.1 million, shareholders’ equity $2,624.0 million, cash and cash equivalents $691.0 million, and debt $978.1 million. Total investments were $7,366.0 million. Gross loss and loss-adjustment reserves were $6,092.5 million. Operating cash flow was negative, while investing activities provided $83.5 million and financing activities provided $66.9 million; cash ended the quarter $691.0 million, up from $564.8 million at year-end 2012.
Statutory capital and surplus of U.S. insurance subsidiaries was $1,623.3 million, up from $1,523.4 million at year-end. Hanover Insurance’s risk-based capital ratio was 243% on the industry scale. The company reported compliance with its debt covenants and Lloyd’s capital requirements. Debt fair value was $1,116.7 million compared with its $978.1 million carrying value.
Material changes and management commentary
- Net premiums written increased to $1,076.7 million, with Chaucer contributing $51.3 million of the year-over-year increase. Chaucer’s written premium rose 25.6%, partly reflecting a larger economic interest in Syndicate 1084 and higher net retentions under its reinsurance program.
- Commercial Lines written premiums rose to $483.6 million, supported by rate increases, retention and targeted new business. Personal Lines written premiums declined to $341.6 million, reflecting exposure-management actions and policy attrition.
- Investment income fell 2.2%; management cited lower yields on new investments. Average pre-tax fixed-maturity earned yield declined to 4.03% from 4.38%, and management expected investment yields to continue declining while new-money rates remained near historic lows.
- Other comprehensive income was a loss of $2.7 million, compared with income of $54.7 million, primarily reflecting a $10.0 million foreign-currency translation loss and lower investment appreciation.
Outlook, risks and unusual items
- Management described continuing rate increases and underwriting actions, but cautioned that competition, economic conditions, regulatory constraints, weather losses and exposure-management measures could limit premium growth or profitability. It gave no specific earnings or premium guidance.
- Chaucer anticipated limited rate increases in 2013 amid excess market capacity, with better opportunities concentrated in catastrophe-exposed marine and property; pricing in energy, aviation, casualty and U.K. motor was described as pressured or weakening.
- Interest-rate, credit, equity-market and foreign-exchange movements may affect investment income, portfolio values and equity. The company also cited catastrophe and non-catastrophe weather losses, reserve-estimation uncertainty, reinsurance collectability, competitive conditions and regulatory or legal developments as risks.
- On March 20, the company issued $175.0 million of 6.35% subordinated debentures due 2053. It also repaid $46.3 million of FHLBB advances and incurred $7.8 million in prepayment fees, contributing to a reported $7.8 million net loss from repayment of advances.
- The company repurchased $25.2 million of shares during Q1 and paid $14.8 million in dividends. It reported an additional $18.5 million share repurchase in April, after quarter-end.
- In the Durand pension-plan litigation, the company did not oppose class certification and said it could not reasonably estimate potential liability. Other proceedings were not expected to materially affect financial position, though they could affect a particular period’s results.
- Management said the quarter’s results are not necessarily indicative of full-year results. It reported no material change in market-risk exposures and no material change in internal control over financial reporting; disclosure controls were deemed effective at quarter-end.
Key facts for investors to verify
- Whether premium growth and improved combined ratio persist, particularly given Commercial Lines’ underwriting loss and Personal Lines’ exposure reductions.
- How catastrophe losses, weather-related claims and prior-year reserve development evolve; Q1 favorable development was materially lower than in the prior-year quarter.
- Whether investment income continues to decline as portfolio yields reset, and how interest-rate and credit movements affect unrealized investment values.
- The effect of Chaucer’s increased net retention and higher Syndicate 1084 participation on future written premium, volatility and claims exposure.
- Debt-service and capital implications of the new subordinated debentures, the FHLBB repayment and continued share repurchases; review holding-company liquidity and insurance-subsidiary dividend restrictions.
- Developments in the Durand litigation and any resulting pension-plan funding or company liability.