WORCESTER, Mass., Aug. 1, 2018 /PRNewswire/ — The Hanover Insurance Group, Inc. (NYSE: THG) today reported net income of $99.3 million, or $2.31 per diluted share, in the second quarter of 2018, compared to $78.4 million, or $1.83 per diluted share, in the prior-year quarter. Operating income(1) was $94.6 million, or $2.20 per diluted share, for the second quarter of 2018, compared to operating income of $72.3 million, or $1.69 per diluted share, in the prior-year quarter.
Second Quarter Highlights
- Combined ratio, excluding catastrophes(2), of 90.5%, an improvement of 0.3 points over the prior-year quarter
- Catastrophe losses of $63.6 million, or 5.0 points of the combined ratio, driven primarily by wind and hail events in the Northeast and Midwest, largely in Personal Lines
- Net premiums written increased 6.9%, with strong growth in more profitable Personal Lines, Small Commercial and target Specialty businesses
- Continued price increases in Commercial and Personal Lines
- Net investment income of $78.7 million, up 8.9% from the prior-year quarter, aided by higher cashflows from operations and growth in partnership income
- Book value per share of $69.17, up 0.9% from March 31, 2018, primarily due to earnings accretion, partially offset by changes in fair value of the fixed income portfolio due to interest rate movements and widening of credit spreads
- Repurchased approximately 99,000 shares of common stock for $11.7 million during the second quarter of 2018
|
Three Months ended |
Six Months ended |
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|
June 30 |
June 30 |
|||||||
|
($ in millions, except per share data) |
2018 |
2017 |
2018 |
2017 |
||||
|
Net premiums written |
$1,363.7 |
$1,275.7 |
$2,628.3 |
$2,462.5 |
||||
|
Operating income |
94.6 |
72.3 |
178.6 |
113.1 |
||||
|
per diluted share |
2.20 |
1.69 |
4.15 |
2.64 |
||||
|
Net income |
99.3 |
78.4 |
167.0 |
123.6 |
||||
|
per diluted share |
2.31 |
1.83 |
3.88 |
2.88 |
||||
|
Net investment income |
78.7 |
72.3 |
161.6 |
143.4 |
||||
|
Book value per share |
$69.17 |
$70.18 |
$69.17 |
$70.18 |
||||
|
Ending shares outstanding |
42.5 |
42.4 |
42.5 |
42.4 |
||||
|
Combined ratio |
95.5 % |
95.6 % |
96.2 % |
97.5 % |
||||
|
Prior year development ratio |
(0.8)% |
(1.3)% |
(0.7)% |
(0.7)% |
||||
|
Catastrophe ratio |
5.0 % |
4.8 % |
5.3 % |
6.0 % |
||||
|
Combined ratio, excluding catastrophes |
90.5 % |
90.8 % |
90.9 % |
91.5 % |
||||
|
Current accident year combined ratio, |
91.3 % |
92.1 % |
91.6 % |
92.2 % |
||||
|
(1) See information about this and other non-GAAP measures and definitions used throughout this press release on the final pages of this document. |
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“We are pleased with our second quarter performance,” said John C. Roche, president and chief executive officer at The Hanover. “We continued to demonstrate the value of our company’s agency-centered strategy and distinctive business model, generating an operating return on average equity of approximately 13 percent(4) and overall growth of 7 percent, notably, in our most profitable businesses.
“While market conditions continue to be very dynamic, we remain satisfied with the overall domestic pricing environment,” Roche said. “Our Core Commercial pricing ticked up in the quarter, while Personal Lines rate increases remained relatively stable. We are confident that our dedicated teams, enhanced capabilities and strong agency franchise approach will allow us to continue growing profitably in target sectors.”
“For the quarter, we delivered solid operating earnings of $2.20 per share,” said Jeffrey M. Farber, executive vice president and chief financial officer. “All of our financial measures remain in line with our expectations. Our current year underlying loss trends remained stable, the expense ratio improved by half-a-point in our domestic business, while retention and new business quality remained strong. We continue to build momentum across the organization, and we are well positioned to capitalize on this momentum in the second half of 2018.”
Second Quarter Operating Highlights
Commercial Lines
Commercial Lines operating income before taxes was $82.0 million, compared to $43.2 million in the second quarter of 2017. The Commercial Lines combined ratio was 93.9%, compared to 99.4% in the prior-year quarter. Catastrophe losses were $24.8 million, or 3.9 points of the combined ratio, compared to $42.6 million, or 7.2 points of the combined ratio, in the prior-year quarter. Second quarter 2018 results included $8.0 million, or 1.3 points, of favorable prior-year reserve development primarily driven by favorable trends in Workers’ Compensation and Other Commercial Lines (“OCL”), largely in Professional Lines, partially offset by unfavorable prior-year reserve development in the Commercial Auto line. This compares to no prior-year reserve development in the second quarter of 2017.
Commercial Lines current accident year combined ratio, excluding catastrophes, improved by 0.9 points to 91.3%, from 92.2% in the prior-year quarter, driven by an improved expense ratio.
The current accident year loss and loss adjustment expense (“LAE”) ratio, excluding catastrophes(5), remained relatively stable at 56.5%, with normal property variability impacting prior-year comparisons by line. The Commercial Multiple Peril (“CMP”) results reflected elevated property large loss experience in the second quarter of 2018, while OCL benefited from the favorable comparison to large losses and related reinsurance reinstatement premium in the second quarter of 2017.
The expense ratio improved by 0.6 points in the second quarter of 2018, driven by expense actions executed in July of 2017, as well as fixed cost leverage from continued premium growth.
Net premiums written were $629.6 million in the quarter, up 6.4% from the prior-year quarter, driven by targeted price increases and strong retention of 84.6%, as well as a comparison benefit from the aforementioned reinstatement premiums recorded in the second quarter of 2017. Core commercial(6) business price increases averaged 5.1% for the second quarter.
The following table summarizes premiums and the components of the combined ratio for Commercial Lines:
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Three Months ended |
Six Months ended |
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|
June 30 |
June 30 |
|||||||
|
($ in millions) |
2018 |
2017 |
2018 |
2017 |
||||
|
Net premiums written |
$629.6 |
$591.6 |
$1,301.5 |
$1,216.9 |
||||
|
Net premiums earned |
634.6 |
591.2 |
1,263.6 |
1,179.5 |
||||
|
Operating income before taxes |
82.0 |
43.2 |
143.5 |
80.6 |
||||
|
Loss and LAE ratio |
59.1% |
64.0% |
60.5% |
63.9% |
||||
|
Expense ratio(7) |
34.8% |
35.4% |
35.0% |
35.9% |
||||
|
Combined ratio |
93.9% |
99.4% |
95.5% |
99.8% |
||||
|
Prior year development ratio |
(1.3)% |
– |
(0.8)% |
– |
||||
|
Catastrophe ratio |
3.9 % |
7.2 % |
5.0 % |
6.7 % |
||||
|
Combined ratio, excluding catastrophes |
90.0 % |
92.2 % |
90.5 % |
93.1 % |
||||
|
Current accident year combined ratio, |
91.3 % |
92.2 % |
91.3 % |
93.1 % |
||||
Personal Lines
Personal Lines operating income before taxes was $27.3 million in the quarter, compared to $47.9 million in the second quarter of 2017. The Personal Lines combined ratio was 97.6%, compared to 91.8% in the prior-year quarter. Catastrophe losses were $34.0 million, or 8.0 points of the combined ratio, compared to $13.3 million, or 3.4 points, in the prior-year quarter. Second quarter 2018 results included $7.8 million, or 1.8 points, of net unfavorable prior-year reserve development, primarily driven by higher bodily injury severity in the auto line, mainly from accident year 2016. This compares to no prior-year reserve development in the second quarter of 2017.
Personal Lines current accident year combined ratio, excluding catastrophe losses, improved by 0.6 points to 87.8%, from 88.4% in the prior-year quarter, driven by lower expense and LAE ratios.
The expense ratio improved by 0.5 points in the second quarter of 2018, driven by expense saving actions executed in July of 2017, as well as fixed cost leverage from continued premium growth.
Net premiums written were $464.6 million in the quarter, up 7.9% from the prior-year quarter, due to higher renewal premium, driven by rate increases and strong retention. Personal Lines average rate increases in the second quarter of 2018 were approximately 4.9%.
The following table summarizes premiums and components of the combined ratio for Personal Lines:
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Three Months ended |
Six Months ended |
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|
June 30 |
June 30 |
|||||||
|
($ in millions) |
2018 |
2017 |
2018 |
2017 |
||||
|
Net premiums written |
$464.6 |
$430.5 |
$861.4 |
$792.6 |
||||
|
Net premiums earned |
423.6 |
391.3 |
837.1 |
773.1 |
||||
|
Operating income before taxes |
27.3 |
47.9 |
61.7 |
57.8 |
||||
|
Loss and LAE ratio |
69.9% |
63.6% |
68.9% |
68.2% |
||||
|
Expense ratio |
27.7% |
28.2% |
27.8% |
28.5% |
||||
|
Combined ratio |
97.6% |
91.8% |
96.7% |
96.7% |
||||
|
Prior year development ratio |
1.8 % |
– |
1.1 % |
– |
||||
|
Catastrophe ratio |
8.0 % |
3.4 % |
7.3 % |
6.9 % |
||||
|
Combined ratio, excluding catastrophes |
89.6 % |
88.4 % |
89.4 % |
89.8 % |
||||
|
Current accident year combined ratio, |
87.8 % |
88.4 % |
88.3 % |
89.8 % |
||||
Chaucer
Chaucer’s operating income before taxes was $21.9 million in the second quarter of 2018, compared to $29.7 million in the second quarter of 2017. Chaucer’s combined ratio was 95.7%, compared to 91.0% in the prior-year quarter. Catastrophe losses were $4.8 million, or 2.2 points, in the second quarter of 2018, compared to $1.2 million, or 0.6 points in the second quarter of 2017.
Second quarter 2018 results also reflected net favorable prior-year reserve development of $10.5 million, or 4.9 points of the combined ratio, compared to $15.6 million, or 7.9 points, in the second quarter of 2017.
Chaucer’s current accident year combined ratio, excluding catastrophe losses, was 98.4% in the second quarter of 2018, consistent with the 98.3% in the prior-year quarter.
The expense ratio increased by 1.3 points in the second quarter of 2018, due to higher brokerage expenses related to mix change and higher quota share utilization net of brokerage, partially offset by favorable foreign exchange movements.
The current accident year loss and LAE ratio decreased 1.2 points compared to the second quarter of 2017, driven primarily by the aforementioned higher quota share utilization.
Net premiums written were $269.5 million in the quarter, up 6.3% from the prior-year quarter, due to strategic growth initiatives, including Accident and Health business, partially offset by increases in ceded reinsurance premiums, reflecting increased reinsurance utilization.
The following table summarizes premiums and the components of the combined ratio in the Chaucer segment:
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Three Months ended |
Six Months ended |
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|
June 30 |
June 30 |
|||||||
|
($ in millions) |
2018 |
2017 |
2018 |
2017 |
||||
|
Net premiums written |
$269.5 |
$253.6 |
$465.4 |
$453.0 |
||||
|
Net premiums earned |
214.7 |
198.7 |
435.8 |
409.9 |
||||
|
Operating income before taxes |
21.9 |
29.7 |
44.8 |
54.6 |
||||
|
Loss and LAE ratio |
52.4% |
49.0% |
52.2% |
51.2% |
||||
|
Expense ratio |
43.3% |
42.0% |
44.2% |
41.0% |
||||
|
Combined ratio |
95.7% |
91.0% |
96.4% |
92.2% |
||||
|
Prior year development ratio |
(4.9)% |
(7.9)% |
(4.4)% |
(4.4)% |
||||
|
Catastrophe ratio |
2.2 % |
0.6 % |
2.4 % |
2.1 % |
||||
|
Combined ratio, excluding catastrophes |
93.5 % |
90.4 % |
94.0 % |
90.1 % |
||||
|
Current accident year combined ratio, |
98.4 % |
98.3 % |
98.4 % |
94.5 % |
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Investments
Net investment income was $78.7 million for the second quarter of 2018, compared to $72.3 million in the prior-year quarter. The increase was primarily due to higher operating cash flows and an increase in partnership income. The average pre-tax earned yield on fixed maturities was 3.32% and 3.37% for the quarters ended June 30, 2018 and 2017, respectively. Total pre-tax earned yield on the investment portfolio for the quarter ended June 30, 2018 was 3.43%, up from the prior-year quarter yield of 3.35%.
In the second quarter of 2018, net realized and unrealized investment gains recognized in earnings were $3.7 million, primarily due to changes in the fair value of equity securities during the period. Net realized investment gains for the quarter also included $1.9 million of impairment charges. In the second quarter of 2017, net realized investment gains were $5.9 million, which included $1.8 million of impairment charges.
The company held $9.3 billion in cash and invested assets on June 30, 2018. Fixed maturities and cash represented 86% of the investment portfolio. Approximately 95% of the company’s fixed maturity portfolio is rated investment grade. Net unrealized losses on the fixed maturity portfolio at the end of the second quarter of 2018 were $117.9 million before taxes, a decline in fair value of $56.9 million since March 31, 2018. This change was due to an increase in prevailing interest rates and widening of credit spreads.
Capitalization, Shareholders’ Equity and Other Items
Book value per share of $69.17 increased 0.9% from March 31, 2018, primarily due to core earnings accretion, partially offset by regular dividend payment and changes in fair value of the fixed income portfolio due to interest rate movements and widening of credit spreads.
During the quarter, the company repurchased approximately 99,000 shares of common stock for $11.7 million, at an average price of $118.72 per share. On June 30, 2018, the company had approximately $121 million of remaining capacity under its existing $900 million share repurchase program.
Earnings Conference Call
The Hanover will host a conference call to discuss its second quarter results on Thursday, August 2, at 8:00 a.m. Eastern Time. A PowerPoint slide presentation will accompany the prepared remarks and has been posted on The Hanover website. Interested investors and others can listen to the call and access the presentation through The Hanover’s website, located at www.hanover.com, in the “Investors” section. Investors may access the conference call by dialing 1-877-270-2148 in the U.S. and 1-412-902-6510 internationally. Web-cast participants should go to the website 15 minutes early to register, download, and install any necessary audio software. A re-broadcast of the conference call will be available on this website approximately two hours after the call.
Financial Supplement
The Hanover’s second quarter earnings news release and financial supplement are available in the “Investors” section of the company’s website at www.hanover.com.
|
The Hanover Insurance Group, Inc. |
|||||
|
Condensed Consolidated Balance Sheet |
|||||
|
June 30 |
December 31 |
||||
|
($ in millions) |
2018 |
2017 |
|||
|
Assets |
|||||
|
Total investments |
$9,020.7 |
$9,041.7 |
|||
|
Cash and cash equivalents |
244.9 |
376.4 |
|||
|
Premiums and accounts receivable, net |
1,773.4 |
1,567.6 |
|||
|
Reinsurance recoverable on paid and unpaid losses and unearned premiums |
2,832.3 |
3,057.0 |
|||
|
Other assets |
1,532.3 |
1,426.9 |
|||
|
Total assets |
$15,403.6 |
$15,469.6 |
|||
|
Liabilities |
|||||
|
Loss and loss adjustment expense reserves |
$7,506.4 |
$7,745.0 |
|||
|
Unearned premiums |
2,958.5 |
2,763.6 |
|||
|
Debt |
787.1 |
786.9 |
|||
|
Other liabilities |
1,211.8 |
1,176.4 |
|||
|
Total liabilities |
12,463.8 |
12,471.9 |
|||
|
Total shareholders’ equity |
2,939.8 |
2,997.7 |
|||
|
Total liabilities and shareholders’ equity |
$15,403.6 |
$15,469.6 |
|
The Hanover Insurance Group, Inc. |
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|
Condensed Consolidated Income Statement |
Three Months ended |
Six Months ended |
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|
June 30 |
June 30 |
||||||||
|
($ in millions) |
2018 |
2017 |
2018 |
2017 |
|||||
|
Revenues |
|||||||||
|
Premiums earned |
$1,272.9 |
$1,181.2 |
$2,536.5 |
$2,362.5 |
|||||
|
Net investment income |
78.7 |
72.3 |
161.6 |
143.4 |
|||||
|
Net realized and unrealized investment gains (losses) |
|||||||||
|
Net realized gains (losses) from sales and other |
(0.4) |
7.7 |
(0.1) |
11.0 |
|||||
|
Net change in fair value of equity securities |
6.0 |
– |
(17.0) |
– |
|||||
|
Net other-than-temporary impairment losses on investments |
(1.9) |
(1.8) |
(2.6) |
(3.2) |
|||||
|
Total net realized and unrealized investment gains (losses) |
3.7 |
5.9 |
(19.7) |
7.8 |
|||||
|
Fees and other income |
7.5 |
6.7 |
15.3 |
13.3 |
|||||
|
Total revenues |
1,362.8 |
1,266.1 |
2,693.7 |
2,527.0 |
|||||
|
Losses and expenses |
|||||||||
|
Losses and loss adjustment expenses |
783.6 |
725.0 |
1,569.4 |
1,491.5 |
|||||
|
Amortization of deferred acquisition costs |
288.9 |
264.6 |
576.9 |
531.0 |
|||||
|
Interest expense |
11.6 |
12.2 |
24.0 |
24.2 |
|||||
|
Other operating expenses |
158.8 |
153.3 |
322.9 |
310.3 |
|||||
|
Total losses and expenses |
1,242.9 |
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